East West Link Project

Tabled: 9 December 2015

Appendix C. Audit Act 1994 section 16—submissions and comments

Introduction

In accordance with section 16(3) of the Audit Act 1994, a copy of this report, or part of this report, was provided to the Department of Premier & Cabinet, the Department of Treasury & Finance, the Department of Economic Development, Jobs, Transport & Resources, the Department of Environment, Land, Water & Planning, the Department of Justice & Regulation, the Victorian Government Solicitor's Office, Linking Melbourne Authority, VicRoads, Environment Protection Authority, Planning Panels Victoria and the Treasury Corporation of Victoria.

The submissions and comments provided are not subject to audit nor the evidentiary standards required to reach an audit conclusion. Responsibility for the accuracy, fairness and balance of those comments rests solely with the agency head.

Responses were received as follows:

Further audit comment:

RESPONSE provided by the Secretary, Department of Premier & Cabinet

Response provided by the Secretary, Department of Premier & Cabinet, page 1.

Response provided by the Secretary, Department of Premier & Cabinet, page 2.

Response provided by the Secretary, Department of Premier & Cabinet, page 3.
 

Further audit comment in response to the submission from the Secretary, Department of Premier & Cabinet

The department has raised several significant issues and concerns in their responses that warrant my further comment.

Department of Premier & Cabinet comment

Acting Auditor-General Comment

1. ‘Frank’ advice standard

As the Secretary of the Department of Premier and Cabinet, I have an institutional stewardship role in maintaining the integrity of the Victorian Public Service as a trusted, apolitical public institution. I take this role very seriously.

It is important that the secretary, as head of the Victorian Public Service has taken a particular interest in the findings of my report concerning the quality of advice to government. I welcome this and strongly support the fundamental principles set out in the secretary’s response that:

  • the public service must remain apolitical so that it is able to serve successive governments of different political persuasions and providing frank, professional and candid advice is a key aspect of remaining apolitical
  • public servants have an essential public function to advise, assist and, importantly, influence government decision-making through professional, frank and apolitical advice
  • the role and duties of the public service do not extend to prosecuting its own agenda by repeatedly advising of other options that it may prefer, but that run counter to the government’s settled and stated decision
  • for a public servant to hinder progress to implement a lawful decision, constantly recontest that decision, or refrain from actions that follow from a lawful decision of a minister, would be to fundamentally undermine the Victorian Public Service as a trusted and apolitical institution, undermine the integrity of our democracy, and erode longstanding conventions that are at the heart of the Westminster system of government.

 

However, the secretary has drawn a number of inferences in his response suggesting this report is at odds with these fundamental principles. This is incorrect and these and other elements of the secretary’s response are addressed below.

DPC maintains its position that the advice provided to government on the project was consistent with the standards, practices and conventions associated with the public service’s role in our Westminster system of representative democracy. Further, the advice met all relevant standards under the Public Administration Act 2004 and the Code of Conduct for Victorian Public Sector Employees.

It should be noted that my report also includes praise for the robust advice to government on elements of the project.

My report clearly describes instances where advice to government in the lead up to key decisions on the project fell short of the required standard of frankness. Specifically, in the lead up to the government decision to sign the contract with East West Connect (EWC) the advice to government did not:

  • comprehensively examine the merits of alternative options, including delaying finalisation of the contract to mitigate the risks posed by the unresolved judicial review of the project planning approval decision
  • directly support or oppose the proposed timing of the transaction
  • recommend any course of action.

Instead, achieving the then government's desired time line for contract signing was given disproportionate emphasis despite the emerging risks and implications for the state.

The report also identifies that the newly elected government was not provided with updated, comprehensive information, previously unavailable to it in opposition, on the impacts of completing the project versus the option of cancelling it, to provide a more complete assessment of the merits of terminating the contract. This meant it was deprived of comprehensive advice to assure it that termination was the best use of public funds.

The draft report presents a view that DPC is arbitrarily adopting a narrow reading of the Public Administration Act 2004 in so far as the report claims that DPC is asserting that a requirement to ‘implement government policy’ sits at the apex of public sector values. DPC rejects these views. Since the earliest articulation of a professional, apolitical public service in the 1850s, the role of the public service has been to serve, and act as an instrument of, the government of the day, subordinate to the Ministers that it serves. Ministers are responsible to Parliament, and through Parliament to the people, for their decisions and actions, as well as those of their departments. Implementing government policies goes beyond a public sector value; it is the principal reason why the public service exists.

