Administration of the Private Irrigation Infrastructure Operators Program in New South Wales
The objective of the audit was to assess the effectiveness of DSEWPaC's administration of PIIOP, including the acquisition of water access entitlements and progress towards achieving the program's objectives.
1. The Murray–Darling Basin (the Basin) is an area of national environmental, economic and social significance. The Basin contains Australia’s three longest rivers—the Darling, the Murray and the Murrumbidgee—as well as nationally and internationally significant environmental assets, such as wetlands, billabongs and floodplains.1 It covers one-seventh of Australia extending across four states—Queensland, New South Wales, Victoria, South Australia—and the Australian Capital Territory. The Basin is an important resource for rural communities and contributes substantially to Australia’s economy. Irrigated agriculture accounts for over 80 per cent of the Basin’s consumptive water use2, contributing to an agricultural industry worth more than $9 billion per year.3 Water from the Basin also directly supports three million Australians.
2. In response to the predicted water scarcity in the Basin, the Australian Government has increased its focus on improving the Basin’s water management. The Government has invested significantly in long-term initiatives designed to better balance the water needs of communities, farmers and the environment, in particular, through the $12.9 billion Water for the Future initiative. This initiative contains a suite of urban and rural policies and programs, including funding for water purchasing, irrigation modernisation, desalination, recycling and storm water capture.4 The $5.8 billion Sustainable Rural Water Use and Infrastructure Program (SRWUIP) is the largest component of the Water for the Future initiative. A key element within SRWUIP is the $650 million Private Irrigation Infrastructure Operators Program in New South Wales (PIIOP), which is the subject of this audit.
Water reforms in the Basin
3. In recent years there have been a number of reforms aimed at improving the management of water resources and addressing the imbalance between consumptive and environmental water use in the Basin. Major reforms include the:
- passage of the Water Act 2007 on 3 March 2008, which provided the legislative basis for the Australian Government’s intervention in managing the water resources of the Basin;
- establishment (under the Water Act 2007) of the Murray–Darling Basin Authority (MDBA) in December 2008, which has responsibility for producing the first Basin-wide water sharing and management plan (the Basin Plan).5 This plan is intended to guide the management of the Basin’s water resources in an integrated and sustainable way;
- signing of an Intergovernmental Agreement on Murray–Darling Basin Reform (the Basin Agreement) on 3 July 2008, which committed Basin jurisdictions (the Australian Government and the Queensland, New South Wales, Victorian, South Australian and the Australian Capital Territory governments) to new ways of managing water resources in the Basin6; and
- establishment of a Commonwealth Environmental Water Holder (CEWH), in April 2008, to manage Australian Government water holdings for the benefit of the environment.
4. To underpin these reforms, the Australian Government is providing $5.8 billion through SRWUIP to increase water use efficiency in rural Australia. SRWUIP comprises over 40 different projects, programs and initiatives7 ranging in size from $1.2 million to $1 billion, both within and outside the Basin. The Department of Sustainability, Environment Water, Population and Communities (DSEWPaC or the department) manages and coordinates SRWUIP activities. SRWUIP includes 15 State Priority Projects where the Australian Government has indicated its intention of making infrastructure investments in the Basin in return for water access entitlements that can be used by the CEWH for environmental watering purposes, and to progress the Government’s water reform agenda.8 State Priority Project investments are to be principally directed towards projects that:
- deliver substantial and lasting returns of water for the environment;
- secure a long-term future for irrigation communities; and
- deliver value for money in the context of the first two tests.9
5. Thirteen of these State Priority Projects are administered by state governments. The other two are Commonwealth-led and administered by DSEWPaC—the Private Irrigation Infrastructure Operators Program in New South Wales (the subject of this audit) and the Private Irrigation Infrastructure Program for South Australia.10
6. The Private Irrigation Infrastructure Operators Program in New South Wales (PIIOP) was developed to deliver on a commitment made by the Basin jurisdictions in the Basin Agreement. Under the program, the Australian Government is providing up to $650 million to NSW private irrigation infrastructure operators (PIIOs)11 in the Basin to:
acquire water entitlements resulting from water savings from eligible projects to improve the efficiency and productivity of water use and management, both off- and on-farm12, … helping to secure a sustainable future for irrigation communities.13
7. Although PIIOP was viewed by the Government as an investment in the Murray–Darling Basin, DSEWPaC considered that PIIOP had more in common with a grants program than a procurement activity. The department, therefore, chose to apply a grants-based framework, underpinned by the Commonwealth Grant Guidelines (CGGs), to administer PIIOP, in the absence of a more suitable administrative framework. PIIOP is managed within a section in DSEWPaC’s Water Group, with additional oversight provided by the department’s Water Group Outcome Board.14
Private irrigation infrastructure operators
8. PIIOs across NSW are not homogeneous, varying in structure, size and sophistication. Prior to 1995, much of NSW’s irrigation infrastructure—generally either systems of interconnected open channels or piped delivery systems—was owned and operated by the NSW Government. Over the period 1995–2000, NSW Government-owned irrigation schemes were progressively privatised. NSW irrigation infrastructure operators now include: large irrigation corporations; a number of private irrigation districts; private water trusts; and small joint water supply schemes.
