Grants for the Construction of the Adelaide Desalination Plant
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The objective of the audit was to assess the awarding of funding for the construction of the Adelaide Desalination Plant (ADP) against the requirements of the Commonwealth's grants administration framework, which includes the Government’s policy requirements for the approval of grants, with a particular focus on the assessments undertaken of each proposed grant in terms of the guidelines for the National Urban Water and Desalination Plan (NUWDP); and identify any potential improvements in grants administration practices.
1. On 28 October 2007, in response to prolonged drought conditions at that time, the then Opposition announced that a Labor Government would implement a $1 billion National Urban Water and Desalination Plan (NUWDP) to help secure the water supplies of Australia’s major cities.1 The NUWDP was outlined in the election policy document Labor’s national plan to tackle the water crisis. That document also included a number of other announcements, including that a Labor Government would be a financial partner in a carbon neutral desalination plant for Adelaide, if the state proceeded with this project.
2. Program guidelines for the NUWDP were issued in December 2008, at the same time that applications opened to a major projects funding round (which closed on 30 June 2009). Those guidelines reflected decisions taken after the election that NUWDP funding would be used to meet the cost of the Adelaide Desalination Plant (ADP) election commitment (subject to a proposal from the South Australian government that met the program’s criteria), and four other election announcements.2 The NUWDP guidelines included program eligibility and merit assessment criteria, which reflected the program objectives. The merit criteria were:
- Level of contribution to enhancing water supply security within the targeted urban area.
- Cost-effectiveness of the project.
- Cost-effectiveness of the Australian Government contribution.
- Demonstrable evidence that the proposed project is a key strategic element of the preferred long-term water supply plan for the area.
- Extent of environmental benefits and/or environmental best practice initiatives.
3. Under the NUWDP, a total of $328 million has been paid by the Australian Government for the construction of the ADP. Two grants have been awarded, as follows:
- in March 2009, the then Minister for Climate Change and Water approved $100 million to support the construction of a 50 gigalitre (GL) per year ADP. This grant related to the 2007 election announcement. The total value of the project was estimated to be $1.374 billion; and
- in April 2009, the Strategic Priorities and Budget Committee (SPBC) of Cabinet decided that a further grant of $228 million should be awarded towards the estimated $456 million cost of expanding the capacity of the ADP to 100GL per annum.
4. The two grants were announced on 12 May 2009 (Budget day) by the then Minister for Climate Change and Water.3 The announcement clearly identified that the first grant towards the cost of a 50GL per annum ADP related to the 2007 election commitment and that the second grant related to a separate decision to award funding to expand the plant’s capacity. Specifically, it was announced that the Government:
- ‘has already acted by meeting its election commitment to provide $100 million to the 50GL [per annum] Adelaide Desalination Plant’; and
- ‘will commit a further $228 million to the Adelaide Desalination Plant if capacity is expanded from 50GL to 100GL per year, reducing South Australia’s reliance on the Murray River. ...The commitment will be funded from the Government’s National Urban Water and Desalination Plan’.
Award of a grant towards a 50GL per annum ADP
5. The election policy document Labor’s national plan to tackle the water crisis had indicated that all NUWDP program funding would be open to applications, and that any financial contribution towards the construction of the ADP would draw on funds for investing in water infrastructure in the Murray-Darling Basin. However, after the election, it was decided that the cost of any contribution towards the ADP (and four other election announcements) would be met from NUWDP program funding. It was further decided that providing funding towards the ADP was subject to receiving a proposal from the South Australian Government which met the NUWDP program criteria.
6. In December 2008, the then Department of the Environment, Water, Heritage and the Arts (DEWHA)4 obtained a funding application from the South Australian Water Corporation (SA Water) that addressed each of the NUWDP’s eligibility and merit assessment criteria. On 27 February 2009, DEWHA briefed the then Minister for Climate Change and Water on its assessment of the SA Water grant proposal, advising that the proposal met the NUWDP program guidelines.
7. Consistent with the department’s recommendation, on 23 March 2009, the then Minister approved a $100 million grant under the NUWDP to the 50GL per annum ADP. An Implementation Plan under the National Partnership Agreement on Water for the Future was agreed to by the then Minister on 11 February 2010. The final payment under this Implementation Plan for the $100 million grant was made in May 2012.
