Recent performance audit priority for the Australian National Audit Office (ANAO) in the Infrastructure, Transport, Regional Development and Local Government portfolio has been directed at the administration of funding for land transport. Accordingly, this audit is one of a series ANAO is undertaking of land transport funding programs. Four audits have already been completed, namely:

  • ANAO Audit Report No. 31 2005–06, Roads to Recovery;
  • ANAO Audit Report No. 45 2006–07, The National Black Spot Program;
  • ANAO Audit Report No. 22 2007–08, Administration of Grants to the Australian Rail Track Corporation; and
  • ANAO Audit Report No. 29 2008–09, Delivery of Projects on the AusLink National Network.

Summary

Introduction

1. The Strategic Regional Program (now Off-Network Program) is a grant program administered by the Department of Infrastructure, Transport, Regional Development and Local Government (DITRDLG, formerly the Department of Transport and Regional Services or DOTARS) (the department).1

2. The Strategic Regional Program was foreshadowed in the then Government's November 2002 Green Paper, titled AusLink: Towards the National Land Transport Plan. The Green Paper outlined that, in addition to funds for the renewal of local roads continuing to be provided under the Roads to Recovery Program (which involved direct allocation to all Local Government Authorities (LGAs) based upon an identified formula), funds would be earmarked for regional transport infrastructure. The Green Paper canvassed options for allocating and administering funding for regional projects, and stated that:

Some element of competition could apply in allocating funding to the best projects and criteria will be developed to evaluate projects for the purposes of allocating funding…All projects nominated for AusLink funding will be subjected to standard evaluation criteria.2

3. The June 2004 White Paper, titled AusLink: Building Our National Land Transport Future, was announced as being the then Government's formal policy statement on land transport.3 The earmarking of funds for strategic regional projects was examined further in the White Paper, which announced that:

The Government has decided that regional funding under AusLink will provide a balance between the immediate need to continue reducing the backlog of local road works and a forward-looking agenda to build sustainable regional economies and communities.4

4. To give effect to this approach, the White Paper outlined that there would be two regional funding streams: one based on the existing Roads to Recovery Program and another directed at strategic regional transport infrastructure priorities. The key features for the latter funding stream, which became known as the Strategic Regional Program, were:

  • funding of $400 million over four years for land transport projects of regional economic and social significance; and
  • operation as a merit-based grant program. All funding was to be competitively allocated based on applications received from LGAs, with regional groupings of councils to perform a significant role in developing and contributing to project proposals.

5. Shortly after the calling of the 2004 Federal election, the Australian Local Government Association (ALGA) wrote to the then Minister for Transport and Regional Services:

  • advising the then Minister of ‘substantial disquiet among many local councils' over the proposal for a single strategic regional project funding pool and seeking an ‘early, positive statement confirming state-based allocations'; and
  • requesting confirmation that all LGAs, including metropolitan councils, would be able to bid for strategic regional funding.

6. During the 2004 election campaign, the Coalition announced some changes in the policy approach to funding for strategic regional projects outlined in the White Paper. Specifically, the Coalition's policy titled Building Our National Transport Future announced on 15 September 2004 outlined that:

  • the Roads to Recovery direct-allocation component would be restored to $1.2 billion over four years (from the $800 million that had been proposed in the White Paper); and
  • an additional $150 million was to be provided over five years (2004 05 to 2008 09), of which $120 million was to be for local road projects of strategic regional importance and $30 million for local roads in the unincorporated areas.

7. To date, five funding rounds have occurred under Part 6 of the land transport legislation, being the Part established to give effect to the Strategic Regional Program. The first four rounds (conducted by the former Government) have been completed, but the consideration of projects for funding by the current Government under the fifth round had yet to be completed when audit fieldwork concluded in November 2009. Funding decisions in respect to the first four rounds were made by the then Minister for Local Government, Territories and Roads. Since November 2007, funding decisions have been made by the Minister for Infrastructure, Transport, Regional Development and Local Government.

First funding round: 2004

8. Of the $120 million announced in the September 2004 election policy document as being available under the competitive strategic component, 78 per cent ($94.085 million) was the subject of Coalition funding announcements made prior to and during the 2004 election campaign in respect of 23 projects. The 22 commitments5 advised to the then Minister for Local Government, Territories and Roads by the department following the election totalled $93.185 million, leaving less than $27 million available to be competitively allocated. Funding of $93.06 million was ultimately approved between 21 October 2005 and 26 February 2007 for 21 of the election commitments.6

Second funding round: public call for applications in 2006

9. In light of the policy undertakings made in the June 2004 White Paper policy statement and the September 2004 election policy, a number of LGAs submitted proposals after the 2004 Federal election seeking funding for various projects. The then Government advised these LGAs that:

  • the 2004 election commitment projects had accelerated implementation of the Strategic Regional Program; and
  • as the remaining $27 million in Program funding did not become available until 2007 08 and 2008 09, competitive bids would not be called for until 2006 07.

10. Ministers were also advised that the $27 million was insufficient to implement a funding program that was consistent with the White Paper commitments to competitively allocate funding based on applications received from LGAs.7 As a result, an additional $100 million in Program funding was announced in November 2005, for allocation through a competitive funding round to be conducted in 2006.

11. Applications were called in March 2006, with Program Guidelines being issued at this time together with an electronic funding application form. Applications closed on 1 May 2006. In total, the department accepted for assessment 495 applications seeking $1.04 billion in Strategic Regional Program funding towards projects with a total estimated cost of $2.02 billion. These applications were assessed in stages, with separate assessment procedures being developed for ‘Large Projects' (those seeking more than $1 million in Program funding) and ‘Small Projects' (applications seeking up to $1 million in Program funding).

12. Funding decisions were made by the then Minister for Local Government, Territories and Roads between 2 November and 19 December 2006. In total, 86 projects were approved for a total of $125.69 million in Program funding.