9. It is generally acknowledged by governments, industry and conservationists that irrigation water could be used more efficiently. Between 10 and 30 per cent of the water diverted from rivers into irrigation systems is lost before it reaches the farm gate.15
Selecting and contracting PIIOP projects
10. PIIOP was originally designed to select projects to modernise and upgrade irrigation infrastructure in a single funding round that closed on 27 November 2009. However, as DSEWPaC’s recommendations to fund Round 1 PIIOP projects did not exhaust the program’s funding allocation, a second funding round that closed on 22 July 2011 was undertaken. PIIOP funding was fully allocated following the conclusion of the second funding round.
11. To guide the preparation of applications in each round, DSEWPaC developed and published program guidelines containing eligibility and merit criteria that reflected the economic/social, environmental/technical and value for money criteria to be applied to the assessment of all State Priority Projects under SRWUIP. PIIOP applications were assessed by an assessment panel that included departmental officers and external advisors. Those projects considered to be the most meritorious were recommended to the Minister for Sustainability, Environment, Water, Population and Communities (Minister) for funding approval.16 Table S1 outlines the nine successful applicants (five in Round 1 and four in Round 2), the funding approved and the total water to be acquired by the Australian Government following both PIIOP rounds.
Source: ANAO analysis of DSEWPaC information.
Note 1: Includes an increase of $3 880 000 to correct a departmental assessment error.
Note 2: The announced water access entitlement transfers to the Australian Government per project have not been disclosed for commercial confidentiality reasons.
Note 3: Long-term cap equivalent (or LTCE) and long-term average annual yield (or LTAAY) are methods that have been used by DSEWPaC over time to standardise the calculation of expected water recoveries in the Murray–Darling Basin from the different water access entitlement categories across the catchments of the Basin. The differences between the former LTCE and current LTAAY methods are only minor. One megalitre (ML) equals 1 000 000 litres.
12. Funding agreements were executed with all successful Round 1 applicants during the period July 2010 to June 2011. In April 2012, DSEWPaC advised that funding agreements for Round 2 projects are expected to be executed by June 2012.
13. The objective of the audit was to assess the effectiveness of DSEWPaC’s administration of PIIOP, including the acquisition of water access entitlements and progress towards achieving the program’s objectives.
14. The audit examined whether DSEWPaC:
- effectively implemented PIIOP and had appropriate governance arrangements to support the program;
- assessed and selected applications in both funding rounds in accordance with the Commonwealth Grant Guidelines (CGGs);17 and
- negotiated appropriate funding agreements for Round 1 projects and established effective arrangements to monitor the implementation of the projects and the achievement of the program’s objectives.
15. The Private Irrigation Infrastructure Operators Program in New South Wales (PIIOP) is one of a number of programs within the $5.8 billion Sustainable Rural Water Use and Infrastructure Program. Under PIIOP, the Australian Government has invested in upgrades to irrigation infrastructure in return for a share of the water efficiency gains and to progress the Government’s water reform agenda. Water access entitlements are used by the CEWH for environmental watering purposes. Over two funding rounds, DSEWPaC received 12 applications from eight applicants requesting some $1.79 billion in financial assistance, which was significantly more than the $650 million funding available under PIIOP.
16. The Minister for Sustainability, Environment, Water, Population and Communities (and the then Minister for Climate Change, Energy Efficiency and Water) approved funding under both PIIOP rounds for nine projects that range in size from $7.4 million to $169.2 million in return for 172.1 gigalitres of water access entitlements (which represents over 90 per cent of the projects’ estimated water savings).18 All available funding was allocated and funding agreements for the five Round 1 projects were executed. As at December 2011, DSEWPaC had acquired 35.1 gigalitres (53.5 per cent) of the water access entitlements contracted under Round 1 and expended $81.5 million (31.9 per cent) of PIIOP funding in Round 1. Although implementation of the Round 1 projects has not progressed as rapidly as DSEWPaC originally expected, the department anticipates that all of these projects will be completed within budget by March 2014. As at April 2012, funding agreement negotiations for the four Round 2 projects were underway.
