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

Tabled: 24 October 2018

2 Results of audits

2.1 Audit opinion for the year ended 30 June 2018

This year, we provided a clear audit opinion on the AFR. A clear audit opinion adds credibility to the financial statements by providing reasonable assurance that reported information is reliable and accurate, in keeping with the requirements of relevant accounting standards and applicable legislation. A copy is shown in Appendix B.

2.2 Reliability of financial statements

The frequency and number of material adjustments arising from an audit is a measure of the accuracy of draft financial statements. Ideally, the entity should not need to make any material adjustments once it has submitted its draft financial statements for audit.

Figure 2A details the material adjustments we identified through our audits of the 33 significant state-controlled entities.

Figure 2A
Material adjustments to the draft financial statements of significant state‑controlled entities

Entity

Reason for material adjustment to draft financial statements

Department of Economic Development, Jobs, Transport and Resources

To disclose future contingent commitments of $4 billion relating to the West Gate Tunnel project.

Department of Environment, Land, Water and Planning

To correct the managerial valuation of property, plant and equipment (PPE) by $1.2 billion as the department's initial calculation had incorrectly applied the Valuer-General indices.

Source: VAGO.

Figure 2B details the material adjustments that were identified during our audit of the AFR.

Figure 2B
Material adjustments to the draft AFR

Issue

Reason for material adjustment to draft financial statements

Omission of a material subsequent event

The financial statements of the Public Transport Development Authority included a $1.7 billion subsequent event relating to the signing of metropolitan bus services contracts.

The processes implemented by DTF to collect subsequent event information for inclusion in the AFR did not capture this transaction.

Prior-period error relating to misclassification of reserves

The draft AFR Consolidated Statement of Changes in Equity included a misclassification of $425 million between types of reserves. The issue was corrected by amending the opening balance for these reserves from 1 July 2016. This was identified as part of DTF's quality-assurance processes.

Source: VAGO.

2.3 Timeliness of financial statements

Timely financial statements provide relevant and useful information to the public and to the entity's other stakeholders. The timeliness of the AFR is measured against the statutory reporting deadline established in the Financial Management Act 1994, and against the annual production timetable set by DTF.

In 2017–18, DTF was able to produce a timely AFR.

Timeliness of significant state-controlled entities

The timely preparation and audit of the AFR largely depends on the 33 significant state-controlled entities meeting their key milestones in the AFR preparation timetable, and on the early identification and resolution of significant accounting issues.

DTF set a milestone date of 17 August 2018 for all significant state-controlled entities to finalise their financial statements, including an audit opinion. This date was set to allow adequate time to prepare and audit the AFR. Figure 2C shows the performance of significant state-controlled entities in finalising their financial statements against the DTF-imposed milestone over the past five financial years.

Figure 2C
Timeliness of significant state-controlled entities against the DTF-imposed milestone

Figure 2C shows the timeliness of significant state-controlled entities against the DTF-imposed milestone

Source: VAGO.

Only three of the 33 significant state-controlled entities met the milestone date in 2017–18. Despite this, the AFR was tabled in Parliament within the statutory deadline.

2.4 Significant transactions in 2017–18

As part of our audit, we focus our attention on significant financial reporting risks. These are usually material and complex transactions that are significant to the state—either in nature or value. For 2017–18, we needed to review and assess three unique transactions:

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

A public private partnership (PPP) is an arrangement where the private sector will design, build, finance, maintain and operate the public infrastructure for a period before transferring ownership of the asset to the state.

West Gate Tunnel project

Background

On 11 December 2017, the state entered a 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 WGT will give road users an alternative to the West Gate Bridge.

Under the contract, Transurban is required to design, partially finance and construct the WGT, then operate and maintain it for a period of approximately 23 years before transferring it back to the state. Construction is expected to be completed by late 2022.

The contract also required Transurban to manage Stage 1 of the Monash Freeway upgrade and deliver Webb Dock improvement works.

Figure 2D
Map of the proposed WGT project

Figure 2D shows a map of the proposed WGT project

Source: Western Distributor Authority, West Gate Tunnel Project Environmental Effects Statement—Development and Urban Design Plans, December 2017.

Status of the project

At 30 June 2018, the project was underway:

  • The Monash Freeway upgrade and Webb Dock improvement works were complete—these are reported as assets in the AFR.
  • The state had paid $75.5 million of project costs—these are reported as prepayments in the AFR.
  • Project costs of $245.6 million to be paid by the state had been incurred and financed by Transurban. This amount forms part of the state capital contribution to the project and is payable by the state to Transurban. It is reported as an interest-free loan in the AFR, consistent with the terms of the contract.
Project costs

The total cost of the WGT project is estimated at $6.7 billion in nominal terms. The estimated state contribution is $2.7 billion in nominal terms, consisting mainly of cash, capital works and land.

Figure 2E
The state's contribution to the WGT project

Element

Nominal amount (excluding GST) $ million

Cash

1 389

Monash Freeway upgrade

283

Webb Dock improvement works

61

Other state costs(a)

927

Total state contribution

2 660

(a) Includes land acquisition, project management and other direct costs.
Source: VAGO.

Transurban will fund the balance of the project of $4.0 billion.

How the project is funded

The $2.7 billion state contributions will primarily be funded through a combination of operating surpluses and debt.

The government has granted Transurban the right to collect tolls from users of the WGT, and intends to amend and extend current Transurban tolling arrangements on CityLink to fund the remaining construction costs and operating and maintenance costs over the term of the contract. The extension will be for a further 10 years. The contract requires the state to seek the passage of legislation in Parliament in relation to tolling users of the WGT, and Parliamentary support to amend and extend the current CityLink arrangements.