Third funding round: 2007 Budget measure

13. The May 2007 Budget announced:

  • further additional funding for the Strategic Regional Program of $250 million in the then current 2006 07 financial year so as to allow more funding offers to be made in response to applications received from Councils8; and
  • further funding of $300 million over five years to 2013 2014 as part of a second five-year AusLink program (known as AusLink 2). The $300 million in Strategic Regional Program funding was to be allocated in two $150 million application rounds to be held in 2009–10 and 2011-12.9

14. Between 11 May 2007 and 21 June 2007, funding offers were made in relation to 102 projects, with offers being accepted in respect to 101 projects involving an aggregate Program contribution of $257.33 million. The majority of projects funded through the 2007 Budget round were selected from those that had been unsuccessful in the 2006 application round. The remaining projects approved for funding related either to unsolicited proposals received after the 2006 round had closed to applications or to a small number of Councils that were provided with the opportunity in May 2007 to apply to their local Federal Member for funding. Payment to the funding recipient of the full amount of each grant by 30 June 2007 was a key element of the 2007 Budget round (for other rounds, payments were to be made in accordance with project progress).

Fourth funding round: projects funded in 2007 from savings and reallocations within the Program

15. Between July and August 2007, $1.77 million in Program funding was approved by the then Minister in relation to three regional transport projects. These projects were funded from project savings and re-allocations within the Program. None of the projects had been the subject of an application to the 2006 competitive funding round, and only one of the three had been the subject of a subsequent request from the relevant Council for Strategic Regional Program funding. The other two projects originated, respectively, from a recently made application to the National Black Spot Program and funding that had been announced as having been secured by the local Federal Member.

Fifth funding round: 2007 election commitments

16. During 2007, the then-Opposition had announced a number of land transport election commitments including for various projects not located on the National Land Transport Network defined under the AusLink (National Land Transport) Act 2005 (AusLink Act) (as it then was). Some of the 2007 election commitments have been, or are expected to be, funded as Off-Network Projects under Part 6 of the Nation Building Program (National Land Transport) Act 2009 (Nation Building Program Act) (as the land transport legislation is now called—see further at paragraph 20).

17. With the change of government and as all remaining Program funding to 2013 2014 has been allocated to 2007 election commitments, there are no longer any plans to run a further two application rounds in 2009 10 and 2011 12 (see paragraph 13).

Legislative framework

18. Commonwealth grant programs involve the expenditure of public money and are thus subject to applicable financial management legislation. Specifically, the Financial Management and Accountability Act 1997 (FMA Act) provides a framework for the proper management of public money and public property. This framework includes requirements governing the process by which decisions are made about whether public money should be spent on individual grants, including those made under the Strategic Regional Program/Off-Network Program.

19. The Strategic Regional Program was established under Part 6 of the AusLink Act, which had given formal effect to the AusLink White Paper. Under the AusLink Act, Part 6 was titled AusLink Strategic Regional Projects (which is referred to in this report as the Strategic Regional Program).

20. In June 2009, the focus of Part 6 of the legislation on funding projects that are of strategic regional importance was removed by the current Government. The AusLink Act was renamed the Nation Building Program Act, with Part 6 being amended to replace all references to ‘Strategic Regional Projects' with ‘Nation Building Program Off-Network Projects' (which is referred to in this report as the Off-Network Program) and to remove other regional references. The purpose of that amendment was:

to make it clear that this Part can be used to approve funding for projects which are off the National Land Transport Network (off-network projects) and which are not in regional areas of Australia (as well as off-network projects that are in regional areas).10

21. The two Acts are collectively referred to in this report as the land transport legislation.

22. The land transport legislation stipulates certain requirements in relation to the approval of projects (eligibility and appropriateness under the legislation, set out in non-exclusive terms), which lead to a Project Approval Instrument that has to be executed before a project is considered to have been formally approved by the Minister for the purposes of the land transport legislation. In practice, the administration of the Strategic Regional Program (and subsequent Off-Network Program) has involved the responsible Minister approving a spending proposal to award a grant to a particular project for the purposes of the FMA Act, as well as signing an Approval Instrument under the land transport legislation. These approvals often occurred separately, particularly for projects approved in the 2006 and 2007 funding rounds.

23. With effect from 1 July 2009, the legislative and policy framework applying to the assessment and approval of grants has been significantly enhanced.11 While not affecting a Minister's right to decide on the allocation of grants:

  • unless specifically agreed otherwise by Government, competitive,
  • merit-based selection processes are to be used, based upon clearly defined and published selection criteria; and
  • as Ministers are now required to seek advice before approving a grant, agencies therefore are required to make recommendations about its merits under the guidelines applying to the program, and Ministers must record the substantive reasons for each funding decision.

24. The fifth funding round will be completed under the new financial framework, whereas the earlier funding rounds were conducted in full under the prior, less robust framework.

Audit objectives and scope

25. Recent performance audit priority for the Australian National Audit Office (ANAO) in the Infrastructure, Transport, Regional Development and Local Government portfolio has been directed at the administration of funding for land transport. Accordingly, this audit is one of a series ANAO is undertaking of land transport funding programs. Four audits have already been completed, namely:

  • ANAO Audit Report No. 31 2005–06, Roads to Recovery;
  • ANAO Audit Report No. 45 2006–07, The National Black Spot Program;
  • ANAO Audit Report No. 22 2007–08, Administration of Grants to the Australian Rail Track Corporation; and
  • ANAO Audit Report No. 29 2008–09, Delivery of Projects on the AusLink National Network.

26. In addition to this audit of the Strategic Regional Program/Off-Network Program, another audit currently underway is examining the management of the current Roads to Recovery Program (including a follow-up of implementation of agreed recommendations made by ANAO in its audit of the initial Roads to Recovery Program), and is expected to be tabled in 2009–10.

27. This audit was conducted under section 18 of the Auditor-General Act 1997. The objective of the audit was to assess whether the Strategic Regional Program/Off-Network Program has been effectively administered. The scope of the audit included each of the five funding rounds, and also considered the ongoing operation of the Program in the context of the July 2009 changes to the framework for grants administration. The proposed report of the audit was issued in March 2010 to DITRDLG. Extracts of the proposed report were provided to the former Minister that had responsibility for funding decisions under the Strategic Regional Program and to the Department of Finance and Deregulation (Finance) (in respect to the application of the new grants administration framework).