17. As one of the first water infrastructure programs within SRWUIP, PIIOP presented implementation challenges for DSEWPaC. These challenges particularly related to the investment-focused nature of the program—characterised by its intended contribution to water reform in the Basin and the acquisition of water access entitlements in exchange for funding infrastructure improvements—administered within a grant program framework. In this context, the due diligence criteria that were to underpin all SRWUIP investments became PIIOP’s eligibility and merit criteria for funding under the program.
18. While DSEWPaC has implemented PIIOP and allocated available funding, weaknesses in program governance and in the management of a number of implementation issues had an adverse impact on the overall effectiveness of the program’s administration. In this regard, shortcomings were evident in DSEWPaC’s design of the program, the assessment of applications and the development of measures to inform an assessment of whether the program is achieving its objectives. DSEWPaC has established appropriate funding agreements with successful Round 1 applicants and developed effective monitoring arrangements to address the project implementation risks arising from the shortcomings in the assessment of applications.
19. Although the department began designing the program in mid-2008, the program area did not develop and submit key program management documentation for endorsement by the departmental committee responsible for PIIOP’s oversight—the Water Group Outcome Board—until mid-2010. As a consequence, DSEWPaC did not have in place an endorsed project plan or associated risk management plan in the first two years of PIIOP, which had an impact on the department’s capacity to implement the program and identify issues early. The Board did not identify these gaps in the program’s management documentation or intervene to resolve the PIIOP taxation treatment issue that put at risk the execution of most Round 1 funding agreements.
20. In designing PIIOP, early consideration should have been given to the potential taxation treatment of the large-scale grants being offered under the program. Taxation of government funding will always be a material consideration for potential applicants and a strong influence on the viability of applications for funding. However, it was not until December 2008, over five months into the establishment of PIIOP, that DSEWPaC recognised the significance of the taxation treatment of program funding to potential applicants, and subsequently sought taxation advice.19 The lack of early consideration of PIIOP’s taxation implications, coupled with delays in developing PIIOP’s funding agreement that outlined the terms and conditions of the funding, delayed the determination of the program’s taxation status until late into the Round 1 application process. Advice from the Australian Taxation Office (ATO) in November 2009 that PIIOP’s terms and conditions did not support the taxation outcome DSEWPaC preferred, and had previously advised to applicants, had the potential to jeopardise the timely and successful implementation of the program. Earlier consideration of PIIOP’s taxation implications would have better positioned the department to have factored into PIIOP’s design the preferred taxation outcome for the program.
21. DSEWPaC decided during PIIOP’s design phase that a one-stage application process would be appropriate. This decision was based on the limited number of potential applicants and the prerequisite for applicants to have completed an irrigation modernisation plan that would underpin their applications.20 Notwithstanding this rationale, the detail required in applications and the variability in the quality of modernisation plans necessitated a substantial financial outlay from PIIOs. Some PIIOs considered that they lacked access to the management expertise and finances needed to fund the development of the detailed PIIOP applications. PIIOs had to balance the effort and resources they allocated to their applications with their likelihood of success. Adopting a two-stage application process, which gave greater assurance of the likelihood of success, may have encouraged a greater investment by PIIOs in more comprehensively completing their applications under the program and allowed a more thorough assessment of applications by DSEWPaC.
Assessment of applications
22. The department’s assessment of PIIOP applications in both rounds proved challenging. This was primarily because the applications did not contain sufficient detail to facilitate a thorough assessment, particularly in relation to addressing the economic/social criteria, environmental/technical criteria and the projects’ benefits-costs analyses. A major contributing factor to this situation was the lack of sufficient guidance in the program guidelines on the level of detail and information required from PIIOs to support their applications. DSEWPaC sought to address the lack of sufficiently-detailed information provided in applications through the use of technical advisors, external advisors on the assessment panels and through seeking additional clarification from the applicants. In Round 2, DSEWPaC also intended to provide applicants with expanded guidance materials to improve the quality of applications, but these materials were not finalised and/or released. Residual information gaps in the applications for both rounds posed substantial risks for the assessment panels.