Award of grant for an expanded ADP
8. Back in October 2008, South Australia (together with other states and territories) had made a submission to Infrastructure Australia5 in the context of the development of the first national Infrastructure Priority List.6 The South Australian submission included a funding request for a collection of water infrastructure projects, including capital and operating costs to expand the capacity of the ADP to 100GL per annum. The proposal that incorporated an expanded ADP was included on the interim Infrastructure Priority List publicly released in December 2008. In order to develop the final Infrastructure Priority List, Infrastructure Australia sought further information from proponents of those proposals included on the interim Priority List.
9. Infrastructure Australia concluded that the ADP expansion proposal was not supported by robust cost-benefit analysis and, in any event, the Benefit Cost Ratio (BCR) calculated for the project was too low such that it did not offer a net economic benefit. Accordingly, Infrastructure Australia did not include the ADP proposal on the final Infrastructure Priority List. In addition, on the basis of Infrastructure Australia’s analysis of the proposal’s economic merit, Ministers were informed in early April 2009 that the ADP expansion was not eligible for funding from the Building Australia Fund.
10. Related to the Infrastructure Australia process7, the then South Australian Premier provided two written submissions to the then Prime Minister in February and March 2009 seeking Australian Government funding for the full cost of an expanded ADP. The last of these submissions had sought $456 million in Australian Government funding to meet the full estimated cost of the ADP expansion. In the context of the global financial crisis, a series of SPBC meetings were held in April 2009 to consider funding for infrastructure projects, including funding for the ADP expansion proposal. On 28 April 2009, the SPBC approved grant funding of $228 million, half the amount sought by the state. This commitment of NUWDP funding, and the earlier $100 million grant, was announced via media release by the then Minister for Climate Change and Water on 12 May 2009 (Budget day).
11. A second Implementation Plan under the National Partnership Agreement on Water for the Future for the $228 million in NUWDP funding was agreed by the Parliamentary Secretary for Sustainability and Urban Water and the Minister for Sustainability, Environment, Water, Population and Communities on 26 July 2011. The final payment under this Implementation Plan was made in December 2012.
12. Construction work on the ADP has been completed and, as mentioned above, all grant payments totalling $328 million have been made. The completed facility has the capacity to supply up to 100GL of desalinated drinking water per year, thereby providing Adelaide with a climate independent source of water.
13. The ADP has been designed to operate flexibly, in conjunction with other water supply sources including the River Murray. The amount of water (if any) that the plant will produce is determined by SA Water. In this respect, on 4 October 2012, SA Water announced that improved inflows into the River Murray and Mount Lofty catchments had put it in a position where it could utilise these sources first. SA Water further announced that, to keep costs down for its customers, it was planning to use the lower cost water sources first, which meant placing the ADP in ‘standby mode’.
Audit objectives, criteria and scope
14. The objective of the audit was to assess the awarding of funding for the construction of the ADP against the requirements of the Commonwealth's grants administration framework, which includes the Government’s policy requirements for the approval of grants, with a particular focus on the assessments undertaken of each proposed grant in terms of the guidelines for the NUWDP; and identify any potential improvements in grants administration practices.
15. The audit followed a request from Senator Simon Birmingham, Liberal Senator for South Australia, Shadow Parliamentary Secretary for the Murray-Darling Basin and Shadow Parliamentary Secretary for the Environment, who had raised a number of concerns about the grants firstly through Senate Estimates and subsequently in correspondence to the Auditor-General.
16. The audit examined the first grant of $100 million towards the 50GL per annum ADP, and the second grant of $228 million towards the expanded 100GL per annum ADP. In respect to each grant, the audit examined the:
- assessment by relevant agencies of the merits of awarding Australian Government funding for the construction of the ADP project;
- provision of departmental advice to Ministers; and
- development of agreements signed in respect to the approved grant funding.
17. In particular, the two grants were examined in the context of key requirements of the financial management framework that:
- any proposal to spend public money, including a grant to meet an election commitment, only be approved if reasonable inquiries have been undertaken to allow the decision-maker to be satisfied that the proposal is an efficient, effective, economical and ethical use of public money, and that it is consistent with the program guidelines and any other relevant government policies; and
- grant funding decisions by Ministers be informed by agency advice on the merits of the proposal relative to the program guidelines.
18. As noted at paragraph 3, the decision to approve $228 million in grant funding for an expanded ADP was made by the SPBC. This decision was informed by advice from central agencies.8 Accordingly, this report includes relevant references to the decision to award the grant, and the nature of the agency advice that informed this decision, given it is a key requirement of the financial framework that any decision to award grant funding draw upon agency advice as to the merits of the proposal in terms of the program guidelines. I have concluded that the inclusion of this limited information concerning the funding decision taken by the SPBC is not contrary to the public interest.9
19. Against the background of a review of grants administration commissioned by the Government10 that had expressed concerns that the administration of grant programs had been vulnerable to political manipulation and encouraged gaming by potential funding recipients, the Government agreed in December 2008 to implement a grants administration framework that would improve the performance, transparency and accountability of spending on grants.11 Two key obligations of the enhanced grants administration framework (reinforcing requirements first introduced in December 2007) were that guidelines be developed for all new grant programs and that Ministers not approve a proposed grant without obtaining the benefits of agency advice on the merits of the proposal relative to the program guidelines.