Overall audit conclusion

28. The Strategic Regional Program was introduced as the result of a policy development process that included the November 2002 AusLink Green Paper and culminated in the June 2004 AusLink White Paper. The policy decision to introduce the Program was intended to address the risk that projects might be of regional significance and value but may not be competitive against larger projects on the National Network, and may also not be funded through Roads to Recovery allocations to LGAs, particularly where the project crosses LGA boundaries.

29. The AusLink White Paper outlined that candidate projects for strategic regional funding would be assessed on merit primarily against the AusLink objective of promoting sustainable national and regional economic growth and connectivity. However, the land transport legislation was drafted in a way that does not require the allocation of available funds to projects competing on merit in response to an open application process. Nor does the legislation set out criteria that must be applied in deciding whether it is appropriate to sign a Project Approval Instrument for a project under Part 6 of the legislation. Nevertheless, the only Guidelines that have been published in respect to the Program stated that funding would be allocated through a competitive, merit based process based on criteria set out in those Guidelines.

30. The administration of the Program has been affected by decisions of both the former and current governments to use the available Program funding to meet the cost of election commitments. Whilst a relatively common approach, the experience with this Program highlights that delivering upon election commitments through existing grant programs introduces a range of program management issues. In this case, adopting such an approach meant that stakeholder expectations were unlikely to be met given the formal policy document that led to the establishment of Part 6 of the land transport legislation had outlined that all funding would be competitively allocated based on applications received from LGAs, with regional groupings of councils to perform a significant role in developing and contributing to project proposals. In addition:

  • the use of the Program to fund commitments from the 2004 election delayed from 2004 to 2006 the calling of applications for Program funding, and required $100 million in additional Program funding to be allocated in order that a sufficient pool of funds would be available to support a credible call for applications (in March 2006); and
  • directing all of the available funding to commitments announced during the 2007 election resulted in the cancellation of further application rounds that were to have been held in 2009–10 and 2011 12. This has meant that, unless further funding is allocated to the Program, land transport projects of strategic regional significance will need to be considered for funding through other programs.

31. Most of the funding rounds examined by ANAO did not relate to election commitments. Rather, all of the projects funded in 2006 (the second funding round under the Program) and most of the projects funded in 2007 (the third and fourth funding rounds) were drawn from the applications submitted to the March 2006 application round.

32. A common feature of the second, third and fourth rounds was that funding decisions were not demonstrably focused on approving those projects assessed as best meeting published eligibility and assessment criteria. For example, 65 per cent of projects approved for funding in those rounds by the then Minister had either not been assessed against the published Program Guidelines; had been assessed as being ineligible under the Guidelines; or had not been assessed as meeting the relevant criteria to a high degree.12 Further, the department did not make any formal recommendations as to which projects should be funded and which should not be funded, based on the outcome of its assessment process.

33. The reasons for approving grants for projects that the department had rated poorly against the published selection criteria, or which had not been assessed by the department, were not documented by the relevant Minister. Nor did the then Minister record the reasons for approving funding for some highly rated eligible applications, but not for others (whilst also approving funding for other projects that had been rated less favourably). In this context, the distribution of funding in these rounds predominantly favoured electorates held by the then Coalition Government. These circumstances leave those funding decisions open to the interpretation that they had been made for political reasons and not on the merits of the project.

34. Under the financial framework in place until July 2009, documenting reasons for decisions was recognised as a sound practice, but was not a requirement. As indicated above, since 1 July 2009, approvers (including Ministers where they perform this role) are required to record the substantive reasons for approving grant funding and the basis on which he or she is satisfied that a proposed grant satisfies the statutory requirements for approving the expenditure of public money.13 The associated promulgation in July 2009 of the Commonwealth Grant Guidelines: Policies and Principles for Grants Administration (Commonwealth Grant Guidelines or CGGs) was aimed at improving the transparency and accountability of grants decision-making processes. Agencies are expected to transition existing grant programs to be consistent with the CGGs.

35. While not affecting a Minister's right to decide on the allocation of grants, the enhanced framework promotes greater transparency and accountability for funding decisions.14 However, based on advice provided to ANAO by the department in April 2010, 34 of 45 projects within the Off-Network Program (those being delivered by the States) have been excluded from the coverage of the CGGs by virtue of the administrative arrangements that have been adopted. For the remaining 11 projects (being delivered by local government), program guidelines have not been published (notwithstanding the requirement under the CGGs that this be done).

36. Irrespective of whether the payment arrangements are captured by the CGGs, the essential principles applying to sound grants administration (as reflected by the Finance Minister's statement in issuing the CGGs15) include transparent and accountable decision-making processes. The legislative provisions governing Ministerial approval of funding for Off-Network projects were developed prior to the new grants policy framework being adopted. The Infrastructure Minister's ability to fulfil his/her obligations under the land transport legislation in a way that accords with the principles underpinning the new grants policy framework would be supported by the documenting of the criteria that will be applied in determining whether a project will be funded. This could be achieved either through legislative amendment or the publication of program guidelines (as previously occurred in 2006).

37. Whilst existing Program funding has been fully committed and there are no current plans to call for further applications for funding under Part 6 of the land transport legislation, the experience with the Program offers useful lessons for the future administration of grants in respect to road projects, and more broadly. In this light, ANAO has made seven recommendations aimed at:

  • promoting transparent and accountable decision-making in a way that is consistent with the principles underpinning the new grants policy framework;
  • as key elements of any future grant programs, encouraging the adoption of:

- open application approaches and competitive allocation of funding in accordance with published criteria;

- more robust departmental practices for assessing the merits of candidate projects for funding; and

- arrangements that seek to link grant payments to project needs, and better manage the risk of any advance payments; and

  • the development of Program funding arrangements that assist to promote the delivery of Program outcomes by providing options to effectively manage cost pressures on projects previously approved for funding.

