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1 V I C T O R I A Auditor-General of Victoria AUDITOR-GENERAL S REPORT on the VICTORIAN GOVERNMENT S FINANCES Ordered to printed by Authority. Government Printer for the State of Victoria No Session 1998
3 Contents Page PART 1 EXECUTIVE SUMMARY 1 Overview 3 Summary of major findings 5 PART 2 AUDIT OPINION ON STATEMENT 11 Financial accountability framework 13 Audit opinion on the Annual Financial Statement 13 PART 3 OPERATING RESULT AND FINANCIAL POSITION 17 Operating result and financial position 19 Financial management reform 26 PART 4 ASSET SALES 29 Government asset sales program 31 PART 5 REVENUE 71 State revenue 73 PART 6 EXPENDITURE 89 State expenditure 91 PART 7 ASSETS OF THE STATE 107 State assets 109 PART 8 LIABILITIES AND COMMITMENTS 127 Aggregate liabilities of the State 129 Borrowings 131 Unfunded superannuation liabilities 149 Other employee entitlements 153 Payables and other liabilities 154 Contingent liabilities of the State 159 Other financial commitments of the State 164 INDEX 169 Auditor-General s Report on the Victorian Government s Finances, iii
4 PART 1 Executive Summary Auditor-General s Report on the Victorian Government s Finances,
5 Overview This Report to the Parliament which is entitled the Auditor-General s Report on the Victorian Government's Finances, outlines the results of the annual audit of the Government s Annual Financial Statement, including an analysis of the operating result achieved in the year and the State's assets and liabilities at year-end, together with the privatisation of government business enterprises and the sale of surplus and underutilised properties. A confirming audit opinion has been provided on the Government s Annual Financial Statement, with the Statement disclosing that the State s financial condition has strengthened during the financial year, reflecting the positive impact of the financial management strategies implemented over recent years. The upgrading of the State s credit rating to AAA by a major rating agency during the financial year is also reflective of the improved financial position of the State and represents a substantial achievement by the Government and the realisation of one of its key long-term targets. Notwithstanding these positive achievements, the Government estimates that the State s tax raising effort was still around $220 million above the national average and remains a major challenge for the Government. The Government s Annual Financial Statement discloses that as at 30 June 1998, the State held assets with an aggregate value of $77.1 billion (30 June 1997, $70.3 billion) and liabilities with an aggregate value of $49.1 billion (30 June 1997, $49.5 billion). While the level of State liabilities has decreased by around $300 million, the level of State assets has increased substantially due to the recognition of certain assets for the first time, the revaluation of certain physical assets and an increase in the level of the State s cash and investment holdings. In particular, cash and investment holdings have increased from $13.3 billion to $16.2 billion over the past 12 months, with a net amount of $4.1 billion held by the Treasury Corporation of Victoria awaiting application by the Government. Finally, given the increasing trend within the public sector for service delivery through contractor services and outsourcing arrangements, and the increasing impact of such services on agency financial operations, it is important that appropriate annual reporting requirements be introduced in relation such services. Auditor-General s Report on the Victorian Government s Finances,
6 Summary of major findings OPERATING RESULT AND FINANCIAL POSITION Page 17 As at 30 June 1998, the State held net assets of $28 billion (30 June 1997, $20.8 billion), comprising assets with an aggregate value of $77.1 billion, and liabilities with an aggregate value of $49.1 billion. Paras 3.6 to 3.7 The State achieved an operating surplus prior to abnormal items of $2 billion for the financial year, which was $410 million higher than the result achieved in the previous year. Paras 3.2 to 3.5 The overall operating surplus for the year was favourably impacted by $2.2 billion of abnormal transactions, mainly relating to the sale of entities in the electricity industry and the recognition of a future revenue stream receivable mainly from electricity distribution companies. Para. 3.3 The State s financial condition has strengthened during the financial year, in that: the Government s capacity to maintain existing programs and operations has improved; the Government s flexibility in responding to future opportunities requiring increased financial resources has also improved; and the State s vulnerability to funding sources not directly within its control has decreased. Paras 3.8 to 3.12 The State s total cash and investment holdings have increased substantially from $13.3 billion as at 30 June 1997 to $16.2 billion as at 30 June 1998, with a net amount of $4.1 billion held by the Treasury Corporation of Victoria awaiting application by the Government. Para Legislative reforms were implemented effective from 1 July 1998 involving the adoption of accrual-based appropriations and financial management focusing on the delivery of outputs. Paras 3.21 to 3.23 While it may have been expected that by shifting to accrual-based arrangements, the appropriations would be applied when expenditure was incurred, the Government s framework provides that the Treasurer will determine when Parliamentary appropriations will be applied, which will be when the Treasurer determines outputs have been delivered. Paras 3.24 to 3.25 Auditor-General s Report on the Victorian Government s Finances,