20. A key recommendation of the Strategic Review accepted by the Government was that the grants assessment and decision-making requirements apply to all proposed grants, including those made in relation to election announcements (such as the $100 million ADP grant) and grant proposals that arise other than through a competitive call for applications (such as the $228 million ADP grant). The Strategic Review concluded that the requirement for Ministers to receive agency advice on the merits of a proposed grant relative to the program guidelines was a ‘prudent control’. Accordingly, the enhanced grants administration framework does not provide for exceptions to this requirement. Further, there was no specific decision taken by Government that the requirement for agency advice on the merits of grant proposals did not apply to the grant funding being considered for the ADP.
21. When considered against the program guidelines, neither of the ADP grants awarded under the NUWDP demonstrably satisfied the program merit criteria. Although the first grant (which related to the election commitment) was assessed against program criteria, the second grant was awarded through a truncated process that did not accord with the grants administration framework established by the Government, nor the NUWDP program guidelines.
22. By way of elaboration, the first ADP grant was awarded after the then Department of the Environment, Water, Heritage and the Arts (DEWHA) had obtained information from SA Water, assessed it against the eligibility and merit criteria included in the National Urban Water and Desalination Plan (NUWDP) program guidelines and provided advice to the then Minister for Climate Change and Water. This process accorded with the grants administration framework but there were shortcomings in the underlying assessment work and the resulting advice did not fully inform the Minister.12 As a result, ANAO has made a recommendation to DSEWPaC concerning its assessment of grant proposals directed at promoting the achievement of value for money by: a high standard of assessment and advice being applied to all grant spending proposals, irrespective of whether they arise from a competitive process, relate to an election commitment or are another form of ad hoc grant; and providing Ministers with other options should they wish to pursue funding for proposals that are not consistent with grant program guidelines.13
23. The shortcomings in respect to the second ADP grant are more significant. In particular, this grant was awarded through a process that was inconsistent in a number of respects with the requirements of the Government’s grants administration framework.14 South Australia had originally sought funding for the ADP expansion proposal through Infrastructure Australia, as part of that entity’s development of the first national Infrastructure Priority List. However, before the Infrastructure Australia process had been concluded, the then South Australian Premier made representations to the then Prime Minister in respect to the Infrastructure Australia funding submission for the ADP expansion project. Funding of the ADP expansion project through the NUWDP was considered after Infrastructure Australia concluded that the project had not demonstrated economic merit and, as a result, Ministers had been advised that the project was not eligible for funding from the Building Australia Fund.15 Nevertheless, the grant was subsequently approved by the Strategic Priorities and Budget Committee (SPBC) of Cabinet notwithstanding that:
- the NUWDP program guidelines did not allow for funding to be awarded for ad hoc grant proposals (a major projects funding round was open16, with applications to close on 30 June 2009 but with project funding capped at 10 per cent of estimated project costs to a maximum of $100 million);
- the May 2008 Budget Papers had stated that funding should only be provided to public infrastructure projects that meet a minimum benchmark social rate of return, determined through rigorous cost‑benefit analysis, with Infrastructure Australia identifying that the ADP expansion proposal did not pass this test (which was a requirement of the Infrastructure Australia assessment methodology); and
- no agency had undertaken an assessment of the ADP expansion proposal against the NUWDP program guidelines.
24. Neither the department nor its then Minister became aware of the funding decision until more than one week after it had been taken. The only advice provided to Ministers in respect to funding of the ADP expansion proposal through the NUWDP was from central agencies, an approach that would generally not be viewed as conducive to good government given the role usually expected of portfolio agencies in advising Ministers on spending proposals being considered in relation to programs they administer.17
25. The central agency advice did not recommend that NUWDP funding be awarded (as neither central agency had assessed the merits of the proposal in terms of the program guidelines) but, rather, supported further consideration of funding the expanded ADP under the NUWDP. This advice did not remind Ministers that, since December 2007, the grants administration framework has required that a decision to award grant funding was not to be made until after an agency had assessed its merits in terms of the program guidelines; notwithstanding that the Department of Finance and Deregulation, which is the agency responsible for the implementation of the enhanced grants administration framework, was one of the central agencies involved in providing the advice.