Key findings by chapter

Decision-making framework (Chapter 2)

38. The Strategic Regional Program/Off-Network Program operates under land transport legislation (Part 6 of the AusLink Act, renamed the Nation Building Program Act in June 2009). The land transport legislation stipulates certain requirements in relation to the approval of projects (eligibility and appropriateness considerations under the legislation, set out in non-exclusive terms), which lead to a Project Approval Instrument that has to be executed before a project is considered to have been formally approved by the Minister for the purposes of Part 6 of the land transport legislation.

39. In addition to the land transport legislation, as the Strategic Regional Program/Off-Network Program involve the expenditure of public money, it is thus also subject to applicable financial management legislation. Specifically, the FMA Act provides a framework for the proper management of public money and public property. This framework includes requirements governing the process by which decisions are made about whether public money should be spent on individual grants, including those made under the Programs examined in this audit.

40. For its part, the financial management framework stipulates certain requirements in relation to the approval of spending proposals (such as proposals relating to the making of individual grants). In practice, the administration of the Strategic Regional Program (and subsequent Off-Network Program) has involved the responsible Minister approving a spending proposal to award a grant to a particular project for the purposes of the FMA Act, as well as signing an Approval Instrument under the land transport legislation. These approvals often occurred separately, particularly for projects approved in the 2006 and 2007 funding rounds. There was also often a significant delay between the FMA Act approval being given and the grant being announced, and the relevant Minister subsequently formally signing a Project Approval Instrument for the purposes of the land transport legislation. In addition, in a number of instances, the approach taken to the preparation of Project Approval Instruments in relation to projects that the Minister had already approved for the purposes of the financial management legislation failed to demonstrate the merit of projects in terms of the land transport legislation.16

41. With effect from 1 July 2009, a new statutory and policy framework was introduced by the Government to improve the transparency and accountability of decision-making processes for grants.17 The new framework involves:

  • the continued application of the general requirements set out in the financial management framework regulating the expenditure of public money, which reflect sound principles that have evolved over time;
  • new specific requirements under the financial management framework in relation to grants administration, in particular a requirement for decision-makers to record the substantive reasons for their approval of a grant, in addition to the factual terms of the approval; and
  • the issuing of the CGGs, under the Financial Management and Accountability Regulations 1997.

42. Transparent and accountable administration of the current Off-Network Program in a way that accords with the principles underpinning the new grants policy framework can be achieved through legislative amendment or by the provisions of the land transport legislation being supplemented with published guidelines that include straightforward, easily understood eligibility and assessment criteria. This is because:

  • under the CGGs:
    • unless specifically agreed otherwise, competitive, merit-based selection processes should be used, based upon clearly defined selection criteria;
    • eligibility and assessment criteria should be set out in the grant guidelines, together with the circumstances (if any) in which the eligibility and assessment criteria may be waived or amended; and
    • criteria for eligibility should be straightforward, easily understood and effectively communicated to potential applicants; whereas
  •  the land transport legislation was drafted in a way that does not require the allocation of available funds to projects competing on merit in response to an open application process.18 Nor does the land transport legislation set out criteria that must be applied in deciding whether it is appropriate to sign a Project Approval Instrument.19

43. The audit also points to the challenges that arise in circumstances where some program payments are subject to the CGGs but others are not. In this case, despite being governed by a single Part of the land transport legislation and being identified for funding through a similar process, the Off-Network Program now consists of a mixture of grants that are subject to the CGGs (being those made for projects delivered by LGAs) and grants that are not subject to the CGGs (being those made for projects delivered by States). This is because Stated-delivered projects are no longer governed by individual Funding Agreements20, but are instead included (along with National Network projects that will be considered for approval under Part 3 of the land transport legislation) within National Partnership Agreements developed shortly before the CGGs were introduced.21 Nevertheless, whilst not mandatory in respect to State-delivered projects being funded under the Off-Network Program, consideration of the principles outlined in the CGGs may assist to promote transparency and accountability in the effective administration of such projects.

44. Against this background, the report of the 2008 Strategic Review of the Administration of Australian Government Grant Programs, which led to the introduction of the CGGs, identified that some programs had been delivered through grants so as to avoid the application of the Commonwealth Procurement Guidelines.22 It may be contrary to the policy intent that underpinned development of a new grants administration framework for the payment arrangements adopted to result in that framework not being applied to transactions that are, in substance, a grant made for a specified project or activity and subject to terms and conditions imposed by the Commonwealth. In this respect, Finance has issued guidance to agencies on how to distinguish between a grant and other common types of financial arrangements. In the interests of achieving greater commonality in the treatment of like payments, there would be benefit in Finance also considering, and, as appropriate, advising the Finance Minister on, the merits of re-examining the interaction of the new grants framework and these types of grant payments to States and Territories made through mechanisms established under the Federal Financial Relations Act 2009.

2006 application and assessment process (Chapter 3)

45. The 2006 application round commenced in March 2006, with a public call for applications for the $127 million in available funding. Potential applicants were advised that projects would be assessed on their competitive merits against standard criteria, with funding to be allocated accordingly. However, little time was allowed for potential applicants to develop project proposals and/or to confirm the availability or otherwise of partner funding, with applications closing on 1 May 2006.23

46. Whilst projects were assessed by the department against published criteria, assessment procedures were not sufficiently robust. The department assigned individual qualitative ratings to eligible applications that proceeded to the detailed assessment stage (High, Medium or Low), but the rating methodology adopted did not provide for clarity and transparency in the assessment and selection process. The ratings of Low, Medium and High were not defined, including in terms of the assessed level of achievement of program objectives and value for money they represented. In particular, the rating scale adopted made no provision for the department to give a clear assessment that an application was not suitable for funding due to not meeting the published criteria. As a result, the rating of Low could be misinterpreted as indicating a project satisfied the criteria set out in the published Program Guidelines, but was not preferred; whereas, in fact, 98 per cent of the projects that proceeded to a detailed assessment and were assigned an overall rating of Low had been assessed as failing to meet and/or barely meeting24 one or more of the assessment criteria (with the remainder being assessed as representing high engineering risks).