This statement is factually incorrect. The report does not claim that DPC ‘is asserting’ that the requirement to implement government policy sits at the apex of public sector values.

The report’s criticisms extend only to DPC’s interpretation of the Public Administration

Act 2004
(the Act) and the Code of Conduct for Victorian Public Sector Employees (the Code) as being ‘narrow’ because it is analogous to suggesting that that the requirement to implement government policy sits at the apex of public sector values.

This is a critically important distinction, as the comment in question reflects VAGO’s analysis of the logical conclusion of DPC’s narrow reading of the Act and the Code in this instance. The statement in question, therefore, does not purport to reflect an explicit assertion of DPC.

The draft report also implies that the Victorian Public Service implements Government policy uncritically and 'at any cost', compromising the public service’s integrity and impartiality. DPC also rejects this view.

This statement is factually incorrect. The report correctly states that the Act does not oblige public servants to implement government policy at any costs, but rather seeks a public service which responds to government policy priorities in a manner that is consistent with public sector values.

The report does not imply that the Victorian Public Service implements government policy uncritically and ‘at any cost’. It states that the Act and the Code empower and oblige public servants to act with integrity and, most importantly, with impartiality.

The Victorian Public Service has, and will continue to provide, frank and impartial advice to Government, consistent with the role of a professional public service to advise, assist and, importantly, influence the government of the day. Being a public servant is more than just a job; we have an essential public function to influence Government decision-making through professional, frank and apolitical advice. This is what distinguishes public servants from fee-for-service consultants and political advisers.

These principles are not in dispute and are strongly supported. The purpose of my recommendation to the department is consistent with these principles as it encourages the department to support further guidance to clarify the requirements for frank, impartial and timely advice to government in the public sector.

After a Government or Minister has made a decision, the public service must understand how to exercise its role appropriately. We continue to provide objective and impartial advice that is of practical assistance in implementing those decisions and Ministers are advised of risks, particularly if circumstances surrounding a matter change. However, the role and duties of the public service do not extend to prosecuting its own agenda by repeatedly advising of other options that it may prefer, but that run counter to the Government’s settled and stated decision.

In an environment where advice is contestable, and can be sought from parties that have no obligations to neutrality, DPC remains of the view that the public service’s credibility and influence with Government would likely diminish if the public service repeatedly and explicitly recommended a course of action that is contrary to the Government’s settled policy.

If the draft report’s implications were followed to their logical conclusion, it would appear to permit public servants to refuse to enact lawful government decisions on the premise that the public service is the best judge of what is in the public interest. For a public servant to hinder progress to implement a lawful decision, constantly recontest that decision, or refrain from actions that follow from a lawful decision of a Minister, would be to fundamentally undermine the Victorian Public Service as a trusted and apolitical institution, undermine the integrity of our democracy, and erode longstanding conventions that are at the heart of the Westminster system of government.

These statements misrepresent my report. There is no suggestion in the report that public servants should refuse to enact lawful government decisions in pursuit of their own agendas. Rather, the report indicates that when advising government on key decisions, or on significantly changed circumstances that impact on previous decisions, the public service has an obligation to go beyond apprising government of risks, to also making an impartial recommendation that is in the best interests of the state. At critical points in this project, this did not occur.

The report neither asserts nor implies that the public service should ‘repeatedly and explicitly recommend a course of action that is contrary to the government’s settled policy’. It is important to note that the report’s major criticism of the quality of advice primarily relates to circumstances in which government had yet to make a final decision on whether or not to sign the contract with EWC prior to the November 2014 election.

The report notes that it was clear that the government’s policy intent was to have a contract in place for stage 1 of the project before the caretaker period for the November 2014 state election. However, it sought and considered advice on the timing and precise content of that contract and its other options before making a final decision on contract signing.

This advice was provided to government on 23 September 2014. The advice made it abundantly clear that government had not made a decision to sign the contract before that day because the submission to Cabinet and the covering briefs from DPC and DTF all clearly indicated that the government faced a choice between:

  • signing the contract in line with the previously set timeframe of having it in place before the election, noting that to achieve this would require accepting the contract amendments and providing the side letter sought by EWC
  • delaying contract signing until after the judicial review of the project planning decision was resolved.

My report is critical of the advice to government on 23 September 2014 because it did not comprehensively examine the merits of options alternative to signing the contract, including delaying contract finalisation, or directly support or oppose the proposed timing of the transaction.

The public service had an opportunity in its advice to government on that day to recommended a course of action in the best interests of the state based on its understanding of the risks posed by the unresolved judicial review and the potential additional costs if the state signed a contract with the amendments sought by EWC and the judicial review went against it.