23. Nevertheless, the department considered that most applications met the merit criteria sufficiently to be recommended to the Minister for funding, with the value for money criteria being the primary determinant for the order of merit in each round.21 The assessment documentation for both rounds did not, however, demonstrate that any of the approved projects met either the program’s economic/social criteria or environmental/technical criteria. The documentation retained by the department for Round 1 was substantially less than that necessary to support a transparent process, as required by the Commonwealth Grant Guidelines (CGGs). The documentation supporting Round 2 assessments indicated that applications had very low scores for most merit criteria.
24. The Minister approved DSEWPaC’s funding recommendations without variation, after being advised of the challenges the department faced when assessing PIIOP applications and the consequential level of residual risk for the Australian Government in funding the recommended projects. The Minister also approved the conditions imposed on successful Round 1 applicants to address identified project implementation risks and the uncertainties flowing from the gaps in the applications. The conditions attached to each project’s approval were addressed satisfactorily during the negotiations for, or in the content of, the Round 1 funding agreements.
Development of performance measures
25. In terms of whether PIIOP is meeting its objective, DSEWPaC is yet to develop key performance indicators (KPIs) or collect the data necessary to measure and report on PIIOP’s performance. The funding agreements require PIIOs to report on the generation of water savings and irrigation system productivity improvements resulting from their PIIOP projects. However, PIIOs are not required to report on how their projects are helping to secure a sustainable future for the irrigation communities. The establishment of an appropriate set of KPIs for PIIOP that align with the objectives of the SRWUIP investments, and the development of an evaluation strategy for PIIOP, would better position DSEWPaC to demonstrate the extent to which the projects are contributing to the achievement of PIIOP’s objectives.
26. The ANAO has made three recommendations to improve DSEWPaC’s administration of its grant programs. The first reinforces the importance of effective governance arrangements, the second highlights the need to tailor the application approach to the program and implement assessment processes that better reflect the requirements of the CGGs. The third recommendation addresses the need to develop appropriate KPIs to collect and analyse performance data.
Program establishment and governance
Establishing the program
27. DSEWPaC consulted appropriately with a range of industry stakeholders during the design and establishment of PIIOP. However, the department’s delay in seeking taxation advice and in finalising the draft PIIOP funding agreement meant that advice from the ATO on PIIOP’s taxation status was not provided to applicants until late in the Round 1 application process. The ATO’s advice was also contrary to the taxation outcome preferred by DSEWPaC. DSEWPaC released the draft funding agreement to the five successful Round 1 PIIOP applicants a week after the announcement of the approved applications. All PIIOs, after consulting with their taxation advisors, identified the potentially significant taxation liabilities that could arise from entering into a PIIOP funding agreement with the Australian Government.
28. DSEWPaC determined that a one-stage application process would be employed for PIIOP. This decision was based on the limited number of known potential applicants and the expectation that irrigation modernisation plans (the development of which could be funded under another program administered by DSEWPaC) would underpin PIIOP applications. However, DSEWPaC’s analyses of the government-funded irrigation modernisation plans identified variance in their quality and comprehensiveness. Despite having completed a modernisation plan or equivalent, all six of the PIIOP Round 1 applicants interviewed by the ANAO stated that the PIIOP one-stage application process had been time-consuming, costly and presented a range of risks. In particular, some PIIOs commented on the lack of readily available management expertise and finances to fund the development of the detailed PIIOP applications.
29. The PIIOP guidelines for both funding rounds included key information, such as the objectives of the program, the amount of funding available, eligible applicants and projects, the merit-based selection criteria, how to apply and the deadline for applications. However, the guidelines did not contain sufficient guidance on the program’s terms and conditions (in the form of the draft PIIOP funding agreement), the relative importance of the merit criteria and the level of detail DSEWPaC required from PIIOs to support their applications. The limited guidance resulted in Round 1 applications of variable quality that ultimately had an impact on the department’s ability to assess the applications.
30. Despite feedback from Round 1 applicants and the variable quality of Round 1 applications, DSEWPaC adopted a similar one-stage application approach for Round 2. Although the department intended to provide Round 2 applicants with expanded guidance materials to improve the quality of applications, these materials were not finalised and/or released prior to the funding round. As a consequence, the variable quality issue encountered in Round 1 was also encountered by the department in respect of Round 2 applications.
Governance arrangements supporting PIIOP
31. PIIOP is managed within a section in the department’s Water Group. In addition, the Water Group Outcome Board (the Board) has an oversight role for all programs under SRWUIP, including PIIOP.