47. In addition to shortcomings in the assessment of applications, the department did not identify a ranked order of eligible applications based on their comparative merits. Nor did the department make any recommendations in respect to whether individual projects should be funded or not, based on their relative merits when compared against competing eligible projects. Rather, information was provided to the then Minister on each project assessed as eligible, including those that had been rated as Low against the requirements of the Program Guidelines.

2006 funding round (Chapter 4)

48. The second funding round was concluded in November and December 2006 when the then Minister approved funding for 86 projects with a total Program contribution of $125.69 million. Without documenting his reasons25, the then Minister approved some (but not all) projects rated High by the department; some (but not all) projects rated Medium; and some projects rated Low. In this context, applications that involved a project affecting a Coalition-held electorate had a significantly higher rate of approval in 2006 than those affecting an ALP-held electorate or an electorate held by an Independent Member (see Table S 1).

Table S 1 Application approvals by political party: 2006 funding decisions

Notes:
1. Total is greater than the 495 applications received due to 20 projects being located in both a Coalition held electorate and an electorate held by the ALP and a further 13 projects being located in both a Coalition held electorate and an electorate held by an Independent.
2. Total is greater than the 86 projects approved in 2006 due to three projects being located in both a Coalition held electorate and an electorate held by the ALP and a further four projects being located in both a Coalition held electorate and an electorate held by an Independent.

Source: ANAO analysis of departmental and Australian Electoral Commission data.

2007 funding rounds (Chapter 5)

49. The third funding round was made possible by the May 2007 Federal Budget including additional Program funding of $250 million so as to enable more offers to be made in response to applications received in 2006. This reflected the fact that the 2006 application round was significantly over-subscribed, with the 495 applications accepted for assessment seeking funding totaling $1.04 billion, compared to the $127 million in available Strategic Regional Program funding.

50. There was no public announcement associated with the 2007 Budget that there would be opportunities to submit new applications for the additional funding now available (which was approximately twice as much as had been available in the 2006 funding round). This was notwithstanding that some Councils that had sought funding after the 2006 application round had closed had been advised that opportunities to apply would be made available should additional funding be made available to the Program. However, at least five Members of Parliament from marginal Liberal Party-held electorates were provided with an opportunity to obtain letters from one or more LGAs in their electorate seeking Program funding for nominated projects. Those letters were then provided directly to the then Minister for Local Government, Territories and Roads by the relevant Member.

51. In addition, in response to a request from the Office of the then Minister for Transport and Regional Services, prior to the May 2007 Budget announcement of additional Strategic Regional Program funding, the department had provided the then Minister's Office with information on various projects that had not been funded in the 2006 round. This information comprised:

  • a list of applications that had been assessed as ineligible for funding in the 2006 round;
  • a list of all eligible but unsuccessful applications to the 2006 round (irrespective of whether they had been rated as meeting the published criteria to a high standard or not); and
  • information in relation to two projects that had been the subject of unsolicited proposals for funding that had been received some months after the 2006 application round had closed.

52. In total, 409 projects (83 per cent of all applications) were not approved for funding in the 2006 round announced in December 2006. Of those, 32 had been rated overall by the department as meeting the Program criteria to a High degree, with a further 39 unsuccessful projects having been rated overall as Medium. However, the significant majority of unsuccessful applications (338 projects or 83 per cent of unsuccessful applications) had been either assessed as ineligible or rated Low when considered against the criteria set out in the Program Guidelines (see Table S 2).

Table S 2 Departmental rating of unsuccessful applications to the 2006 round against the Program Guidelines

Source: ANAO analysis of departmental data.

53. Applications that do not satisfy the assessment criteria set out in the Program Guidelines published for a grant program, or in respect of which no inquiries have been undertaken, are unlikely to meet the requirements under FMA Regulation 926 for approving the expenditure of public money. It is also important for agencies and Ministers to remain cognisant of the fact that, given the requirements of the financial framework, only eligible applications that demonstrably provide value for the public money involved should be approved, even if there are insufficient applications of adequate quality on hand to exhaust the available appropriation within a required timeframe.

54. In that context, collectively, the unsuccessful applications to the 2006 round that had been rated as either High or Medium against the Program Guidelines had sought total Program funding of $186.2 million, compared to the $250 million in additional funding that was available to be allocated in the 2007 Budget round. However, there was no documented consideration as to whether it would be likely to be in accordance with the Minister's obligations under the FMA Regulations to consider the approval of funding for applications that:

  • had been assessed as ineligible under the published criteria and, therefore, had not been further assessed by the department;
  • had been rated Low following the Initial Review of Large Projects (those seeking more than $1 million in Program funding) and, therefore, had not been subjected to a detailed assessment against the published criteria and were not to have been considered further for funding;
  • had been assessed against the published criteria and rated Low overall (including failing to meet one or more criteria); and/or
  • related to unsolicited proposals that had not been assessed by the department against any criteria.27

55. There was also no documented consideration, either in providing the lists of available projects or subsequent to the department being advised of the projects that were to be offered funding, of the risks involved in considering for funding applications that had been submitted 12 months earlier28 without any steps having been taken to determine whether:

  • the project had already proceeded such that Australian Government funding was no longer needed; and/or
  • the project scope, timeframe and/or total estimated project cost had changed.

56. A list of approved projects was provided to the department by the then Minister for Local Government, Territories and Roads on 10 May 2007 (and a revised list was provided on 11 May 2007). These lists included 12 projects that had been the subject of May 2007 letters from the relevant LGA to their local Federal Liberal Member seeking funding for the project. None of the 12 projects had been submitted for funding as part of the 2006 public call for applications.29 In addition, none of the projects was subject to a departmental assessment against the published Program criteria, either before or subsequent to the then Minister advising the department that he had decided that funding offers should be made in respect to those projects.