26. A recurring theme in ANAO’s audits of grants administration over a number of years has been the importance of grant programs being implemented in a manner that accords with published program guidelines. Similarly, the grants administration framework was developed based, in part, on a recognition that potential applicants and other stakeholders have a right to expect that program funding decisions will be made in a manner, and on a basis, consistent with the published program guidelines. Accordingly, where a proposal is inconsistent with the guidelines for a particular grant program, it is important that Ministers receive sound advice to this effect from their departments. In situations where Ministers may still be disposed to fund such proposals because they are seen as potentially an efficient and effective use of public money, alternative approaches should be considered such as seeking to improve the value proposition from the Commonwealth’s perspective (where envisaged by the guidelines), publishing amended program guidelines or establishing a new program or funding source.
Key findings by chapter
Grant Awarded for the 50 Gigalitre (per annum) Desalination Plant
27. To enable an assessment to be undertaken against the published NUWDP eligibility and merit criteria18, DEWHA obtained from SA Water a funding application together with a range of supporting material. DEWHA assessed the grant proposal as meeting the program guidelines and recommended that the then Minister for Climate Change and Water approve funding of $100 million under the NUWDP for a 50GL per annum ADP. The Minister agreed to this recommendation.
28. The evidence supports DEWHA’s assessment that the application met the NUWDP’s eligibility criteria. However, the basis for DEWHA concluding that the merit criterion ‘cost-effectiveness of the Australian Government contribution’ (see paragraph 2) had been met was not consistently set out in the assessment records and associated briefing provided to the Minister. Specifically, the assessment record stated that DEWHA had identified that the project would proceed without Commonwealth funding and there was no specific additional outcome from any Australian Government funding. Nevertheless, the department’s assessment record outlined that this merit criterion could be considered met as making a financial contribution to the project was consistent with an election commitment.
29. Notwithstanding the comments stated in DEWHA’s assessment against merit criterion three, the department included a separate comment in its covering briefing noting that NUWDP funding would result in a small reduction in cost increases for water users.19 In April 2013, DSEWPaC advised ANAO that the reduced cost to water users was the basis on which the third merit criterion had been met. This situation emphasises the importance of assessment records and associated briefings clearly and consistently reflecting the basis for assessment conclusions.
30. A factor not effectively addressed by DEWHA in its assessment of the grant proposal related to the amount of water the ADP was expected to contribute to Adelaide’s water supply. The flexible operational model adopted for the ADP was intended to allow a high degree of control over how much water the plant produces, which in turn was to provide flexibility to shut down the plant or reduce production when ‘cheaper’ water supplies are available or storages are sufficiently full. However, this situation was not addressed in DEWHA’s assessment of the application against two merit criteria, namely:
- the level of contribution to enhancing water supply. Reflecting the contents of the application submitted by SA Water, DEWHA advised the then Minister that a plant with a 50GL per annum capacity would be able to provide more than one quarter of Adelaide’s water needs in a ‘normal’ year and up to 32 per cent during a drought year. These figures were premised on the plant operating at full capacity each and every year. In this respect, the drought year figure was consistent with the intended use of the plant during periods of reduced inflows (as had been recommended by the state’s Desalination Working Group), thereby providing water security/insurance during such periods. However, the ‘normal’ years figure drawn by DEWHA from SA Water’s funding application (see Figure 2.1 at page 47) overstated the contribution the ADP was expected to make to Adelaide’s water supply as it was intended that the ADP would only be used when cheaper water sources were not available (see further at paragraph 13) which was not expected to be the case in average years; and
- the cost-effectiveness of the project. The assumption that the plant would operate at maximum capacity each year meant that the cost of water to be produced was understated in the funding application.20 Further, the assessment advice provided by DEWHA to the then Minister made no reference to the cost of water that would be produced, notwithstanding that the published guidelines had indicated that this was a key measure of project cost-effectiveness, and that data on the cost of water had been included by SA Water in its funding application.
31. DEWHA’s assessment in terms of the project cost-effectiveness criterion was also limited in scope, as it focused on whether construction of a desalination plant was more cost effective than an alternative approach of purchasing high security water entitlements. This was notwithstanding that the May 2008 Budget Papers had emphasised the importance of Benefit Cost Ratios (BCRs) to informing Government decision-making on public infrastructure projects, and the published NUWDP program guidelines had similarly stated that assessments against the project cost-effectiveness criterion would consider a project’s BCR. The SA Water application had included information on BCRs for the project based on various assumptions21, but the methodology and assumptions used were not critically examined by DEWHA, and a BCR for the project was not referenced in the assessment advice provided to the then Minister.