32. While the program commenced in mid-2008, administrative arrangements for PIIOP were first documented by DSEWPaC in February 2009 in a draft Annual Plan for the program area managing PIIOP. The Plan was not, however, finalised or endorsed by DSEWPaC senior management, nor was the plan submitted to the Board for approval in accordance with administrative arrangements established for SRWUIP programs. It was not until early June 2010, some two years after the department began designing the program, that DSEWPaC developed, and the Board approved, an Annual Plan. It was a further year before DSEWPaC developed, and the Board approved, a PIIOP-specific Project Plan and associated risk management plan. The development of these project-specific plans better positions the department to manage the ongoing delivery of the program.
33. Since October 2009, the PIIOP section has provided monthly PIIOP status reports to the Board. However, the absence of key program governance documentation has inhibited the Board’s ability to use these status reports to effectively monitor program risks and program progress against planned performance. Notwithstanding the absence of key program governance documentation, the Board was informed of the impact of the taxation issue on PIIOP’s progress. However, when the resolution of taxation issues became protracted over the period June to November 2010, the Board did not intervene to resolve the issues. There would be merit in DSEWPaC reviewing the systems and processes in place to ensure that all required information is provided to the Board and that the monitoring activities of the Board effectively identify and manage significant risks to program delivery.
34. Although PIIOP is not listed as a discrete program in DSEWPaC’s Portfolio Budget Statements (PBS), the PBS and department’s annual reports contain performance information (deliverables, KPIs and targets) for the broader ‘Water Reform’ program related to PIIOP’s (and SRWUIP’s) performance. However, the department has not established baselines from which to measure water efficiency improvements and the established deliverables do not identify the quantity of water savings that are to be returned to the Australian Government from SRWUIP investments. Improving the relevance of KPIs and deliverables would provide greater insights into the extent to which water programs are contributing to the achievement of program objectives for PIIOP and SRWUIP.
Assessment of applications
Promotion and communication of PIIOP to potential applicants
35. DSEWPaC consulted with peak industry bodies and provided detailed briefings to known potential applicants on PIIOP soon after both funding rounds were launched. Round 1 applicants indicated to the ANAO that they were generally satisfied with the department’s responsiveness to important issues raised during the application phase; with the exception being the taxation treatment of the grants.
36. DSEWPaC provided information to potential Round 1 applicants that PIIOP funding would create a capital gains tax (CGT) outcome—in advance of such an outcome being confirmed with the ATO. Subsequent advice from the ATO stated that program documentation did not support a CGT outcome, instead creating an income tax outcome that could cause severe cash flow problems for PIIOs. PIIOs advised the ANAO that their applications assumed either a tax-neutral outcome or CGT outcome.
Assessment framework process
37. The PIIOP guidelines clearly specified the program’s eligibility requirements for projects and applicants. The program’s merit criteria were based on the due diligence criteria established under the Basin Agreement for SRWUIP investments. However, some of the economic/social, environmental/technical and value for money sub-criteria were not sufficiently clear or specific to guide applicants—particularly in terms of the standard and level of detail expected in the applications.
38. The Rounds 1 and 2 assessment plans prepared by DSEWPaC were designed to deliver an accountable, transparent, fair and competitive process for assessing PIIOP applications. While the plans were generally comprehensive and provided a key point of reference for the assessment of PIIOP projects, there were a number of limitations related to:
- guidance to assessors on benchmarks/weightings within the scoring system, to score applications consistently and establish the relative importance of the criteria to the final scores;
- guidance on how the benefits-costs analyses that applicants were required to submit would be incorporated into assessments;
- assessing the viability of sub-projects independently of the projects as a whole; and
- guidance on including the PIIOs’ intended compliance with the funding agreement terms and conditions in the assessments.
Assessment and selection of projects
39. One of the major challenges that faced the PIIOP assessment panels was the variable quality of applications caused by the lack of detail and gaps in the information provided. The variable quality of applications for both funding rounds made it difficult for the department to effectively assess and compare projects—particularly in terms of the extent to which projects met the merit criteria and the relative costs and benefits of each application. DSEWPaC had the option of recommending far fewer or no projects on the ground that the applications were not complete. While this position could be justified, it was unlikely that progressing the assessment of few or no applications would have been compatible with the imperative to progress water reform in the Murray–Darling Basin. DSEWPaC considered that the information provided by applicants was sufficient to progress all applications to a full assessment of the merits in the subsequent assessment phase.