57. The then Minister had decided that funding offers should be made in relation to 89 projects for total Program funding of $249.85 million. Offers were required to be accepted by 15 June 2007 (one month after being made)—this timeframe was driven by a desire to pay all approved funding to the respective funding recipients by 30 June 2007.30 With one exception, each recipient of a letter of offer accepted the offer. The $10 million in funding from the offer that was unable to be accepted by the due date31 was combined with a residual amount that had not been included in the original 2007 funding offers; residual funds available for the 2006 application round that had not been allocated in that round; and an amount relating to a 2004 election commitment to a project that had not proceeded, and used by the then Minister on 21 June 2007 to approve funding offers in respect to a further 13 projects that had been unsuccessful in the 2006 round. Each of these second tranche offers was accepted. The reasons for selecting the projects approved for funding by the then Minister in May and June 2007 were not documented.

58. A feature32 of the 2007 Budget round was that 47 per cent of the projects approved for funding (48 projects) had either not been an application to the 2006 round and had not been assessed by the department; had been assessed as ineligible in the 2006 round and, therefore, had not been further assessed against the Guidelines; or had been rated Low against the published criteria in the 2006 round. Such projects predominantly related to a Coalition-held electorate.

59. In addition, later in 2007, the then Minister approved $1.77 million in funding in relation to a further three projects located in Coalition-held seats. This represented the fourth funding round. None of the approved projects had been the subject of an application to the 2006 competitive funding round, and only one of the three had been the subject of a subsequent request from the relevant Council for Strategic Regional Program funding.33 Again, the reasons for approving funding for these projects were not documented.

Program savings and program contingency arrangements

60. The importance of decisions to fund infrastructure projects being based on robust cost estimates is well recognised. Nevertheless, the application of cost estimating standards is not able to eliminate cost overruns. Accordingly, the management of cost overruns, as well as any savings for individual projects, is an important aspect of the overall management of infrastructure funding programs.

61. For the Strategic Regional Program, the approach taken has been to allocate almost all of the available Program funding to individual projects with no contingency reserve retained. Further, in circumstances where individual projects have been delivered at a lower cost than had been expected, or funding offers have not been accepted, the project ‘savings' have been used to either fund additional projects or the funding recipient has been permitted to increase the scope of an existing project. For example, in the former respect, the $1.77 million fourth funding round in 2007 was made possible by project savings and re-allocations within the Program.

62. As a result of this approach, there has been no flexibility available to consider the merits of requests from funding recipients for a Commonwealth contribution toward increased project costs. In circumstances where additional funding has not been available to funding recipients from non-Australian Government sources, project scopes have been reduced and, for some projects, the future of the project has been placed in jeopardy.

Election commitments (Chapter 6)

63. The first and fifth funding rounds involved funding being directed to projects announced as part of the 2004 and 2007 Federal election campaigns respectively, as follows:

  • 2004 election commitment announcements in respect to 23 projects consumed 78 per cent ($94.085 million) of the $120 million available under the Strategic Regional Program (as announced in the 15 September 2004 Coalition election policy—see paragraph 5). A direct consequence of this was that a public call for applications was delayed until March 2006, after an additional $100 million in Program funding was provided in November 2005; and
  • as all remaining Program funding to 2013 2014 has been allocated to 2007 election commitments, there are no longer any plans to run a further two application rounds in 2009 10 and 2011 12 and, unless further funding is allocated to the Program, land transport projects of strategic regional significance have to be funded through other programs.34

64. Except where a Minister with the necessary authority has approved spending for the relevant project, party election policies and other election commitments announced during an election campaign represent undertakings to provide certain funding, services or facilities in the event the relevant party is elected or re-elected to government.35 The importance to governments of delivering upon their election commitments is recognised. Nevertheless, the use of public money to fulfil such commitments may only occur in accordance with the financial framework that governs the expenditure of funds from the Consolidated Revenue Fund.36

65. Like all proposals to spend public money, the financial framework requires that any decision to approve expenditure to satisfy an election commitment must be undertaken in a manner that considers whether the proposed expenditure represents efficient, effective and ethical use of public money that is not inconsistent with the policies of the Commonwealth.37 In this respect, a number of improvements were made to the documented processes by which information was to be obtained and assessed to inform funding decisions in relation to the 2007 election commitments funded under the Program compared with those adopted for the 2004 election commitments. This was important given that there have been long delays in the implementation of a significant proportion of the 2004 election commitment projects, together with increases in the cost of some projects and/or reductions in the scope of the works being undertaken. However, there was not a consistent standard adopted with regard to implementing the improved procedures documented for 2007 election commitments.

66. Since July 2009, the administration of the fifth funding round has been taking place within the context of the enhanced grants legislative and policy framework. However:

  • grants made under Part 6 of the land transport legislation satisfy the definition of a grant set out in the FMA Regulations and are not an arrangement that is stipulated as being taken not to be a grant. Accordingly, all such grants may be expected to be subject to the requirements of the CGGs. Nevertheless, since 2009, the process adopted in respect to administering payments for State-delivered Off-Network projects has meant that LGA-delivered projects approved under Part 6 of the land transport legislation are covered by the CGGs whereas State-delivered projects are not38; and
  • theCGGs outline an expectation that grant program guidelines will be made publicly available, and will effectively communicate to potential funding recipients all criteria that will be applied in the selection of funded projects. In these respects:

- whilst the guidelines for State-delivered Off-Network projects (in the form of Notes on Administration) are publicly available, the guidelines that apply where proponents are LGAs have not been published; and

- because the Nation Building Program Act sets out eligibility and appropriateness factors in non-exclusive terms, the practice of Guidelines referencing the provisions of the Act alone will not satisfy the requirement of the CGGs that all eligibility and assessment criteria be clearly articulated and be made available to potential funding recipients. Rather, transparent and accountable administration of the Off-Network Program in a way that accords with the principles underpinning the new grants policy framework will require the provisions of the Act to be supplemented with published guidelines that include straightforward, easily understood eligibility and assessment criteria.

