Managing the Municipal and Industrial Landfill Levy

Tabled: 25 July 2018

1 Audit context

Victoria's MILL was established in 1992 to create a disincentive to putting waste into landfill and to encourage resource recovery and recycling. Income generated by the MILL supports Victoria's environmental agencies, with the remainder transferred to the fund to be used only for initiatives that aim to address environmental challenges for the benefit of all Victorians.

1.1 Municipal and Industrial Landfill Levy

Legislation

The Act requires the MILL to be charged on each tonne of waste deposited at licensed landfills. The EPA collects the levy from landfill operators and councils.

Changes to the levy

The landfill levy system has changed significantly over the past 25 years. The metropolitan waste levy has increased from $2 per tonne in 1992 to its current rate of $63.28 per tonne. DELWP forecasts MILL income for 2017–18 to be $215 million.

In 2010, the government considered the metropolitan municipal waste levy of $9 and the regional municipal waste levy of $7 too low to drive behavioural changes. It increased the levy substantially to make recycling economically competitive compared to depositing valuable materials to landfill. Figure 1A shows the change in the Victorian levy since 2001.

The objective was to increase recycling rates and stimulate the recycling industry by making new recycling ventures more viable and create new jobs. The expected impact of the rate increase was a fall in annual volumes of waste to landfill of 34 per cent between 2009–10 and 2013–14.

Environmental groups and the waste industry supported the 2010 rate increase, which brought Victorian landfill levy rates in line with those of New South Wales. Since then, New South Wales's 2017–18 rates have increased to $138.20 per tonne for the metropolitan rate and $79.60 per tonne for the regional levy, more than double Victoria's rates.

Figure 1A
Changes in the Victorian Municipal and Industrial Landfill Levy rates

Figure 1A shows changes in the Victorian Municipal and Industrial Landfill Levy rates

Note: Annual rate increases started in 2010–11. At that time, the industrial and municipal metropolitan rates became the same rate.

Source: VAGO based on EPA data.

Figure 1B shows the changes in the volume of waste to landfill between 2006–07 and 2016–17. While this shows a decline, there may be other contributing factors, such as community education.

Figure 1B
Volume of municipal and industrial waste to landfill (tonnes per person)

Figure 1B shows the volume of municipal and industrial waste to landfill (tonnes per person)

Source: VAGO based on EPA and Australian Bureau of Statistics data.

MILL collection and distribution

EPA is responsible for collecting and distributing the MILL under the Act. EPA collects the MILL from licensed landfill operators, managed by councils or commercial operators, and transfers the income to the MILL Trust Account, managed by DELWP.

Figure 1C shows MILL income since 2009.

Figure 1C
MILL income

Figure 1C shows MILL income

Note: The amounts above are on an accrual accounting basis. Income is accounted for in the period it is earned, not received.

Source: VAGO.

MILL income is used first to fund the core operating activities of environmental agencies in accordance with section 70E(3) of the Act. These are the EPA, SV and Victoria's seven WRRGs under subsections 70E(3)(a)–(c).

Subsection 70E(3)(d) of the Act was inserted in 2014 and enables the MILL to fund 'a public entity or other body established for public purposes to be used for environment assessment, protection, restoration or improvement purposes'. Distributions under this provision have, to date, been made to PV, the CES and 22 committees of management.

The minister determines, on advice from DELWP policy areas, the funding levels, period and timing of payments for environmental agencies and organisations under section 70E(3). However, this determination occurs after the budget process whereby ERSC first reviews the funding for these agencies for the four‑year budget period.

1.2 Sustainability Fund

Establishment

In 2004, the government amended the Act to create the fund and directed a portion of the MILL towards it. The MILL is the sole source of revenue for the fund. Figure 1D details the flow of MILL monies to the fund under today's legislative arrangements.

Figure 1D
Flows from the MILL into the Sustainability Fund

Figure 1D shows flows from the MILL into the Sustainability Fund

Source: VAGO.

Purpose

The fund is a hypothecated trust account created under section 70F of the Act for the specific purpose of fostering:

  • environmentally sustainable uses of resources and best practices in waste management
  • community action or innovation in relation to the reduction of greenhouse gas substance emissions, or adaptation or adjustment to climate change in Victoria.