40. The assessment panels in both rounds assessed applications against the merit criteria. However, in Round 1 there were some inconsistencies between the assessment of projects by the panel and those of the independent technical advisors on particular merit criteria. The Round 1 assessment report did not acknowledge the difference of opinions, or provide a justification for the panel’s contrary opinion. Additional documentation that may have provided clarity over the Round 1 assessments, such as assessment panel meeting minutes and the assessments of individual panel members, were either not retained or insufficiently documented. The assessment documentation supporting the Round 2 process provided much better alignment between the assessments in technical reports, the individual panel member assessments, minutes of meetings and the final assessment report to the Minister.
41. Assessments against the value for money criteria were the primary determinant of the orders of merit in both PIIOP rounds. In Round 1, the assessment panel determined value for money by calculating a ‘market multiple’—the ratio of PIIOP funding sought to the market value of water access entitlements to be transferred to DSEWPaC—for each application. Given the shortcomings in the documentation of Round 1 assessments, it is unclear how the recommended applications met the program’s economic/social and environmental/technical criteria. In Round 2, the value for money criteria (including scores based on the market multiple, a form of benefits-costs analysis, and cash/in-kind contributions by applicants) accounted for 70 per cent of the total potential score for each application. Given the very low scores against the economic/social and environmental/technical criteria (generally less than five out of ten) and for the benefits-costs analyses, the assessment panel’s assessment of Round 2 applications does not clearly demonstrate that approved projects met all the merit criteria.
Recommendations to the Minister
42. The Minister was briefed on all the projects submitted for consideration in both rounds, including those recommended (nine) and not recommended (three) for funding. The briefings included documentation to support the Minister’s mandatory grants approval obligations along with documentation to support the reasons for recommendations. DSEWPaC advised the Minister of the general lack of clarity and detail provided in all applications and the challenges this posed to the department’s assessment of applications. To manage the consequential risks from funding PIIOP applications in Round 1, the Minister approved funding on the basis that extensive conditions were placed on successful applicants to address identified risks and uncertainties flowing from the gaps in their applications. While DSEWPaC did not recommend imposing conditions on Round 2 applicants, the project risks and stakeholder issues identified in the briefing to the Minister should be considered and addressed as part of the negotiations of Round 2 funding agreements.
Development of funding agreements and management of projects
Negotiation of funding agreements for Round 1 projects
43. DSEWPaC negotiated funding agreements that committed PIIOs to transferring to the Australian Government the quantity of water access entitlements that PIIOs offered in their applications in return for government funding. As funding agreement negotiations progressed, most PIIOs requested changes to their project parameters. In general, DSEWPaC considered favourably those requests that: were for eligible activities consistent with the PIIOs’ applications; maintained the projects’ value for money; and did not increase the approved maximum contribution to the projects. The original Round 1 funding agreements negotiated by DSEWPaC accurately reflected the PIIOP projects approved by the Minister and satisfactorily addressed the preconditions attached to the projects’ approval.
44. Under the PIIOP funding agreements, PIIOs are required to report to DSEWPaC on their projects’ contributions towards the elements of the program’s objective related to the generation of water savings and productive improvements. However, PIIOs are not required to report on the extent to which their projects contribute to the ‘helping to secure a sustainable future for irrigation communities’ element of PIIOP’s objective. Further, DSEWPaC has not established key performance indicators (KPIs) to measure the extent to which the program is achieving its objective. DSEWPaC’s development of an appropriate set of KPIs for PIIOP, aligned with the objectives of the SRWUIP investments, and the collection of relevant performance data, would better position the department to demonstrate the achievement of PIIOP’s objective.
45. The execution of most Round 1 funding agreements was extensively delayed pending the resolution of the taxation treatment of PIIOP funding. While DSEWPaC considers that the PIIOP taxation issues were raised with the appropriate agencies in a timely manner once there was clear evidence that action was warranted, the resolution of the taxation issues was overly protracted due to the department’s reliance solely on private binding rulings between the ATO and PIIOs. Although other options were canvassed, none were pursued concurrently or as alternatives to obtaining private binding rulings for many months, including the legislative amendment option that ultimately resolved the taxation issue. DSEWPaC’s pursuit of alternative options in parallel with private binding rulings sought by PIIOs would have better positioned the department to resolve the PIIOP taxation issues in a more timely manner.