Grant to Increase Plant Capacity to 100 Gigalitres (per annum)
32. The merits of the ADP expansion project were considered by Infrastructure Australia, which examined in detail a submission from South Australia that the project be funded from the Building Australia Fund.22 Infrastructure Australia concluded that the project was not supported by robust cost-benefit analysis and, in any event, the BCR calculated for the project was too low such that it did not offer a net economic benefit. Accordingly, Infrastructure Australia did not include the project on its first Infrastructure Priority List, and the ADP expansion proposal was not eligible for funding from the Building Australia Fund.
33. In April 2009, the ADP expansion project was awarded funding from the NUWDP. However, the process by which approval was given for the grant of $228 million to increase the capacity of the ADP from 50GL per annum to 100GL per annum did not accord with an important aspect of the grants administration framework. Specifically, since December 2007, there has been a requirement that Ministers not approve a proposed grant without first receiving agency advice on its merits relative to the guidelines for the program. However:
- DSEWPaC has advised ANAO that it was unaware of an intention for the project to be funded under the NUWDP and, as a result, the department did not assess the proposal for Australian Government funding towards an expanded ADP against the NUWDP program guidelines before Ministers decided to award the $228 million grant; and
- advice to Ministers on the proposal was provided by central agencies. The advice indicated that the proposal was not supported by a full business case, the quality of the costings was low and the Commonwealth’s exposure to project risk was high. Central agencies supported further consideration of funding the expanded ADP under the NUWDP, but the central agencies did not assess the merits of the proposal in terms of the program guidelines.23
34. DEWHA became aware of the decision to award NUWDP funding towards an expanded ADP some days after the decision was taken. In a subsequent briefing to its then Minister, the department referred the Minister to its earlier assessment that a $100 million grant towards a 50GL per annum ADP satisfied the NUWDP criteria, and advised that the ‘expanded plant would also meet these criteria’ and also suggested that the decision to award funding be explained, in part, by the then Minister stating that the proposal had been assessed outside the NUWDP competitive process but against the program criteria. However, DEWHA had not obtained the information from South Australia that would be necessary to assess the 100GL per annum ADP proposal in terms of the NUWDP program criteria, and had not examined the expansion project against the NUWDP program guidelines. The department’s advice as to how to explain the decision to award funding was not sound, noting that:
- the awarding of further funding to the ADP was inconsistent with the competitive bidding process outlined in the NUWDP program guidelines. The only exceptions to this process requirement related to five named election commitment projects which had been the subject of a specific government decision that they be progressed through the NUWDP. The first $100 million grant to the ADP had satisfied the election commitment in respect to the Australian Government making a financial contribution to a desalination plant for Adelaide. Under the published program guidelines24, any further grant required consideration in the context of the competitive major projects funding round that was underway at the time the South Australian Government approached the then Prime Minister seeking funding for the expansion project;
- the size of the grant ($228 million, representing 50 per cent of the estimated project costs) was significantly greater than permitted under the program guidelines (which limited NUWDP funding contributions to 10 per cent of eligible capital costs, to a maximum of $100 million); and
- the grant proposal did not demonstrably satisfy three of the five merit assessment criteria. Specifically:
- constructing a 100GL per annum ADP provided increased water security/insurance compared with that provided by a 50GL per annum plant. However, in respect to the first of the NUWDP’s merit criteria relating to water supply security (see paragraph 2), information provided to DEWHA in relation to the $100 million grant proposal had outlined that the ADP expansion was expected to provide increased insurance in terms of long-term (between 2025 and 2050) water security but water from an expanded plant was not expected to be needed in the short-term25 either in average years or drought years;
- based on Infrastructure Australia’s analysis26, the project was not cost-effective, meaning the project did not meet the second merit criterion; and
- in respect to the third merit criterion relating to the cost‑effectiveness of an Australian Government contribution (see paragraph 2), the evidence is that the 100GL expansion project was proceeding irrespective of whether Australian Government funding was awarded and, in seeking funding, South Australia did not offer to commit to provide any environmental benefits in return for Australian Government funding of the proposal.27
35. In response to a number of ANAO performance audit reports that have noted continuing shortcomings in adherence to the requirement for spending decisions to be informed by agency advice on the merits of proposed grants relative to the program guidelines, updated Commonwealth Grant Guidelines (CGGs) (to take effect from 1 June 2013) will introduce more specific briefing requirements. These requirements seek to improve the information provided to Ministers and consistency in briefing practices across government. Among other matters, the updated CGGs state that an agency is required, as a minimum to:
- explicitly note that the spending proposal being considered is a ‘grant’;
- provide information on the applicable requirements of the FMA Act and Regulations, the CGGs (particularly any ministerial reporting obligations), including the legal authority for the grant;
- outline the application and selection processes, including the selection criteria, that were used; and
- include the merits of the proposed grant or grants relative to the grant guidelines and the ‘key consideration’ of achieving value with public money.