This opportunity was not taken despite advice from the Linking Melbourne Authority that it would be unprecedented to sign a PPP contract in the circumstances that prevailed at that time. Instead, the advice to government included no recommendation on whether or not signing the contract at that time was in the best interests of the state and it did not sufficiently assess the benefits of delaying finalisation of the contract to mitigate the risks posed by the unresolved judicial review.

That is why the report concludes that the advice to government fell short of the expected standard of being frank and fearless.

It should be noted that the government decided to sign the contract with EWC on 23 September 2014. Yet the department’s response suggests that a decision to sign the contract had already been made before 23 September 2014. If this were true, there would have been no purpose or reason for outlining the options available to the government in the advice presented to it on that day. On this basis, the criticism in the department’s response that my report is suggesting that the public service should have prosecuted its ‘own agenda’ by ‘repeatedly advising on options that were against the government’s settled and stated decision’, or to ‘hinder progress to implement a lawful decision’, or ‘constantly recontest that decision’ cannot stand.

There is no suggestion in the report that the public service should have frustrated or resisted the government policy decision to sign the contract, once that decision was made.

The department has had no regard to another pertinent example which is appropriately acknowledged in my report. This relates to advice to government from DTF on options for repurposing the EWC loan facility. The government initially announced its intention to take over that facility. DTF advised on the significant complexities and value-for-money issues associated with this approach and the government ultimately determined not to take over the loan facility. This was an instance where 'government had signalled a preferred outcome but had not yet taken a final decision to implement that outcome'. The public service provided frank and fearless advice and the government was influenced to adopt an approach which was different to its initial preference.

It is not a uniquely Victorian approach to view the role of the public service as serving the government of the day by diligently implementing lawful government decisions, and through providing impartial advice both in the forming of those decisions and on potential risks flowing from those decisions. Public service guidance from other Australian jurisdictions, including Auditor-General reports, consistently articulate this role for the public service. For example, in instances where Government has already made a lawful decision, New South Wales guidance material advises that it is the responsibility of public servants to implement that decision diligently and to the best of their ability, and to advise the Minister if they see potential risks resulting from that decision.

These principles are not in dispute. They are strongly supported. The purpose of my recommendation to the department is consistent with these principles as it encourages the department to support further guidance in the public sector to clarify the requirements for frank, impartial and timely advice to government.

The draft report claims that there were serious deficiencies in the advice provided to government on the EWL project. DPC reiterates that the quality of advice provided by the public service about any project can only be assessed fairly and effectively by considering the advice cumulatively and in totality over a project’s life cycle. An auditing process that focuses on individual briefs rather than on a continuous program of advice in its totality would set an unreasonable standard for the public sector, and Ministers, to manage.

The deficiencies in the advice are discussed above and are clearly set out in my report. The suggestion that my audit and report have somehow selectively focused on individual briefs is emphatically rejected as it fails to acknowledge that my audit has examined this project from its inception to termination.

My office has been monitoring the progress of this project since mid-2013. When planning and conducting this audit we took particular pains to gain assurance that departments and agencies had disclosed all relevant information and my officers obtained and reviewed thousands of pages of advice and other project related documentation.

While the audit did examine all relevant advice and other evidence, it would be a disservice to the Parliament if my report did not seek to distil the key issues. The report is appropriately focused on the adequacy of advice to government on key project decisions on matters such as the business case, procurement outcome, contract signing and project termination.

2. Treatment and presentation of costs

Emphasis on sunk costs

DPC is also concerned that report places too much emphasis on sunk costs as a relevant and appropriate factor in decision-making and, consequently, as a measure of assessing the value of projects.

In particular, the report notes that the Government was provided with comprehensive advice about the termination of the project, but that advice did not fully consider the benefits of completing the project or include detailed information about the amount of sunk costs.

While the amount of sunk costs incurred on the project was significant, the only costs relevant to a rational investment decision are prospective costs. In the context of the incoming Government’s decision about whether to continue the project, as the report notes, the prospective costs of:

  • discontinuing the project were estimated at $900 million (though DPC notes that this cost would vary over time depending on the time of termination); and
  • proceeding with the project were $22 billion.