The second clause—enabling the fund to be used for greenhouse gas reduction or climate change adaptation —was introduced in 2010.

Priorities and guidance

Before any money can be distributed from the fund, the minister must issue a Priority Statement and Guidelines, under section 70A of the Act. These documents are designed to maximise the effectiveness of the fund and to ensure that a strategic approach is taken to the application of its monies.

Section 70F also requires the consent of both the Premier and the minister before fund monies can be applied to one of the fund's legislative purposes.

Priority Statement

Section 70A(1)(a) of the Act requires that the Priority Statement set out, in order of priority, how the minister and Premier intend to use the money. The Priority Statement is refreshed at intervals consistent with changes to government policy directions. The minister and Premier approved the current version in 2016.

The current Priority Statement does not order the strategic priorities for the fund but notes preference for initiatives that foster employment, new technology and innovation, resource efficiency or ongoing behaviour change. It states that the following climate change and waste policies and strategies should inform the choice of potential investments from the fund:

  • climate change policies
  • Victoria's Climate Change Adaptation Plan 2017–2020
  • Victoria's Energy Efficiency and Productivity Statement
  • Renewable Energy Action Plan
  • Protecting Victoria's Environment – Biodiversity 2037 and other relevant strategies
  • the Statewide Waste and Resource Recovery Infrastructure Plan (SWRRIP)
  • the Regional Waste and Resource Recovery Implementation Plans and other relevant strategies.
Guidelines

The Act requires guidelines be in force that explain how the minister and Premier will exercise their powers in relation to the application of money from the fund.

The Guidelines state that the minister and Premier will seek advice from the Sustainability Fund Manager (a DELWP staff member who manages the team) directly or via the committee, before allocating fund money to a project so they are informed about:

  • compliance of the proposal with legislated obligations
  • its consistency with the Priority Statement
  • other considerations such as value for money.

Under the Guidelines funding should be directed to support projects, programs, services or technologies that will benefit Victoria environmentally, socially and economically.

The Guidelines also identify the types of projects that the fund should not be used for, including:

  • projects that seek retrospective funding, or that duplicate environmental programs already operating
  • the core administrative costs of an existing organisation.

Administration

SV was initially responsible for managing the fund.

In 2013 the MAC review found issues with the administration of the fund:

  • governance arrangements remained overly complicated
  • perceptions of conflicts of interest and a lack of transparency, as SV was both the administrator and a recipient of funding
  • that reporting of fund activity was unclear.

In 2015, in response to stakeholder concerns and the findings of the MAC review, government amended the Act and transferred responsibility for the fund from SV to DELWP. DELWP has administered the fund since 1 July 2015.

The team sits within DELWP's Finance and Planning unit and is responsible for administering the MILL Trust Account and the fund. This includes financial management, providing secretariat support to the committee, assessment of funding proposals and the establishment and management of funding agreements.

Sustainability Fund Committee

When SV administered the fund, the Sustainability Fund Advisory Panel —an independent statutory committee —was established to review and recommend projects for funding to the minister. The legislative changes that transferred fund administration to DELWP in July 2015 removed the requirement for a statutory committee.

In its place, the minister established an advisory committee to provide advice to the minister on funding proposals before fund monies are allocated to a program.

The committee has no delegated decision-making authority. Authority to apply money from the fund rests with the minister and Premier.

The Guidelines require that the committee's advice to the minister and Premier be based on:

  • alignment of the proposal's objectives with the fund's legislative objectives
  • alignment of the expected outcomes of the proposal against the defined priorities of the fund as stated in the Priority Statement
  • achieving value for money given the immediate and long-term environmental benefits expected to be achieved by the proposal
  • the availability of funding to the applicant from other sources.

The committee has five members: an independent Chair, a finance expert (currently an independent member who is also the Deputy Chair), two DELWP subject matter experts and a governance expert.

The governance position was vacant from July 2017 until March 2018. DELWP's subject matter experts are the Executive Director, Energy Policy and Programs and the Executive Director, Climate Change.

The committee held its first meeting in May 2016 but did not have its full complement of members until December 2016. The interim arrangements are explained in more detail in Section 3.4.