Grant management arrangements
36. The program guidelines required that NUWDP grants be governed by a legally enforceable funding agreement, and DEWHA initially sought to develop a funding agreement with SA Water. However, as it eventuated, the two ADP grants are governed by Implementation Plans under the Water for the Future National Partnership Agreement. The change in approach occurred as a result of a misunderstanding of the new Federal Financial Relations Framework at the time it was being introduced. Among other adverse effects, the decision to adopt Implementation Plans under a National Partnership Agreement contributed to delays in the finalisation of governance arrangements for the grant funding (the Implementation Plans were not agreed until February 2010, for the $100 million grant, and July 2011, for the $228 million grant).
37. However, the most significant factor in the delay in finalising the governance arrangements for the $228 million grant related to South Australia meeting the funding condition adopted after the SPBC approval of the grant, which required that the expanded ADP provide environmental benefits. Considerable effort was made by senior DEWHA (and, subsequently, DSEWPaC) officials as well as at ministerial level to obtain a proposal from South Australia that would meet the funding condition. Obtaining an acceptable proposal from South Australia was challenging given that the following circumstances placed the Commonwealth in a difficult negotiating position:
- funding was obtained by South Australia other than through a competitive funding round (a process that can provide an incentive for project proponents to offer maximum benefits in return for an Australian Government funding contribution in order for their grant proposal to be ranked more highly than other competing proposals);
- the South Australian Government had not offered to commit to reducing its draw on the Murray River when seeking Australian Government funding for the expansion project; and
- the amount and nature of the environmental benefits expected was not discussed or agreed with South Australia prior to funding being awarded, and the funding condition did not require a specific level of water savings to be provided.
38. The proposed audit report issued under section 19 of the Auditor-General Act 1997 was provided to DSEWPaC, Finance and PM&C as well as the Prime Minister and Minister for Climate Change and Water at the time the grants were awarded, the Parliamentary Secretary for Sustainability and Urban Water who approved the Implementation Plan for the second grant and the Minister for Sustainability, Environment, Water, Population and Communities. A formal response to the draft report was provided by DSEWPaC and Finance.
Department of Sustainability, Environment, Water, Population and Communities
39. DSEWPaC’s response is provided below.
The Department of Sustainability, Environment, Water, Population and Communities agrees with the recommendation of the audit report (Recommendation 1).
The Government’s decisions to provide funding for the Adelaide Desalination Plant reflected judgements, at a time of unprecedented drought, about the level of risk to Adelaide’s future water supply that would be acceptable to the community. These judgements informed the Government’s decision about the consequent Commonwealth financial contribution. Such judgements are properly matters for Ministers to determine.
In advising the Government, the department was cognisant of the fact that funding for the Adelaide Desalination Plant was a specific election commitment. The guidelines for the National Urban Water and Desalination Plan explicitly provided for funding related to the election commitment to be determined outside the general competitive grant funding round. As required, the department undertook an assessment against the criteria in the guidelines. The department acknowledges the findings of the report in relation to the documented assessment process by the department for the first tranche of funding.
In advising on the second tranche of funding, the department’s advice was informed by its earlier assessment of the first tranche, which, as noted above, had been conducted against the criteria in the guidelines. As indicated in the Audit report, a further substantive evaluation of the second tranche of funding against the criteria was not undertaken.
The department agrees with the audit recommendation and is committed to continuous improvement in grants administration processes. This has included implementation of a Grants Administration Framework in June 2011 and establishment of the Portfolio Project Management Office in May 2012.
Department of Finance and Deregulation
40. The Department of Finance and Deregulation’s response is provided below.
The Australian Government's grants policy framework has evolved significantly over recent years, from December 2008 when the Government agreed to implement a new grants administration framework in response to the Strategic Review of The Administration of Australian Government Grant Programs (Strategic Review), to the more recently enhanced and updated Commonwealth Grant Guidelines (CGGs) (with updates to take effect on 1 June 2013).