Project monitoring by DSEWPaC
46. Central to the original monitoring arrangements established by DSEWPaC for PIIOP Round 1 projects was the department’s approval of annual workplans for the projects. However, the submission and approval of PIIO’s workplans has not occurred in accordance with DSEWPaC’s original expectations. Workplans were required to be resubmitted numerous times to address the concerns of the department’s technical advisors. Further, the detail DSEWPaC expected in the first project workplans was not available until subsequent milestones were achieved, which necessitated the department’s approval of ‘interim’ workplans and the submission and approval of ‘updated’ workplans at later dates. Nonetheless, DSEWPaC’s technical consultants, who cleared the contents of all workplans prior to their approval by the department, have provided assurance about the reasonableness of the timeliness, cost and effectiveness of the PIIO’s proposed construction and project management activities.
47. From mid-2011, DSEWPaC negotiated additional PIIOP funding agreement obligations and revised monitoring arrangements that significantly strengthened the department’s framework for monitoring project progress and the expenditure of project funding. The revised arrangements have simplified the PIIOs’ preparation of milestone and expenditure documentation. Payment delegates now receive documentation evidencing the achievement of each project milestone, including certifications from PIIO management and independent auditors.
DSEWPaC’s management of project implementation issues
48. Under the funding agreement model selected for PIIOP, PIIOs were required to enter into legally-binding agreements with participating irrigators in their scheme to deliver the on-farm works component of the PIIOP projects and transfer the required water access entitlements to PIIOs. The contracting of irrigators by PIIOs under the program has not been straightforward. Information provided by irrigators to the ANAO indicated that many found their contracts with the PIIO complex and daunting. As a consequence, some irrigators withdrew from PIIOP projects, while others executed contracts based primarily on the assurance they received from other irrigators in their community entering into similar agreements.
49. DSEWPaC has established effective working relationships and communication channels with PIIOs and their project managers. Issues arising from PIIOP projects have been considered in a timely manner, and their resolution clearly communicated to all parties. The most common issues impacting on PIIOP Round 1 projects have been related to the slow rate of progress—most of which are beyond the control of the Australian Government, and some of which are also beyond the control of PIIOs.
50. At times, DSEWPaC has also received requests from PIIOs to vary funding agreements, including changes to the parameters of irrigation projects or the substitution of irrigators and/or irrigator projects. In all cases, DSEWPaC appropriately assessed the impact of the delays or proposed variations on the projects concerns and the PIIOs’ rights and obligations, before agreeing or not agreeing to the change requests. Further, DSEWPaC’s interventions in disputes between PIIOs and their irrigators and inquiries into third-party complaints have been appropriate and effective to resolve the matters and progress the PIIOP projects.
Progress of PIIOP projects
51. During the establishment of PIIOP, DSEWPaC’s initial expenditure forecasts for the program indicated that payments to approved PIIOP projects would commence in 2009–10. However, due to delays with the funding agreement negotiations, the first payments to PIIOP projects occurred early in 2010–11 and the larger milestone payments expected to occur in 2010–11 were delayed until 2011–12. Further, a review of the schedules of the original PIIOP Round 1 funding agreements against progress as at March 2012 indicated that project expenditure on two projects was below original expectations, but transfers of water access entitlements were generally meeting original funding agreement schedules. By March 2012, DSEWPaC had expended $127.1 million (49.9 per cent) of Round 1 funding, which was significantly less than the original expectations of $143.3 million, but had received 45.9 gigalitres (69.8 per cent) of water access entitlements, which was more than the 44.9 gigalitres originally expected at this time. DSEWPaC expects that by July 2012 the total project expenditure and water entitlement transfers will exceed the department’s original expectations of progress as anticipated in the original funding agreements.
52. Project completion dates for four of the five Round 1 projects have not changed from the original funding agreements—with dates ranging from March 2012 to March 2014. The project completion date for the remaining project has been delayed by 11 months from late February 2012 to early February 2013. As at 31 March 2012, all Round 1 projects were considered by the department to be on track to be completed within their approved budgets.
53. The department’s summary response to the proposed audit report is provided below, while the full response is provided in Appendix 1 of the report.
The Department of Sustainability, Environment, Water, Population and Communities (SEWPaC) agrees with each of the ANAO’s recommendations. SEWPaC appreciates the ANAO’s recognition that the policy intent of the Government was for PIIOP to provide for investment in rural irrigation infrastructure, to achieve long term benefits for irrigation water providers, related communities and the environment.
In particular, SEWPaC welcomes the ANAO’s finding that assessment and contract management arrangements progressively applied by the Department from the beginning of 2011 have significantly strengthened SEWPaC’s framework for monitoring project progress and the expenditure of Australian Government funding on PIIOP projects.
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 Department of Sustainability, Environment, Water, Population and Communities, Murray–Darling Basin [Internet], DSEWPaC, Australia, 2011, available from <http://www.environment.gov.au/water/locations/
murray-darling-basin/index.html> [accessed 25 October 2011].