DPC assert that the ‘sunk costs’ incurred on the project were totally irrelevant to decision-making on the future of the project by the new government and that only prospective costs should have been considered. My office previously responded to DTF and DPC on this issue, noting that the argument is not soundly based because the report clearly indicates that the state had spent significant amounts on planning, developing, procuring and contracting EWL and that although these were 'sunk costs' they may have impacted the extent of 'future costs' required if the option of completing EWL was compared directly to other priority projects. This is because other projects would have required expenditure on pre-construction and procurement activities that had already been completed for EWL.

The other main deficiency in the departments’ argument is that it is totally cost-centric, and ignores the fact that sunk costs are relevant for determining both realised and future benefits. The report fairly observes that advice to government on termination options did not adequately analyse the comparative benefits of proceeding with the project against terminating it to fully inform the government's decision on whether or not to terminate.

Presentation of costs

The approach used to calculate the costs of the project also potentially materially overstates its costs, and does not fairly represent the offsets or other benefits that the State will realise.

In particular, the headline figure of $1.1 billion in costs is misleading, because it does not offset the revenue that the State expects to realise from renting and selling properties that were acquired for the project.

DPC also notes that the headline figure includes costs of 'complementary' projects (approximately $9.7 million) that are proceeding and deliver standalone benefits to the state, and pre-construction activities such as design and geotechnical work that may be of value in future.

These assertions are incorrect and misrepresent the content of my report because:

  • references in the report to the state having expected costs of in excess of $1.1 billion on the project are appropriately and transparently qualified with reference to the fact that the properties acquired for the project can be resold and includes the Department of Treasury & Finance’s estimate of future sale proceeds
  • the report fairly notes in both the Audit summary and Part 2 that pre-construction activities including design and geotechnical work and elements of the complementary projects may provide some value in the future.

RESPONSE provided by the Secretary, Department of Treasury & Finance

Response provided by the Secretary, Department of Treasury & Finance, page 1.

Response provided by the Secretary, Department of Treasury & Finance, page 2.
 

Further audit comment in response to the submission from the Secretary, Department of Treasury & Finance

The department has raised several significant issues and concerns in their responses that warrant my further comment.

Department of Treasury & Finance comment

Acting Auditor-General Comment

DTF has consistently raised concerns about successive drafts of the audit report regarding a lack of substantiation of some of the findings and selective quotation of advice with inadequate context. DTF remains disappointed that despite extensive feedback, my Department and your office continue to disagree on many matters of substance.

As such, DTF considers that the report does not offer an appropriate basis to reasonably support the audit recommendations, and therefore we are unable to, and do not, accept any of the recommendations.

The department’s assertion lacks foundation as it is made without supporting evidence, and misrepresents both the content of my report and the veracity of issues it claims it has consistently raised. This latter inference is particularly misleading as it incorrectly implies my office has repeatedly ignored DTF’s concerns, and that DTF has consistently made plausible and accurate representations to my office concerning these matters.

It should also be noted that DTF’s submission is not subject to audit, nor the Australian Auditing and Assurance Standards applying to my office when making findings and forming an audit conclusion.

DTF’s refusal to accept any recommendation is at odds with its earlier response to a draft of my report in which it indicated at least partial support for elements of the recommendations.

Consistent with standard practice, my office carefully considered and promptly responded to issues and concerns raised by DTF during this audit. This involved considering the basis for all matters raised and the veracity, sufficiency and appropriateness of any supporting evidence.

While my office made a number of changes to the draft report in response to some of these issues, most of DTF’s claims did not warrant the adjustments it was seeking as they would have compromised the accuracy and integrity of this audit. This is because they were not supported by sufficient and appropriate evidence, and in particular would have:

  • obscured the scale of the state’s expenditure on the EWL project
  • diverted attention from the inadequate advice to the government at critical junctures of the project.

Our assessment of, and responses to, DTF’s concerns were clearly documented in the form of acquittals and promptly communicated to DTF during this audit. While DTF maintains it is ‘disappointed’ by the outcome, I am satisfied that these assessments were objective, balanced, appropriate and made in the public interest.

Of particular importance, the report makes a number of findings about providing advice to successive governments, and specifically that in some instances it fell short of the required standard to be 'frank and fearless'. I fundamentally disagree. I believe that the Department acted with integrity and impartiality in providing advice to both the current and former governments in line with our responsibilities, duties and the best traditions of the Victorian Public Service. I am firmly of the view that at all times the Department met all the relevant standards of the PubIic Administration Act 2004, the Code of Conduct for Victorian Public Sector Employees and further relevant Implied and express conventions.

Throughout the development and implementation of the EWL project and serving the government of the day, DTF provided appropriate and frank, impartial and apolitical advice.

