Grants for the construction of the Adelaide Desalination Plant

7 May 2013

This audit assessed the awarding of funding for the construction of the Adelaide Desalination Plant (ADP) against the requirements of the Commonwealth's grants administration framework.

Overall conclusion:

Against the background of a review of grants administration commissioned by the Government10 that had expressed concerns that the administration of grant programs had been vulnerable to political manipulation and encouraged gaming by potential funding recipients, the Government agreed in December 2008 to implement a grants administration framework that would improve the performance, transparency and accountability of spending on grants. Two key obligations of the enhanced grants administration framework (reinforcing requirements first introduced in December 2007) were that guidelines be developed for all new grant programs and that Ministers not approve a proposed grant without obtaining the benefits of agency advice on the merits of the proposal relative to the program guidelines.

A key recommendation of the Strategic Review accepted by the Government was that the grants assessment and decision-making requirements apply to all proposed grants, including those made in relation to election announcements (such as the $100 million ADP grant) and grant proposals that arise other than through a competitive call for applications (such as the $228 million ADP grant). The Strategic Review concluded that the requirement for Ministers to receive agency advice on the merits of a proposed grant relative to the program guidelines was a ‘prudent control’. Accordingly, the enhanced grants administration framework does not provide for exceptions to this requirement. Further, there was no specific decision taken by Government that the requirement for agency advice on the merits of grant proposals did not apply to the grant funding being considered for the ADP.

When considered against the program guidelines, neither of the ADP grants awarded under the NUWDP demonstrably satisfied the program merit criteria. Although the first grant (which related to the election commitment) was assessed against program criteria, the second grant was awarded through a truncated process that did not accord with the grants administration framework established by the Government, nor the NUWDP program guidelines.

By way of elaboration, the first ADP grant was awarded after the then Department of the Environment, Water, Heritage and the Arts (DEWHA) had obtained information from SA Water, assessed it against the eligibility and merit criteria included in the National Urban Water and Desalination Plan (NUWDP) program guidelines and provided advice to the then Minister for Climate Change and Water. This process accorded with the grants administration framework but there were shortcomings in the underlying assessment work and the resulting advice did not fully inform the Minister. As a result, ANAO has made a recommendation to DSEWPaC concerning its assessment of grant proposals directed at promoting the achievement of value for money by: a high standard of assessment and advice being applied to all grant spending proposals, irrespective of whether they arise from a competitive process, relate to an election commitment or are another form of ad hoc grant; and providing Ministers with other options should they wish to pursue funding for proposals that are not consistent with grant program guidelines.

The shortcomings in respect to the second ADP grant are more significant. In particular, this grant was awarded through a process that was inconsistent in a number of respects with the requirements of the Government’s grants administration framework. South Australia had originally sought funding for the ADP expansion proposal through Infrastructure Australia, as part of that entity’s development of the first national Infrastructure Priority List. However, before the Infrastructure Australia process had been concluded, the then South Australian Premier made representations to the then Prime Minister in respect to the Infrastructure Australia funding submission for the ADP expansion project. Funding of the ADP expansion project through the NUWDP was considered after Infrastructure Australia concluded that the project had not demonstrated economic merit and, as a result, Ministers had been advised that the project was not eligible for funding from the Building Australia Fund. Nevertheless, the grant was subsequently approved by the Strategic Priorities and Budget Committee (SPBC) of Cabinet notwithstanding that: the NUWDP program guidelines did not allow for funding to be awarded for ad hoc grant proposals (a major projects funding round was open, with applications to close on 30 June 2009 but with project funding capped at 10 per cent of estimated project costs to a maximum of $100 million); the May 2008 Budget Papers had stated that funding should only be provided to public infrastructure projects that meet a minimum benchmark social rate of return, determined through rigorous cost‑benefit analysis, with Infrastructure Australia identifying that the ADP expansion proposal did not pass this test (which was a requirement of the Infrastructure Australia assessment methodology); and no agency had undertaken an assessment of the ADP expansion proposal against the NUWDP program guidelines.

Neither the department nor its then Minister became aware of the funding decision until more than one week after it had been taken. The only advice provided to Ministers in respect to funding of the ADP expansion proposal through the NUWDP was from central agencies, an approach that would generally not be viewed as conducive to good government given the role usually expected of portfolio agencies in advising Ministers on spending proposals being considered in relation to programs they administer.

The central agency advice did not recommend that NUWDP funding be awarded (as neither central agency had assessed the merits of the proposal in terms of the program guidelines) but, rather, supported further consideration of funding the expanded ADP under the NUWDP. This advice did not remind Ministers that, since December 2007, the grants administration framework has required that a decision to award grant funding was not to be made until after an agency had assessed its merits in terms of the program guidelines; notwithstanding that the Department of Finance and Deregulation, which is the agency responsible for the implementation of the enhanced grants administration framework, was one of the central agencies involved in providing the advice.

A recurring theme in ANAO’s audits of grants administration over a number of years has been the importance of grant programs being implemented in a manner that accords with published program guidelines. Similarly, the grants administration framework was developed based, in part, on a recognition that potential applicants and other stakeholders have a right to expect that program funding decisions will be made in a manner, and on a basis, consistent with the published program guidelines. Accordingly, where a proposal is inconsistent with the guidelines for a particular grant program, it is important that Ministers receive sound advice to this effect from their departments. In situations where Ministers may still be disposed to fund such proposals because they are seen as potentially an efficient and effective use of public money, alternative approaches should be considered such as seeking to improve the value proposition from the Commonwealth’s perspective (where envisaged by the guidelines), publishing amended program guidelines or establishing a new program or funding source.

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