Agency response

67. As noted, the proposed report of the audit was issued in March 2010 to DITRDLG, with extracts of the proposed report being provided to the former Minister that had responsibility for funding decisions under the Strategic Regional Program and Finance. Comments received from Finance have been reflected in the audit report. DITRDLG provided the following formal comments:

The two programs covered in this report are the Strategic Regional Program and the Off-Network Program. The Strategic Regional Program ended in 2009 and therefore a number of the recommendations in this audit that would apply to the program will not be actioned. The Off-Network Program is not currently application based and program funding has already been fully allocated. The Department acknowledges that the principles of all audit recommendations and the Commonwealth Grant Guidelines (CGGs) apply to programs within the portfolio.

The Department agrees with five of the seven recommendations and agrees in principle to the remaining two recommendations but notes that these two recommendations do not apply to the Off-Network Program.

The Department acknowledges ANAO's recognition in the Report of the wide ranging administrative improvements the Department has put in place over the past 18 months to enhance oversight of the implementation of Off-Network Program/Strategic Regional Program projects. The Department is committed to continuous improvement of its administration of the Government's land transport infrastructure investment program.

The Department will work to ensure that delivery of the Government's land transport infrastructure investment programs continues to meet policy and legislative requirements as well as its accountability responsibilities. This will be achieved through continual review and improvement of the regulatory, contractual and operational oversight processes, while at the same time ensuring that projects are managed and resources allocated in accordance with the appropriate strategies to mitigate risk to the Commonwealth.

Footnotes

1 In this report, ANAO refers to both the then DOTARS and the current DITRDLG as ‘the department'.

2 Department of Transport and Regional Services, AusLink Green Paper, AusLink: Towards the National Land Transport Plan, November 2002, p. 72.

3 Department of Transport and Regional Services, AusLink White Paper, AusLink: Building our National Transport Future, June 2004, Ministerial Foreword.

4 ibid., p. 81.

5 The department did not identify a commitment that had been announced during the 2004 election campaign by the sitting Liberal Member for McMillan that $900 000 would be provided from the Strategic Regional Program to seal an 18 kilometre section of Grand Ridge Road between Korumburra-Warragul Road and Mirboo North. An application to fund this project was later submitted during the second funding round in 2006, and was approved for funding by the then Minister for Local Government, Territories and Roads.

6 In one instance, no Program funding was approved because an actual project was unable to be identified in respect to a commitment of $125 000 announced in respect to Bribie Island Road in Queensland.

7 For example, by November 2005, the department had received 27 unsolicited submissions seeking a total of $242 million in Australian Government funding.

8 Mark Vaile, Deputy Prime Minister and Minister for Transport and Regional Services and Jim Lloyd, Minister for Local Government, Territories and Roads, Regional Roads: Building for the Future, Joint Media Release 009/TRS Budget, 8 May 2007.

9 Building a Strong Future for Regional Australia 2007 2008, Statement by the Honourable Mark Vaile MP Deputy Prime Minister, Minister for Transport and Regional Services, Leader of the Nationals; The Honourable Jim Lloyd MP Minister for Local Government, Territories and Roads; The Honourable De-Anne Kelly MP Parliamentary Secretary to the Deputy Prime Minister and Minister for Transport and Regional Services, 8 May 2007, p. 95.

10 Explanatory Memorandum, Nation Building Program (National Land Transport) Amendment Bill 2009, circulated by authority of the Minister for Infrastructure, Transport, Regional Development and Local Government, the Hon. Anthony Albanese MP.

11 A number of mandatory aspects of the new framework were initially introduced as policy requirements by the Government on 16 January 2009 through the issuing of Finance Minister's Instructions (in the form of Estimates Memorandum 2009/09 Changes to Grant Approval and Reporting Requirements), and were given statutory authority from July 2009 through the issuing of the Commonwealth Grant Guidelines: Policies and Principles for Grants Administration (Commonwealth Grant Guidelines or CGGs) under FMA Regulation 7A, as well as through amendment of the FMA Regulations.

12 This included 60 projects rated overall as Medium. Of these, 37 (62 per cent) were assessed as not meeting or barely meeting at least one criterion.

13 Finance Minister's Instructions issued in January 2009 (see footnote 11) introduced a requirement to record the basis for approval where a grant was approved in the responsible Minister's own electorate or contrary to departmental advice. Since 1 July 2009, approvers (including Ministers where they perform this role) are required by FMA Regulation 12 to record the substantive reasons for approving all grants funding, having regard for the requirements of FMA Regulation 9. The CGGs further require that Ministers report annually to the Finance Minister all decisions to approve a grant that the relevant agency had recommended be rejected, and the basis for those decisions, as well as all decisions to approve a grant in the Minister's own electorate.

14 ANAO Audit Report No. 21 2009 10, Administration of the Water Smart Australia Program, Canberra, 4 February 2010, p. 17.

15 See Department of Finance and Deregulation, Commonwealth Grant Guidelines: Policies and Principles for Grants Administration, Financial Management Guidance No. 23, July 2009, Foreword.

16 For example, a number of projects that the department had assessed as not meeting particular criteria in the context of the 2006 assessment process were nevertheless approved for funding by the then Minister. The department subsequently prepared a Project Approval Instrument in relation to those projects for signature by the Minister for the purposes of the land transport legislation. Despite the department's earlier assessment concluding that a project did not satisfy a criterion that reflected one of the matters listed in section 55 of the land transport legislation as being matters the Minister may consider in determining that it is appropriate to approve the project under Part 6 of the legislation (such as improving safety of transport operations or improving access for regional communities to services and employment), ANAO observed a number of instances in which the subsequent Project Approval Instrument was prepared on the basis that the project did, in fact, satisfy that criterion. This approach was taken despite the department having received no advice from the then Minister in relation to the basis on which the Minister had approved the project for funding, and without any attempt being made to reconcile the two assessments or otherwise drawing the issue to the attention of the then Minister.

