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Report

The approval and administration of Commonwealth funding for the WestConnex Project

14 Feb 2017
Description

Background

The WestConnex project in Sydney is one of Australia’s largest land transport infrastructure projects. As of December 2016, it was being delivered progressively through three main stages, which have a current estimated total cost of $16.8 billion. It is also the first road project to receive Australian Government support through the provision of a concessional loan.

Both the Coalition and the Australian Labor Party announced commitments of at least $1.5 billion in grant funding towards the project prior to the September 2013 Federal Election.1 In May 2014, a further $2 billion concessional loan for the project was announced by the recently elected Australian Government.

Advice relating to the eligibility and appropriateness of infrastructure projects for Australian Government funding is the responsibility of the Department of Infrastructure and Regional Development (DIRD). Infrastructure Australia is a separate entity and is responsible for conducting independent assessments of infrastructure projects, as proposed by respective project proponents. These assessments are made publicly available once complete.

As of December 2016, construction work on the WestConnex project was underway. Specifically, construction of the main works for the first two stages had commenced, and planning had begun for the third stage (with construction forecast for commencement in 2019 and completion in 2023). By 1 November 2016, all $1.5 billion of Australian Government grant funding had been paid to New South Wales (NSW) and, as of February 2017, $408.1 million of the concessional loan had been drawn down.

Audit objective and criteria. 

The objective of the audit was to assess whether appropriate steps were taken to protect the Australian Government’s interests and obtain value for money in respect to the $3.5 billion in funding committed for the WestConnex project. To form a conclusion against the audit objective, the ANAO adopted the following audit criteria: Was the decision to make a financial commitment to the project informed by appropriate advice and made through the processes that have been established to assess the merits of nationally significant infrastructure investments? Were the decisions to approve the commitment of $1.5 billion in direct funding, and make respective milestone payments to date, informed by appropriate advice? Was the decision to enter into a $2 billion concessional loan arrangement for the WestConnex project informed by appropriate advice? Do the terms of the concessional loan arrangements represent value for money?

Conclusion

The Department of Infrastructure and Regional Development took a number of steps to protect the Australian Government’s financial interests, particularly in relation to the risk of the concessional loan not being repaid. The upfront payment and approach to agreeing and adjusting milestones for later payments did not adequately protect the Australian Government’s financial interests. Additionally, the provision of the concessional loan did not achieve the Australian Government’s objective of bringing Stage 2 of the project forward by approximately two years.

The WestConnex project had not proceeded fully through the established processes to assess the merits of nationally significant infrastructure investments prior to Australian Government funding being committed. This situation was identified in departmental advice to decision makers prior to decisions being taken.

Funds have been paid in advance of project needs. Advice provided prior to the first payment (of $500 million in June 2014) identified that a payment of that magnitude was not yet required. The ANAO estimates that as of November 2016, the total cost of amounts provided in excess of project needs since June 2014 has been approximately $20 million.

The May 2014 decision to make the $500 million advance payment led to the project being approved without there being any documented analysis and advice to Ministers that the statutory criteria for giving such approvals had been met. Advice seeking the necessary approval for later payments (of $250 million in June 2015, $450 million in June 2016 and $300 million in November 2016) addressed those criteria. But those three milestone payments were designed and administered in a way that did not adequately protect the Australian Government’s financial interests. This was because, in order not to delay payments, milestones were agreed to after the respective event had already occurred or amended shortly before the payment was due to be made where NSW had not met the milestone.

Departmental advice to Ministers focused on the benefits of providing a concessional loan to the WestConnex project. The key benefits identified were the: lower net financial impact on the presentation of the Federal Budget of a loan compared with further grant funding (due to the differences in the accounting treatment of loans and grants, and because a loan would earn interest income and be later repaid); increased construction activities between 2015‒16 and 2016‒17 from accelerating the second stage; and potential to reinvigorate the private sector lending market in relation to demand risk toll roads.

But the advice to Ministers did not adequately identify or quantify the costs and risks associated with providing a concessional loan. Key issues that detract from the loan providing value for money include: there is evidence that the loan was not needed to accelerate the second stage of WestConnex and, in any event, the project has not been accelerated to the extent projected by DIRD (by up to two years); and the interest rate on the loan was set well below comparable market rates with no margin included to cover the Australian Government’s loan administration costs or risks.

Publication Details
Identifiers: 
ISBN: 
978-1-76033-224-2
Published year only: 
2017
46
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