In advising on the development of the grants policy framework, Finance has been committed to supporting sound grants management practices and to accountability and transparency in grants administration and decision making. In response to the Government's decisions following the Strategic Review, Finance implemented the CGGs in July 2009 which sought to improve transparency and accountability and introduce rigour and common processes around government granting activity. The most recent changes to the CGGs have been in response to continuing issues in grants administration practices, which have been highlighted, particularly by the ANAO.
In particular, Finance notes that the grants administration arrangements that applied at the time of the National Urban Water and Desalination Plan and the Adelaide Desalination Plant grants, which are relevant for this audit, relate to interim arrangements introduced in January 2009 and not to the CGGs themselves (which took effect in July 2009). The interim arrangements reflect the Government's decision to implement a new grants administration framework provided general policy guidance in relation to grant approval and reporting processes, whereas the CGGs introduced mandatory requirements from July 2009.
For grant spending proposals that result from election commitments or arise other than through a competitive process, ANAO recommends that the Department of Sustainability, Environment, Water, Population and Communities promote the achievement of value for money by:
(a) clearly informing decision-makers about the extent to which a proposal meets the program assessment criteria;
(b) applying cost-benefit analysis as a key input to its advice on decisions about whether to provide Australian Government funding towards public infrastructure projects; and
(c) providing Ministers with other options should they wish to pursue funding for proposals that are not consistent with the guidelines for the relevant grant program.
DSEWPAC response: Agreed
Finance response: Agreed in principle
 Kevin Rudd and Anthony Albanese, Federal Labor’s $1 Billion National Urban Water and Desalination Plan, Media Statement, 28 October 2007.
 Specifically, on 28 April 2008 as part of the 2008–09 Budget process, when agreeing to $1 billion of funding over six years for the NUWDP, Ministers decided that five election commitments, including the ADP, should be funded from within the NUWDP. It was further decided that any use of NUWDP funds to make a financial contribution to the ADP was ‘subject to a proposal from the South Australian Government, which meets the program criteria’.
 Senator the Hon Penny Wong, Minister for Climate Change and Water, Additional $228 million to Help Secure Adelaide’s Water Supply, Media Release PW Budget 09, 12 May 2009.
 In September 2010, DEWHA became the Department of Sustainability, Environment, Water, Population and Communities (DSEWPaC). Throughout this report, the department responsible for administering the NUWDP at the relevant point in time is referred to as the DEWHA or DSEWPaC, as appropriate.
 In the context of the 2007 election, the Australian Labor Party reiterated an intention first outlined in 2005 to establish Infrastructure Australia as an independent statutory authority to assist in the planning and coordination of Australia’s infrastructure needs. The election policy announcement of the NUWDP had stated that Infrastructure Australia would also undertake an independent cost-benefit assessment of all proposals for NUWDP funding. However, after the election, administrative responsibility for the NUWDP was allocated to DEWHA.
 See ANAO Audit Report No.2 2010–11, Conduct by Infrastructure Australia of the First National Infrastructure Audit and Development of the Infrastructure Priority List, Canberra, 23 July 2010.
 Each request referred to South Australia’s submission to Infrastructure Australia.
 Advice specific to the ADP’s expansion was provided by central agencies on two occasions, with particular input from the Department of Finance and Deregulation (Finance) and the Department of the Prime Minister and Cabinet (PM&C).
 Section 37 of the Auditor-General Act 1997 outlines the circumstances in which particular information is not to be included in public reports, including if the Auditor-General is of the opinion that disclosure of the information would be contrary to the public interest.
 The Strategic Review of the Administration of Australian Government Grant Programs (Strategic Review).
 The Government decisions were made after considering the July 2008 report of the Strategic Review of the Administration of Australian Government Grant Programs, which had referenced ANAO audits of grant programs.
 Specifically, the department identified that the project would proceed without Australian Government funding, meaning that the third merit criterion relating to the cost-effectiveness of an Australian Government contribution (see paragraph 2) had not been met. However, in its brief to the Minister, the department advised that the proposal met all program criteria.
 In this respect, the Strategic Review of Grants observed that: ‘The statutory obligations applying to the approval of spending proposals deriving from election commitments are no different from those attaching to the approval of any other spending proposal; accordingly, departments should provide their Ministers with advice on options for the funding of election commitments, having regard both to a Minister’s statutory obligations and the extent to which the spending proposals satisfy the eligibility or assessment criteria for grant programs which might be used to fund the commitments.’
 In requesting this audit, Senator Birmingham had outlined that, despite questioning through the Senate Estimates process, he had been unable to establish how the request for the second grant had been made, what assessment of its merits had been undertaken or how the decision to award the grant had been taken.