17 See footnote 11.

18 Rather, section 56 of the land transport legislation provides that the Minister may invite submissions from anybody the Minister thinks appropriate and by any method the Minister thinks appropriate but that the Minister can also approve a project even if it was not submitted in response to an invitation. This provision was included in the AusLink Act of 2005 (which pre-dated the CGGs) and was duplicated in the Nation Building Program Act created in 2009 through amendment of the AusLink Act.

19 The land transport legislation stipulates that a Minister may approve a project under Part 6 of the legislation if, and only if, the Minister is satisfied that the project is eligible for approval and the Minister considers that it is appropriate to approve the project. Whilst the legislation identifies matters the Minister may have regard to when deciding whether it is appropriate to sign a Project Approval Instrument, the Minister is not required to have regard to these factors and may have regard to other, unspecified, factors.

20 Prior to 2009, all projects approved for funding under Part 6 of the land transport legislation were covered by Funding Agreements. This included projects where funding was being paid direct to State road authorities for work on a State road, as well as projects on a State road being delivered by a State authority but where the Funding Agreement was signed with an LGA.

21 FMA Regulation 3A(2) stipulates a number of arrangements that are taken not to be grants and to which, therefore, the CGGs do not apply. These include a payment to a State or Territory that is made for the purposes of the Federal Financial Relations Act 2009 (FFR Act), including National Partnership Payments made under National Partnership Agreements. National Partnership Agreements are made between the Commonwealth and the States and Territories as part of the revised approach to Commonwealth/State financial relations introduced through the Intergovernmental Agreement on Federal Financial Relations and the FFR Act. For administrative reasons, National Partnership Agreements on implementation of the Nation Building Program now include not only National Network projects that may be funded under Part 3 of the land transport legislation (as was the case under the previous AusLink Bilateral Agreements), but also Off-Network Projects approved under Part 6 of the legislation that are to be delivered by the State or Territory. Funding for projects listed in each Agreement will be provided through National Partnership Payments. The Nation Building Program National Partnership Agreements were finalised in advance of the CGGs being promulgated, meaning the adverse effect of including Part 6 projects within their coverage would not have been known to the department at the time the Agreements were drafted.

22 Mr Peter Grant PSM, Strategic Review of the Administration of Australian Government Grant Programs, 31 July 2008, p. 3.

23 The 2006 Program Guidelines had required partner funding of a minimum of 50 per cent of total project costs for projects on State roads and a minimum of 30 per cent where more than $1 million in Program funding was being sought and the project was on a local road.

24 For each of the individual assessment criteria, projects were assessed as either: ‘Strongly meets', ‘Generally meets', ‘Barely meets' or ‘Did not meet'. The basis on which the rating assigned to a project in respect to each criterion would be determined was not documented. Nor did the department document the rationale for applying the separate ratings of ‘did not meet' and ‘barely met' for individual criteria, or the difference this assessment was intended to convey in terms of the application's capacity to contribute to achieving the program's objectives.

25 As noted at paragraph 34, until January 2009, documenting reasons for decisions was recognised as a sound practice, but was not a requirement. As further noted at footnote 13, in January 2009 the Government introduced a requirement for the basis of approval to be recorded where a grant was approved in the responsible Minister's own electorate or contrary to departmental advice, with this being a statutory requirement under FMA Regulation 12 since 1 July 2009 for all grant approvals.

26 And, from 1 July 2009, the CGGs.

27 By way of comparison, a more robust approach was taken to the departmental response to a September 2007 request from the Office of the then Minister for Local Government, Territories and Roads for an electronic copy of all unfunded Strategic Regional Program applications received in the context of the 2006 funding round and of the one page summary of the departmental assessment prepared in relation to each project. Specifically, the department advised the then Minister that projects that did not satisfy the eligibility criteria or could not demonstrate ‘even on initial review' that they would likely meet the assessment criteria would be unlikely to satisfy the test under FMA Regulation 9 of making efficient and effective use of public money and therefore details of these projects were not provided to the then Minister.

28 As noted, applications to the 2006 funding round were invited on 2 March 2006 and closed on 1 May 2006. In addition, due to the short timeframe provided for the development of applications, many proposals submitted to the 2006 round had been based on studies or estimates that had been undertaken some months (or, in some cases, years) prior to the application process.

29 In two instances, the relevant LGA had not submitted any applications for funding in response to the 2006 public invitation for project applications.

30 Proponents that had projects approved for funding as part of the 2007 Budget round were offered more attractive funding terms and conditions than those proponents who had successfully applied for funding in 2006. In particular, they were provided with their funds in advance in full and had more time to deliver the projects.

31 This project was one of the 12 projects that had been approved on the basis of a May 2007 letter from the relevant LGA to their local Member of Parliament (see paragraph 56).

32 A further feature of this round was the payment of the full amount of each grant by 30 June 2007. There was no documented risk assessment and cost benefit analysis that considered whether designing the round for payment in advance of need was warranted or not. This was compounded by the department's administration of the Funding Agreement progress reporting and monitoring arrangements not being intensified to reflect the heightened risks from advance payment. In addition, there have been some significant delays in the application of the prepaid funding to the construction of the relevant road project.

33 The other two projects originated, respectively, from a recently made application to the National Black Spot Program and funding that had been announced as having been secured by the local Federal Member.

34 For example, the 2008 09 application round for the Regional and Local Community Infrastructure Program—Strategic Projects was used to provide $18 million to Etheridge Shire Council in Queensland to fund the replacement of the Einasleigh River Bridge. The application to that Program had been assessed as non-compliant as the published Program Guidelines stated that funding would not be available for transport infrastructure. However, funding was approved by the Government because floods had: ‘demonstrated again the vulnerability of the communities served by this bridge.'

35 ANAO Audit Report No. 14 2007–08, Performance Audit of the Regional Partnerships Program, Volume 1—Summary and Recommendations, Canberra, 15 November 2007, p. 55.

36 ibid.

37 ibid., p. 56.

38 See footnote 21.

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