1.3 Sustainability Fund distributions

Access to funds

The Guidelines state that funding recipients may be direct grant recipients or government departments or agencies. When SV administered the fund, open grant rounds were available. However, there have been no open grant rounds announced since 2009.

Open grant rounds refer to the ability of potential recipients, including community groups, councils, government departments, statutory entities, non-government organisations and businesses, to apply directly for a grant from the fund.

All distributions now occur through the budget process with departments and agencies as recipients. A proportion of these funded initiatives involve grant programs that provide subsequent opportunities for councils and non‑government organisations to access monies from the fund.

The team handles public enquiries seeking direct funding from the fund. It attempts to refer people to currently available grant programs, funded from the fund, or to direct them to alternative government grant programs. The team shares details of enquiries with relevant DELWP policy areas and portfolio agencies. Details of public enquiries are included in the team's quarterly report to the committee and the committee's annual report to DELWP's Secretary.

Developing funding proposals

Department policy areas or agencies develop funding proposals as part of the government's annual budget cycle. To request funding from the fund applicants nominate it as the source of funding on the State Budget Bid Template. In some cases, the government or central agencies recommend the fund as the funding source.

Assessing funding proposals

Role of the team

The Sustainability Fund Manager and the team receive a copy of DELWP's funding proposals prior to its minister's presentation of initiatives to ERSC for endorsement. It prepares an assessment of each funding proposal against the legislative objectives for the committee's review. The team liaises with DELWP policy areas and its portfolio agencies if more information is required.

Role of the committee

The committee reviews funding proposals submitted by DELWP and its portfolio agencies prior to submission to ERSC and any other department proposals provided to them. All bid information is provided to the independent members. The independent members have an established practice of reading and forming their own initial views on the merit of funding proposals prior to reviewing the team's proposed recommendations. The two independent members of the committee meet with the team to consider and test draft positions before they are put to the committee. The whole committee then reviews each proposal based on documentation collated by the team and reaches a recommendation.

The committee chair subsequently provides written advice to the minister with the committee's recommendations on which proposals it supports for funding.

The committee's review occurs as part of the budget cycle. The timing of its meetings is coordinated so that they occur after the policy areas develop funding proposals and prior to ERSC's consideration of funding proposals.

The nature of the budget process means that the time frame for development, assessment and recommendation can be tight and proposals may continue to change up to the point that departments lodge proposals with the Cabinet office for consideration by ERSC.

Expenditure Review Sub-Committee

ERSC considers and endorses all funding proposals from all sources as part of the budget process. The minister and Premier then approve the endorsed proposals for release from the fund. Figure 1E shows the standard approval process for proposals seeking funding from the fund.

Figure 1E
Funding approval process

Figure 1E shows the funding approval process

Source: VAGO.

1.4 Sustainability Fund balances

The fund balance had grown to $562 million as at 31 December 2017. Figure 1F shows the growth of the fund balance since 2009–10. The forecast closing balance of the fund at 30 June 2018 is $513 million. By the end of the forward estimates, 2021–22, the balance is expected to be $552 million. This balance assumes no new funding from the fund is announced between now and 2021–22.

Figure 1F
Sustainability Fund balance

Figure 1F shows the Sustainability Fund balance

Note: Balances are at 30 June each year.

Source: VAGO based on EPA and DELWP data.

Rate of future expenditure

The rate of expenditure from the fund against income has been low when compared to other trust funds such as the Community Support Fund and the New South Wales Environment Trust Fund that typically distribute over 90 per cent of their annual income.

Reducing the balance of the fund can be achieved by:

  • reducing the income to the fund by distributing more money from the MILL Trust Account
  • increasing distributions from the fund.

The government has increased funding to environmental agencies, from $76.1 million to $130.5 million in the past two years, a 71 per cent increase. This has resulted in less MILL income transferred to the fund.

Figure 1G shows MILL income transferred to the fund and distributions from the fund from 2009–10 to 2016–17 and budgeted income and expenditure for the period 2017–18 to 2021–22.