 The BAF evaluation criterion not met related to a proposal demonstrating, through a thorough cost-benefit analysis, that it represents good value for money. This criterion was closely aligned with the published methodology for compiling the Infrastructure Priority List, which had outlined that objective cost-benefit analysis (through Benefit Cost Rations, BCRs) would be used as the ‘primary driver’ of decision-making (and Infrastructure Australia had assessed that the BCR for the ADP expansion proposal was too low to support being included on the Infrastructure Priority List). Similarly, the second NUWDP merit criterion was ‘cost-effectiveness of the project’ with the program guidelines stating that, in terms of this criterion, proposals should include cost-benefit analysis.
 A funding condition was adopted after the SPBC approval of the grant requiring that the expanded ADP provide environmental benefits but obtaining an acceptable proposal from South Australia was challenging for a number of reasons including that the funding was not awarded through a competitive process. A competitive funding process provides an incentive for project proponents to offer maximum benefits in return for an Australian Government funding contribution in order for their grant proposal to be ranked more highly than other competing proposals, noting that one of the NUWDP merit criteria related to environmental benefits.
 In March 2013, the Department of Finance and Deregulation advised ANAO that it agreed that agency advice should be provided on the merit of a proposed grant, relative to the relevant grant program guidelines, before a funding decision is taken but that central agencies do not have ‘the same capacity or access to information that is required to evaluate a grant proposal against the relevant program guidelines’ and that ‘it would be inappropriate and inconsistent with the Administrative Arrangements Orders for central agencies to take on the role of a line-agency in an area for which a line‑Minister is responsible’.
 Selection criteria form the key link between the program’s stated objectives and the outcomes that are expected to be achieved from the funding provided, and fall into two main groups, as follows:
- eligibility criteria are the criteria that an application must satisfy in order to be considered for funding; and
- merit (or assessment) criteria are the criteria against which all eligible, compliant applications will be assessed in order to determine their merits against the program objectives and, for competitive programs, other competing applications.
 Costs were to be recovered over time from users, with the application indicating that a $100 million grant would reduce by 0.6 per cent (from 17.5 per cent to 16.9 per cent) the annual price increase. The program guidelines had included a reduction in the cost of water to end users as an example of an additional outcome from NUWDP funding that would be considered to demonstrate merit against the ‘cost-effectiveness of the Australian Government contribution’ merit criterion.
 Desalination plants involve high fixed costs and significant, fixed, unavoidable operating costs such that the cost per kilolitre of water is greater in scenarios where the plant is not operated at full capacity.
 BCRs calculated by SA Water drawing on the work of the state’s Desalination Working Group, indicated that the project was not cost-effective (with a BCR less than 1.0).
 ANAO has previously concluded that Infrastructure Australia’s methodology provided a ‘robust framework’ for the development of infrastructure priority lists, and that ‘a clear strength in the process employed in developing the first Infrastructure Priority List was the rigorous approach adopted to analysing proponent submissions against the published criteria’. See ANAO Audit Report No.2 2010–11, Conduct by Infrastructure Australia of the First National Infrastructure Audit and Development of the Infrastructure Priority List, Canberra, 23 July 2010, pp. 20 – 23.
 Central agencies were aware of the program eligibility and merit criteria.
 ANAO’s grants administration Better Practice Guide notes that departing from the selection process and/or criteria outlined in the published guidelines may be detrimental to the conduct of a transparent and equitable grant program. Further in this respect, the Commonwealth Grant Guidelines advise that, in the interests of transparency, accountability and equity, the program guidelines should document any circumstances in which it might be considered necessary to waive or amend the eligibility or assessment criteria established for a granting activity.
 SA Water’s application for funding towards the 50GL per annum plant advised that a plant with this capacity was expected to reduce the risk of level 5 water restrictions from a 1 in 45 year chance without a 50GL per annum ADP to 1 in 230 years with a 50 GL per annum ADP.
 See footnote 15.
 However, both before and after funding was approved, DEWHA had suggested that South Australia should be required to provide environmental water as part of the conditions of the grant. Accordingly, the announcement of the grant included a statement that funding would be provided on the basis that the expanded project would deliver improved water security for Adelaide and a reduced reliance on the Murray River, along with environmental benefits. In this respect, the NUWDP program guidelines included a merit criterion titled ‘environmental benefits’, with the guidelines outlining that proposals for NUWDP funding should describe ‘for projects that generate water savings for environmental flows, how they intend to preserve and manage those flows over the long term’.