These statements echo those from the Department of Premier & Cabinet (DPC) and have been extensively dealt with above in my response to the comments from DPC. In short. they misrepresent the content of my report as it clearly demonstrates instances where, over the life of this project, the advice to government in the lead up to key decisions fell short of the standard and values espoused in the Public Administration Act and the Code.

The report makes unattributed allegations that some staff felt 'that providing frank and fearless advice when a government does not want to receive it will negatively impact their Influence or career opportunities'. All signatories to the DTF briefings on the project and other key DTF staff advising both the current and former governments have confirmed this was never a consideration in their advice.

The views cited in the report were expressed verbally, in confidence, to my officers by more than one official in more than one agency. Given this, the commentary in the report is supported by sufficient evidence. It is important that these views, as expressed to us, are disclosed in the report because as stated in the report, if this view becomes common in the public sector it poses a significant risk to the integrity of government decision-making and public administration.

The proposed report develops a theme that the project was rushed and implies this led to poor outcomes. DTF’s view is that within the policy setting clearly established by the former government from the outset and in implementing subsequent ministerial decisions, the planning, development and procurement of the project was undertaken by the bureaucracy in a highly robust, appropriate, considered and efficient manner.

The report fairly assesses the management of the project and advice to government and includes praise for the completion of the procurement process in line with the government’s desired time lines.

The report also highlights issues that arose due to the concurrent activity on project development, statutory planning, procurement and contract negotiation. Our review of advice to government shows ample evidence of DPC and DTF raising issues about the challenging time lines for the project and the risks relating to parallel processes.

The report highlights a 'total expected' or 'total incurred' cost to the state of around $1.1 billion for the eastern section. As previously advised, DTF considers this presentation to be selective and misleading by including incurred and expected future costs associated with land purchases but excluding the corresponding estimates of land sale proceeds.

This assertion is incorrect and misrepresents the content of my report because references in the report to the state having expected costs of in excess of $1.1 billion on the project are appropriately and transparently qualified with explicit references to the fact that the properties acquired for the project can be resold and DTF’s estimated value of the proceeds from these potential future sales of $320 million.

However, we do not consider it appropriate to deduct this figure from the actual cost of the project as the properties in question have yet to be sold and thus actual proceeds from any sale may materially differ from DTF’s current estimate as they will depend heavily on the timing of any future sale and the prevailing conditions of the property market at that time.

DTF considers a net figure split into the separate time periods of project development and termination is a more appropriate presentation throughout the document.

We have clearly acquitted the objective for this audit which included assessing the total costs of the project. These costs are set out in Figure 2A of the report which also includes adequate discussion on the components of the total expected cost. As noted above, this total cost is appropriately qualified with reference to the fact that the state will obtain future revenue from the sale of properties acquired for the project.

Figure 2A of my report also includes an appropriate breakdown of the total project costs by phase, including the periods of project development and termination.

DTF also notes that the total expected costs quoted include sunk costs at the time the decision was made to terminate the project. DTF remains of the view that sunk costs are not relevant in making decisions on future actions.

My office has previously responded to DTF and DPC on this issue, noting that the argument is not soundly based because the report clearly indicates that the state had spent significant amounts on planning, developing, procuring and contracting EWL and that although these were 'sunk costs' they may have impacted the extent of 'future costs' required if the option of completing EWL was compared directly to other priority projects. This is because other projects would have required expenditure on pre-construction and procurement activities that had already been completed for EWL.

The other main deficiency in the departments’ argument is that it is totally cost-centric, and ignores the fact that sunk costs are relevant for determining both realised and future benefits. The report fairly observes that advice to government on termination options did not adequately analyse the comparative benefits of proceeding with the project against terminating it to fully inform the government's decision on whether or not to terminate.

RESPONSE provided by the Secretary, Department of Environment, Land, Water & Planning

Response provided by the Secretary, Department Environment, Land, Water & Planning.
 

RESPONSE provided by the Secretary, Department of Justice & Regulation

Response provided by the Secretary, Department of Justice & Regulation, page 1.
 

RESPONSE provided by the Acting Chief Executive Officer, Linking Melbourne Authority

Response provided by the Acting Chief Executive Officer, Linking Melbourne Authority, page 1.
 

RESPONSE provided by the Chief Panel Member, Planning Panels Victoria

Response provided by the Chief Panel Member, Planning Panels Victoria, page 1.
 

RESPONSE provided by the Chief Executive Officer, Environment Protection Authority Victoria

Chief Executive Officer, Environment Protection Authority Victoria.
 

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