7 EXECUTIVE SUMMARY ASSET SALES Page 29 The application of privatisation proceeds towards the reduction of State debt has been a major factor contributing to the strengthening of the State's financial position. Paras 4.1 to 4.4 It was estimated that the State derived annual net savings of approximately $760 million during the financial year from electricity privatisations that have occurred to date. Paras 4.35 to 4.38 A formal independent valuation of Victorian Electricity Metering Pty Ltd was not obtained prior to its sale to enable an assessment of the adequacy of the result achieved by the State. Paras 4.20 to 4.34 Under a partnering agreement entered into between Melbourne Water Corporation and the purchaser of its business segment, Streamline Australia, the purchaser has been established as a preferred service provider to the Corporation, with the Corporation undertaking to provide business to the purchaser subject to competitive pricing and conditions over a 5 year period, up to a value of $60.1 million in present value terms. Paras 4.41 to 4.56 The gross sale proceeds achieved for the former SECV building located at 452 Flinders Street, Melbourne were $19.5 million higher than the reserve price set by the Valuer- General in July Paras 4.57 to 4.65 The gross sale proceeds achieved for the former SECV building were $130.5 million less than the price of $250 million paid by the SECV in 1994 to acquire ownership of the building, but the State has avoided the on-going exposure associated with the onerous lease contract. Para The successful tenderer for the provision of metropolitan bus services within the Footscray and Sandringham areas of Melbourne has entered into a 10 year contract with the Department of Infrastructure, in return for receiving annual fees which are estimated to total around $135 million in nominal terms (around $99 million in present value terms) over the period of the contract. Paras 4.76 to While an inter-departmental evaluation committee initially selected a preferred tenderer for the provision of metropolitan bus services based on its assessment of tenders received against predetermined criteria, the second ranked tenderer was ultimately engaged by the Department of Infrastructure based on a re-assessment of tenders with an increased emphasis on service benefits. Para Auditor-General s Report on the Victorian Government s Finances,
8 EXECUTIVE SUMMARY ASSET SALES - continued Page 29 The savings to the State from proceeding with the service contract for the external provision of metropolitan bus services compared with the pre-existing inhouse arrangements were estimated by the Department of Infrastructure at $2.5 million per annum. Para The net proceeds from the sale of the former Port Melbourne gasworks sites, after taking account of the estimated costs of $8.5 million to be incurred mainly in relation to the required remediation works, will be around $1 million. Paras to While the return of $7.5 million obtained from the sale to the University of Melbourne of the former VicRoads property at Carlton by the Department of Treasury and Finance, was consistent with the valuation provided by the Valuer-General, the return to Victorian taxpayers may not have been maximised as the sale was not subject to a competitive process. Paras to Four months prior to the Governor-in-Council approving the sale of the former VicRoads property to the University of Melbourne, in December 1997 the University entered into a contract for the sale of the property to a private sector developer for a price of $7.5 million. Para REVENUE Page 71 The operating revenues of the State totalled $25.6 billion during the financial year, which was $258 million higher than the revenues raised in the previous year. Para. 5.1 The Government estimated that, after taking account of the tax relief measures announced in its Budget, the State s tax raising effort was still around $220 million above the national average. Paras 5.5 to 5.7 During , the total revenues to the State from gambling activities totalled $1.3 billion and represented 5 per cent of total State operating revenues. Para A fifth deed of variation to the Casino Management Agreement has been executed to defer the completion date of the construction of a second hotel tower and the Lyric Theatre from November 1999 to November The impact of the recent amendment which deferred the obligation by Crown is equivalent to the waiver by the State of up to $73 million in liquidated damages which would have been payable from November 1999 to November Paras 5.26 to 5.38 Report of the Auditor-General on the Government s Annual Financial Statement,
