Victorian Auditor-General’s report 
14 November 2012 

Auditor-General’s Report on the Annual Financial Report of the State of Victoria, 2011–12
Audit summary
The financial result for the state is reported to Parliament through the Annual Financial Report for the State of Victoria (the AFR). The Auditor-General forms an independent opinion on the financial statements presented in the AFR. 
The AFR for 2011–12 complies with the requirements of Australian accounting standards and the framework set in the Financial Management Act 1994. However, because the financial statements are detailed and complex, our report gives Parliament an interpretation of the state’s 2011–12 results reported in the AFR, an insight into important changes and trends, and a high-level overview of how major asset spending initiatives are tracking against financial budgets and delivery time frames.
Conclusion
The state’s financial position deteriorated in 2011–12, reflected by a decrease in net worth of $13 991 million. Changing financial conditions outside the state’s control impacted the bottom line. However, in areas that the state can directly control, there were also negative trends. These require attention to improve the state’s financial outcomes.
Despite these challenges, most major asset projects being delivered on behalf of the state are progressing well against budgets and time frames.
Findings
Audit result
A clear audit opinion was issued on the AFR on 5 October 2012. The Department of Treasury and Finance (DTF) provided the AFR to Parliament on 15 October 2012, within the statutory reporting time frame.
DTF acted in 2011–12 to address accuracy issues in the preparation of the AFR but timeliness remains an issue. Although material entities were given extra time to finalise their financial reports in 2011–12, less than half achieved the revised whole‑of‑government time frames. It was disappointing that some audit committees had not timed their meetings to enable entities to achieve the time frames. The late completion of financial reports by material entities, coupled with the introduction of a new computer system at DTF, adversely impacted the timely delivery of the 2011–12 AFR.
The state’s financial result
A deficit was reported for the state for 2011–12, continuing a trend in all but one of the past five financial years. The deficit was driven by growth in unfunded superannuation obligations, and the continuing trend of expenses growing faster than revenue. 
The government has set fiscal objectives that include:
·	funding its unfunded superannuation obligations by 2035
·	achieving a $100 million surplus on transactions for the general government sector each year.
The unfunded superannuation obligations are partially funded by the investment returns on the existing asset base of the funds, with the remainder to be funded by the government. In 2011–12, $594.1 million was paid towards the unfunded superannuation liability.
The general government sector reported a net result from transactions of $571.2 million, achieving the fiscal objective set by government. However, the surplus was underpinned by increased dividends paid from government agencies outside the general government sector and one-off transactions that contributed to the favourable result. 
This approach to achieving the $100 million fiscal target relies on the financial capacity of agencies outside the general government sector to pay dividends, and to service additional liabilities transferred to them. Further, relying on dividends to increase general government sector revenue may mean that the underlying drivers of deficits in the general government sector, such as inefficiency, waste or poor financial decision‑making are not addressed, and necessary action not taken.
Capital projects
Significant capital projects are underway in the health, water and transport sectors. Delivery methods for projects are varied, as is the role of the respective public sector entity. Projects designated as high-value high-risk are subject to increased oversight by DTF. 
We examined a sample of high‑value high‑risk projects, projects being delivered as public private partnerships, and projects of significant financial risk to the state. A summary of the costs and progress of the projects reviewed is provided in Figure A1. Further commentary around these projects is provided later in this report.
Figure A
Project costs and progress at 30 June 2012
Project	Actual expenditure ($mil)	Comment on progress	
Box Hill Hospital redevelopment	44.1	Enabling works complete. Construction underway with expected completion in December 2015.	
Metropolitan trains project	51.0	Delivery of the trains commenced in 2012–13.	
Regional Rail Link	888.0	Works underway. Time line for completion extended from December 2014 to 2016. Revised budget not announced.	
Trains ordered pre‑November 2010	530.0	All 38 new trains delivered by 30 June 2012, on schedule.	
myki	958.7	Project proceeding in modified form. Budget increased by $166.5 million in May 2012. Further increases could occur.	
Bendigo Hospital redevelopment	51.3	Preferred bidder expected to be announced in early 2013. Construction to commence in the second quarter of 2013. Completion expected in 2016.	
Desalination plant	223.7	No contract extensions approved by the state. Delays in completion have resulted in estimated savings of $441 million to the state as at 30 June 2012. The quantum of actual savings remains uncertain. 	
Peninsula Link	49.1	Progressing on schedule and budget. Expected completion in early 2013.	
Victorian Comprehensive Cancer Centre	55.6	Contract between the state and private sector consortium signed in December 2011. Construction commenced during 2011–12. Planned to be completed by December 2015. Total estimated nominal cost of $3 410 million over 25-year contract period.	
Building the Education Revolution	2 584.0	98 per cent of projects completed. $46 million of administrative and capital expenditure overruns borne by the state.	
Social housing	1 248.7	Construction of new social housing 98 per cent completed. Some projects deferred due to planning delays, persistent rain and land contamination.
Repairs and maintenance works completed on 9 363 dwellings.	
Food Bowl Modernisation	731.0	Major changes to Stage 1 business case in 2011–12. Goulburn-Murray Water now responsible for delivering the project. Expected completion by 30 June 2018.	
Northern Sewerage Project	513.1	All major works commissioned ahead of schedule. Substantial project savings realised during construction.	
New trams	95.8	Contract value revised upwards by $4.4 million. The first five trams are expected to be delivered over a three-month period from July 2013.	
M80 upgrade	712.0	Expected completion 2018–19.	
Western Highway upgrade projects	257.0	Anthony’s Cutting realignment completed on schedule in June 2011.
Revised budget expected not to be sufficient to complete the projects.	
Source: Victorian Auditor-General’s Office.
Recommendation
Number	Recommendation	Page	
1.	That the Department of Treasury and Finance engage with, and educate, audit committees of material entities regarding the expectation that entities meet established whole-of-government reporting time lines.	8	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16A and 16(3) of the Audit Act 1994 a copy of this report, or relevant extracts from the report, was provided to the Treasurer and all relevant agencies with a request for submissions or comments.
The Treasurer’s and agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16A and 16(3) submissions and comments are included in Appendix E.