If legislation is not passed or Parliamentary support is not obtained in the agreed form and time frame, the contract requires the state to make additional contributions of up to $4.0 billion to replace funding from the relevant toll revenue streams. Additionally, the state will need to pay a rate of return on finances raised by Transurban. Several variables, disclosed in note 7.2 of the 2017–18 AFR, may reduce this amount.

The State Budget does not allow for the additional state contributions that will be required if legislation is not passed by Parliament. The state will need to determine how these contributions will be funded if they become payable. Without adjusting the phasing of, or reprioritising, other government initiatives, any additional state contributions made to Transurban under the contract will be funded through a combination of operating surpluses and debt. This will increase the GGS's net debt and will impact one of government's key financial measures—net debt to gross state product, discussed in Part 5 of this report.

Accounting for the project

PPPs are long-term, complex contracts where both the public and private sectors have an interest in the underlying infrastructure. Accounting for them is challenging. There is currently no Australian accounting standard or other whole-of-Victorian Government guidance that prescribes the accounting treatment for PPP transactions.

The conditional nature of the Transurban contract adds additional complexity. The financing aspect of the contract requires legislation to be passed in the agreed form and within a specific time frame, and outlines the financial implications for the state if this does not occur. There are fundamental differences in the accounting treatment depending on the timing and nature of Parliament's decisions, which are out of the government's control.

Even though the government expects the legislation to pass and that it will obtain Parliamentary support, Australian accounting standards require that the transaction be accounted for based on the facts and circumstances current at 30 June 2018. At that date, and up to the date the Treasurer and Secretary of DTF certified the financial statements, legislation had not been passed by Parliament and support had not been obtained.

Since the legislation had not been introduced before Parliament at the reporting date, government needed to account for and disclose its contributions on the basis that there is no legislation or Parliamentary support. In the absence of an accounting standard or guidance for PPPs, government needed to exercise significant judgement to make sure the treatment reflected the substance and economic reality of the transaction, with reference to other Australian accounting standards dealing with similar transactions. Australian accounting standard AASB 117 Leases is the most relevant standard in this context.

When we assessed the attributes of the WGT contract against the current AASB 117 standard, without Parliamentary support in place, the transaction is a finance lease in nature. This has resulted in the full amount of actual and contingent commitments being disclosed in the 2017–18 AFR.

This accounting treatment will need to be reassessed:

  • if legislation is passed and/or Parliamentary support is obtained
  • when Australian accounting standard AASB 1059 Service Concession Arrangements: Grantors comes into effect.

Metro Tunnel project

Background

The Metro Tunnel project will deliver a new underground rail line that will cross Melbourne and join two existing rail lines. This involves building two tunnels, approximately nine kilometres long, and five new train stations, which will be integrated with the existing metropolitan train network. The project is expected to be completed by 2025.

Figure 2F
Map of the proposed Metro Tunnel project

Figure 2F shows a map of the proposed Metro Tunnel project

Note: Indicative route only.
Source: VAGO based on Metro Tunnel Project, metrotunnel.vic.gov.au.

The project includes three key components, shown in Figure 2G.

Figure 2G
Key components of the Metro Tunnel project

Component

Description

Tunnels and stations

Design, construction, fit-out and maintenance of tunnels and stations.

Being delivered under a public private partnership arrangement.

Rail systems

Delivery of significant components for signals, power and operational control systems.

Being delivered under an alliance arrangement.

Rail infrastructure

Design and construction of the tunnel entrance and exit portals.

Being delivered under a separate alliance arrangement.

Source: VAGO.

An alliance arrangement is an arrangement between two or more entities that have agreed to share resources on a specific project.

The tunnels and stations component is being delivered under a PPP arrangement. The private sector consortium responsible for the design, construction and fit-out of the tunnels and stations is required to maintain the majority of the assets for a period of 25 years. Once built, the state will recognise in the AFR the assets and a finance lease liability for amounts payable to the consortium. The lease liability will be paid over 25 years. Maintenance costs, which are in addition to the lease liability, will be paid and expensed as incurred.

The rail systems and rail infrastructure components are being delivered under other procurement approaches. Construction costs will be paid progressively during construction and reported in the AFR as work-in-progress assets until complete.

Status of the project

At 30 June 2018, the state had:

  • executed contracts for the tunnels and stations, and the rail systems components—the contract for the rail infrastructure component was executed on 28 September 2018
  • paid $411.5 million to the early works managing contractor
  • paid $68.3 million to the tunnels and stations PPP
  • paid $29.0 million to the rail systems alliance
  • paid $1102.0 million for land acquisition, design development, business case and procurement activities, geotechnical investigations, high-capacity signalling, project management and other direct costs.
Project costs

Construction of this project will cost an estimated $11.1 billion in nominal terms. The state will fund the project through a combination of operating surpluses and debt.

Figure 2H
Estimated cost of the Metro Tunnel project

Element

Nominal value (excluding GST) $ million

Early works and wider network enhancements(a)

915.7

Tunnels and stations(b)

4 935.9

Rail systems

1 123.4

Rail infrastructure

1 001.5

Other state costs(c)

3 083.6

Total cost

11 060.1

(a) Includes early works managing contractor, tram works and road and wider network enhancements.
(b) Capital cost excluding financing and maintenance costs. The state will pay $4 068.3 million during construction and the remainder over a 25-year lease period.
(c) Includes land acquisition, design development, business case and procurement activities, geotechnical investigations, high-capacity signalling, project management and other direct costs.
Source: VAGO.

Sale of investment in Snowy Hydro Limited

Snowy Hydro Limited is a company that owns and operates the Snowy Mountain Hydro-electric Scheme as an independent electricity generator in the National Electricity Market.

In March 2018, the state entered into an agreement to sell its 29 per cent equity holding 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.

Back to Top