9 EXECUTIVE SUMMARY EXPENDITURE Page 89 The operating expenses of the State totalled $23.7 billion during the financial year, which was $152 million lower than the expenditure incurred in the previous year. Paras 6.1 to 6.3 The net operating costs incurred by the State on the Formula One and Motorcycle Grand Prix projects, determined on an accrual basis, relating to the financial year were $8.9 million. Paras 6.24 to 6.40 Since the inception of the Grand Prix events, the net aggregate operating costs incurred by the State were $27.4 million. Para In May 1998, the Treasurer formally approved additional funding of $10 million to the Department of Education to meet the associated costs of excess teachers. However, in October 1998 the Minister for Education announced that up to teaching jobs will be available in Government primary and secondary schools in Around 1000 of the new jobs will be created as part of the Government s $102 million a year early literacy initiative. Paras 6.41 to 6.44 The total cost to the State of the Government s Winter Power Bonus Scheme over the 3 year period will be around $370 million. Paras 6.45 to 6.47 The electricity distribution businesses agreed to terminate the previously established sales tax reimbursement agreements with the State with effect from 1 July The total cost to the State associated with the termination of these agreements was around $67 million. Paras 6.48 to 6.51 Given the increasing trend within the public sector for service delivery through contractor services and outsourcing arrangements, and the increasing impact of such services on agency financial operations, it is important that appropriate annual reporting requirements be introduced in relation to contractor and outsourcing services, to complement the existing reporting requirements relating to consultancy services. Paras 6.52 to Auditor-General s Report on the Victorian Government s Finances,
10 EXECUTIVE SUMMARY ASSETS OF THE STATE Page 107 Certain assets of the State are yet to be recognised by the relevant agencies, including certain parcels of crown land managed by Committees of Management which come under the ultimate responsibility of the Department of Natural Resources and Environment, the State s share of assets managed by the Murray-Darling Basin Commission, and land under roads. Paras 7.5 to 7.9 While supplementary information is provided in the notes to the Government s Annual Financial Statement on funds held in trust by State Trustees Limited, information is not disclosed on the extent of funds held in trust by the courts. Para Over the past 6 years, the TAC has achieved strong financial results and has maintained a strong financial position. The key factors impacting on these outcomes have been the achievement of high investment returns and the effective management of claims liabilities. Paras 7.18 to 7.33 The high level of financial performance achieved by the TAC over the past 6 years has enabled substantial contributions of around $3 billion to be made by the TAC to other public sector agencies for application towards funding Government programs. Paras 7.34 to 7.38 In July 1997, the Rural Finance Corporation entered into a Loan Portfolio Sale and Management Agreement with a bank for the sale of the rights to a defined loan portfolio with an aggregate value of $43.5 million. However, the arrangements were not subject to a contestable process, although the Corporation did consider various proposals from a number of financiers. Para LIABILITIES AND COMMITMENTS Page 127 The liabilities of the State totalled $49.1 billion at 30 June 1998, a reduction of $317 million in the level of liabilities when compared with the previous year. Paras 8.4 to 8.6 The State also has quantifiable contingent liabilities of around $1.4 billion. In addition, various other contingent liabilities existed at 30 June 1998 which could not be reliably quantified. Para. 8.7 The aggregate value of the State s operating lease and capital commitments as at 30 June 1998 were $2.9 billion (30 June 1997, $2.6 billion). However, these do not include all the State s commitments under outsourcing contracts entered into for the provision of services to the public sector, such as health services. Par. 8.8s Report of the Auditor-General on the Government s Annual Financial Statement,
11 EXECUTIVE SUMMARY LIABILITIES AND COMMITMENTS - continued Page 127 While an assumption of debt of around $1.1 billion by the Consolidated Fund from the Director of Housing has facilitated the consolidation of the Housing debt portfolio with the budget sector debt portfolio, it has resulted in reduced transparency associated with the net costs of providing housing rental and finance assistance. Paras 8.36 to 8.41 The State sold its 25 per cent interest in the Portland Smelter, without divesting that share of the exposure relating to the flexible electricity tariff arrangements. Para Based on current Government expectations of future aluminium prices and inflation levels, and after taking account of the impact of established hedge and levy arrangements, as at 30 June 1998, the estimated net present value of the State's future