 Department of Sustainability, Environment, Water, Population and Communities, Water for the Future: Fact Sheet [Internet], DSEWPaC, Australia, 2010, available from <http://www.environment.gov.au/
water/publications/action/pubs/water-for-the-future.pdf> [accessed 6 October 2011].
 The Proposed Basin Plan was released on 28 November 2011. After comments on the Proposed Plan received during the consultation period are taken into account, the Government intends to present the final Basin Plan to the Parliament later in 2012.
 The Basin Agreement also allocated the initial round of Australian Government funds for infrastructure-based water recovery projects under SRWUIP.
 SRWUIP initiatives include compliance and enforcement activities, communication campaigns and meter testing facilities.
 State Priority Project investments were contingent on their assessment against the due diligence criteria established in the Basin Agreement.
 Department of Sustainability, Environment, Water, Population and Communities, Sustainable Rural Water Use and Infrastructure [Internet], DSEWPaC, Australia, 2011, available from <http://www.environment.gov.au/water/policy-programs/srwui/index.html> [accessed 25 October 2011].
 The Department of the Environment, Water, Heritage and the Arts (DEWHA) originally had administrative responsibility for PIIOP (and the Private Irrigation Infrastructure Program for South Australia). DEWHA was re-established as DSEWPaC through machinery of government changes on 14 September 2010. For the purposes of this report, DSEWPaC has been used universally to refer to as the department responsible for PIIOP’s administration.
 A private irrigation infrastructure operator (PIIO) is defined in the Water Act 2007 as an entity that owns or operates infrastructure to store, deliver and/or drain water for the purpose of providing a service to another person, primarily for irrigation.
 Examples of eligible off-farm activities include: upgrading channel lining; replacing channels with piping systems; repairing pipes and pumps; and permanently decommissioning sections of the water delivery system. Examples of eligible on-farm activities include: installing or upgrading on-farm meters; and other infrastructure upgrading activities which complement the proposed off-farm delivery system upgrades while contributing to the total water savings.
 DSEWPaC, Sustainable Rural Water Use and Infrastructure Program: Guidelines for the Private Irrigation Infrastructure Operators Program in New South Wales—Round 2, February 2011, p. 5.
 The Water Group Outcome Board comprises a departmental Deputy Secretary, who is the Chair, and the three First Assistant Secretaries who have responsibility for divisions within the Water Group.
 More specifically, losses in irrigation infrastructure systems can arise from: outfalls, that is, water flowing from the downstream-end of the delivery system; farm irrigation water meter inaccuracy; unrecorded usage of water where water usage is not metered or stolen; leakage of water from channels through channel banks and structures; seepage, that is, the movement of water through the beds of irrigation channels; and evaporation in channels and storages. (Marsden Jacob Associates, Improving water-use efficiency in irrigation conveyance systems: A study of investment strategies, Land & Water Australia, May 2003, pp. 7 and 8).
 In earlier times, the former Minister for Climate Change and Water and former Minister for Climate Change, Energy Efficiency and Water were responsible for the administration of PIIOP by DSEWPaC.
 The Commonwealth Grant Guidelines (CGGs) outline seven principles for grants administration, which are: (1) Robust planning and design; (2) An outcomes orientation; (3) Proportionality; (4) Collaboration and partnership; (5) Governance and accountability; (6) Probity and transparency; and (7) Achieving value with public money. (Department of Finance and Deregulation, Commonwealth Grant Guidelines—Policies and Principles for Grants Administration, Finance Management Guidance No. 23, July 2009, p. 14.)
 One gigalitre equals 1000 megalitres or 1 000 000 000 litres.
 Grants are generally considered as taxable income to recipients, unless legislation specifically provides otherwise. Early taxation advice obtained by DSEWPaC indicated that the best outcome for applicants would be for PIIOP funding to be subject to capital gains tax on the disposal of water access entitlements by PIIOs—on the basis that an income tax outcome could have created cash flow problems for PIIOs.
 DSEWPaC administered a separate program, the Irrigation Modernisation Planning Assistance (IMPA) program, that provided funding to assist PIIOs to identify and consider a range of options available to increase the efficiency of their irrigation systems and adapt to a future with less water.
 In Round 1, value for money was calculated by reference to the ratio of funding sought to the market value of the water access entitlements offered in return. In Round 2, value for money also included reference to a form of benefits-costs analysis and cash/in-kind contributions by applicants.