The 2017–18 Budget provides for fund expenditure of $439 million in new funding approved over five years between 2016–17 and 2020–21. The forecast amounts included in Figure 1G are more than this as they include future distributions for existing programs.

Figure 1G
Fund income and distributions

Figure 1G shows fund income and distributions

Note: Fund distributions for 2015–16 and 2016–17 are on a cash accounting basis. Forecast and Budget figures for 2017–18 onwards are on an accrual basis and exclude administration costs.

Note: The total cash transferred into the fund may not equal the sum of the accrual revenue less distributions in Figure 2A due to timing differences.

Source: VAGO based on DELWP and SV annual reports and DELWP forecast data.

Figure 1G shows that the government distributed $52 million in 2016–17 and expects to spend $152 million in the 2017–18 financial year. Despite the government's commitment to spend, actual program expenditure is falling behind budget, resulting in lower than expected expenditure from the fund.

From 2016–17 to 2017–2018, budget commitments from the fund have been at their highest levels since the fund was established. However, Figure 1H shows also that commitments from the fund in the 2018–19 Budget drop significantly from $320.1 million in 2017–18 to $32.7 million 2018–19.

Figure 1H
State Budget commitments from the fund in 2016–17 to 2018–19

Figure 1H shows State Budget commitments from the fund in 2016–17 to 2018–19

Source: VAGO.

Figure 1I shows the income and expenditure from the fund over the past three years and the impact on the balance of the fund.

Figure 1I
Sustainability Fund Trust Account

Figure 1I shows the Sustainability Fund Trust Account

Note: The amounts above are on a cash accounting basis. The total cash transferred into the fund may not equal the sum of the accrual revenue less distributions in Figure 2A due to timing differences. The amount in distributions to fund programs includes administrative costs.

Note: Prior to the establishment of the Sustainability Fund Trust Account, the money was held in the Environment Protection Fund. As a result, its balance was $0 in 2015 when it was established.

Source: VAGO based on DELWP data and annual reports.

1.5 Stakeholder interest

There has been substantial interest in the MILL and the fund in recent years. The waste industry and local councils supported the introduction of the levy and the subsequent increases to the levy on the basis that it would fund environmental agencies and the remainder would support innovative waste and resource recovery initiatives.

Waste industry groups, councils and environmentalists have expressed concern over the growth of the fund and the low level of expenditure from the fund on waste and resource recovery initiatives. A recent decision by China to restrict the importation of some recyclable material has further highlighted concerns about the future of the recycling industry. Waste industry advocates, councils and environmental organisations are lobbying the Victorian Government to access the fund to invest in future solutions for recycling.

In February 2018, the Victorian Government announced a $13 million support package for councils and industry affected by the recent Chinese restriction on recycling imports. This has been approved to be funded from the fund.

1.6 Why this audit is important

The MILL and its distribution is designed to play an important role in minimising the environmental impacts of waste and in promoting investment in alternatives to landfills.

The SWRRIP states that based on the current rate of population growth total waste generation is likely to increase by 57 per cent from 12.7 million tonnes in 2015–16 to 20 million by 2046.

There is significant community concern about how the government and its agencies spend funds generated through the MILL. Some stakeholders are concerned that government may not direct enough funds towards waste management activities.

This audit provides an independent assessment of, and insights into, whether the landfill levy system is being managed transparently and is meeting its intended legislative objectives.

1.7 What this audit examined and how

This performance audit examined DELWP's management of MILL income, including its distribution and expenditure. It assessed how the money is spent and whether and to what extent it aligns with the legislative objectives of the MILL Trust Account and the fund.

The audit examined the management of the MILL Trust Account and the fund since responsibility transferred to DELWP on 1 July 2015. We examined the administrative practices of DELWP since this transfer, considered the impact of legislative changes and compared the structure of funding agreements established prior to the transfer.

We conducted our audit in accordance with section 15 of the Audit Act 1994 and ASAE 3500 Performance Engagements. We complied with the independence and other relevant ethical requirements related to assurance engagements. The cost of this audit was $520 000.

1.8 Report structure

We have structured the remainder of the report as follows:

  • Part 2 examines the distribution and management of the MILL
  • Part 3 examines the administration of the fund
  • Part 4 examines program outcomes of the fund.

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