Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18

Tabled: 24 October 2018

Overview

The Treasurer tabled the 2017–18 Annual Financial Report of the State of Victoria (AFR) in Parliament on 20 September 2018. The AFR includes the financial statements of the State of Victoria (the state) and the general government sector (GGS).

This report provides Parliament with information about matters arising from our financial audit of the 2017–18 AFR. It also provides our assessment of the financial sustainability of the three sectors that make up the state at 30 June 2018—the GGS, public financial corporations (PFC) and public non‑financial corporations (PNFC).

Conclusion

This year, we provided clear audit opinions on the financial statements of the 33 significant state‐controlled entities included in the AFR and, consequently, on the AFR.

The state continues to operate sustainably and is well positioned financially.

Findings

Significant transactions in 2017–18

As part of our financial audit of the 2017–18 AFR, we considered the following significant transactions:

  • the West Gate Tunnel (WGT) project
  • the Metro Tunnel project
  • the sale of the state's investment in Snowy Hydro Limited.
West Gate Tunnel project

On 11 December 2017, the state entered a public private partnership (PPP) contract with Transurban for the construction of a road tunnel, widening of the West Gate Freeway and an elevated motorway that will link the West Gate Freeway to the CityLink tollway and the Port of Melbourne. The project is expected to be completed by 2022.

Construction will cost an estimated $6.7 billion. The estimated state contribution to the project is $2.7 billion, with the remaining construction costs and operating and maintenance costs over the term of the contract to be funded by Transurban through tolling revenue collected from users of the WGT and CityLink. The tolling arrangements require legislation to be passed.

At 30 June 2018, this legislation had not been passed. Therefore, against the requirements of current Australian accounting standards, the WGT transaction is a finance lease. This is reflected in the AFR, where actual and contingent commitments are disclosed.

Metro Tunnel project

The Metro Tunnel project will deliver a new underground rail network that will cross Melbourne and join two existing rail lines. Construction will cost an estimated $11.1 billion and is expected to be completed by 2025.

Contracts for key components of the project have been finalised, and construction has commenced. At 30 June 2018, the state had spent $1.6 billion on the project. These costs are disclosed in the AFR.

Sale of the state's investment in Snowy Hydro Limited

In March 2018, the state entered into an agreement to sell its 29 per cent equity investment in Snowy Hydro Limited to the Commonwealth Government for $2.03 billion. On 29 June 2018, the state received the entire proceeds from the transaction and derecognised its investment—it made a profit of $24.8 million on this sale.

Internal controls

We assessed the internal controls implemented by the Department of Treasury and Finance (DTF) as effective to support the preparation of a complete and accurate AFR. We also judged that the overall internal control frameworks at the 33 significant state‐controlled entities were adequate to support their preparation of complete and accurate financial reports.

State-controlled entities can improve the way they address common control weaknesses.

Financial sustainability of the general government sector

We assessed the GGS's financial sustainability in the following key areas:

  • operating results
  • debt
  • its target of fully funding its superannuation liability by 2035.
Operating results

The 2017–18 financial year marks the fifth consecutive year in which the GGS generated a positive net result from transactions. Coupled with low debt, this demonstrates the state's strong financial position and the government's sound financial management. This should provide the state with an adequate buffer against unanticipated shocks to revenue or increases in expenditure.

To maintain its financial sustainability, the state will need to continue to closely monitor growth in its employee costs, which account for one third of its total expenditure. Unlike discretionary grants and much expenditure on supplies and services, staff costs tend to be fixed over the short to medium term.

Debt

Government's use of debt for major projects is an important source of finance, particularly in a low‐interest‐rate environment.

At 30 June 2018, the GGS had borrowings of $33.5 billion, an increase of $4.7 billion from the prior year. This increase reflects additional borrowings required to finance the Level Crossing Removal Program and other infrastructure projects.

Over the next four financial years, GGS debt is estimated to increase by $11.4 billion to fund capital projects and public services. Over this period, the GGS's debt burden is expected to remain manageable.

Superannuation liability

At 30 June 2018, the state owed $25.2 billion to four superannuation funds. This represents the gap between the estimated future amounts the funds will be required to pay to their members, and the value of the assets held by the funds to meet these payments.

The state government has a target to reduce its obligation to zero by 2035. Each year, actuaries provide the state government with a plan detailing the payments that need to be made each financial year to achieve the state's target. Over the past five financial years, the state has met these payments.

Financial sustainability of public financial corporations

PFCs manage most of the state's financial assets and liabilities. Over the last five financial years the sector has delivered strong financial outcomes.

These entities need to be managed prudently, to ensure their own long-term solvency and viability, and to reduce the risk of adverse impacts on the state's finances. There are no immediate short-term risks likely to significantly impact the financial sustainability of the sector.

Financial sustainability of public non-financial corporations

The PNFC sector consists of 72 entities. The 19 water entities generate 55 per cent of the revenue of the PNFC sector and hold 34 per cent of its assets.

There are no immediate short-term financial sustainability risks to the water sector although, in the longer term, some water entities will need to consider the risks associated with their ability to replace or renew assets and repay debt. In particular, the two rural water entities continue to make significant losses, as their customer service and usages charges, which are regulated, do not adequately fund their depreciation costs.

Submissions and comments received

As required by section 16A of the Audit Act 1994, we gave a draft copy of this report to the Treasurer of Victoria and asked for his submissions or comments.

As required by section 16(3) of the Audit Act 1994, we gave relevant extracts of this report to named agencies and asked for their submissions or comments.

We also provided a copy of the report to the Department of Premier and Cabinet.

We have considered their views when reaching our audit conclusions.

The following is a summary of those responses. The full responses are included in Appendix A.

The Treasurer of Victoria highlighted the clear audit opinion issued on the 2017–18 AFR, and was pleased that the report presents a positive assessment of the state's finances and operating sustainability.

The Secretary of the Department of Justice and Regulation has confirmed the accuracy of the information reported in Figure 4D, and has indicated that the issues raised have either been resolved by the external service provider deploying further functionality, or will be resolved as the deployment of the VIEW system continues to progress throughout this year and into early 2019.

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