liabilities under the flexible electricity tariff arrangements was $1.3 billion and the estimated amount receivable from the levy on distribution businesses established by the Government was $894 million. Paras 8.93 to 8.97 Following receipt of an Auditor-General s certificate regarding the calculation of electricity tariffs payable under the electricity supply agreements relating to the aluminium smelters and discussions with the smelter operators, the SECV received an amount of $10.7 million from the operators representing a cost adjustment to the period July 1993 to April Paras to Expenditure incurred by the Melbourne City Link Authority in relation to the total City Link project during the period ended 30 June 1995 to 30 June 1998 amounted to $249 million, with the State s capital commitments in relation to the City Link project amounting to $120 million as at 30 June Paras to Under a contract awarded by the Government to a company to develop an advanced computer network within the State, the company will build and own the network at a cost of between $100 million and $150 million over 5 years, with the respective Government agencies utilising the network on a fee-for-service basis and, in the event of the expiry or the early termination of the agreement, the State having the option to purchase the network equipment at its fair market value. Paras to Auditor-General s Report on the Victorian Government s Finances,
12 PART 2 Audit Opinion on Statement Auditor-General s Report on the Victorian Government s Finances,
13 AUDIT OPINION ON STATEMENT FINANCIAL ACCOUNTABILITY FRAMEWORK 2.1 The Financial Management Act 1994, Audit Act 1994 and Constitution Act 1975 collectively establish the legislative framework which sets out the Government s accountability responsibilities to the Parliament over State finances, including the external financial reporting and audit arrangements which operate within the Victorian public sector. 2.2 A key element of the framework is the requirement, under the Financial Management Act 1994, for the Government to prepare an Annual Financial Statement which must be audited by the Auditor-General and presented to the Parliament each year, together with a Report of the Auditor-General on that Statement. Under the Act, the Government s Annual Financial Statement must be prepared in a manner and form approved by the Minister for Finance and must include certain disclosures relating to the transactions and balances of the Public Account, comprising the Consolidated Fund and the Trust Fund, and the liabilities (including contingent liabilities) and prescribed assets of the State. 2.3 To enhance the quality of the information available to the Parliament and the Government on the financial performance and position of the State, and in turn to facilitate more informed decision-making on financial strategy and resource allocation matters, in the financial year the Minister for Finance determined that, commencing from that year, the Annual Financial Statement would incorporate a consolidated financial report for the State. The consolidated financial report includes an operating statement, balance sheet, statement of cashflows statement and accompanying notes, which are prepared consistent with the requirements of Australian Accounting Standard AAS31 Financial Reporting by Governments. 2.4 Consistent with the Ministerial determination, the Annual Financial Statement for the financial year was presented on a similar basis. AUDIT OPINION ON THE ANNUAL FINANCIAL STATEMENT 2.5 The Annual Financial Statement for the year ended 30 June 1998 has been audited in accordance with the requirements of the Financial Management Act The audit has been undertaken in accordance with Australian Auditing Standards, using methodologies consistent with those applied by the accounting profession. My opinion on the Government's Annual Financial Statement is as follows: Auditor-General s Report on the Victorian Government s Finances,
14 AUDIT OPINION ON STATEMENT Audit Scope The accompanying Annual Financial Statement for the year ended 30 June 1998 of the Government of Victoria (excluding local government bodies, universities and certain parcels of Crown land managed by Committees of Management), which comprises the consolidated operating statement, the consolidated statement of financial position, the consolidated statement of cash flows and the accompanying notes contained in Section 2 of the Statement, has been audited. The Secretary to the Department of Treasury and Finance is responsible for the preparation and presentation of the Statement and the information it contains. An independent audit of the Statement has been carried out in order to express an opinion on it as required by the Financial Management Act The audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. The audit procedures included an examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with Australian Accounting Standards and other mandatory professional reporting requirements, and comply with the requirements of the Financial Management Act 1994 so as to present a view which is consistent with my understanding of the financial position of the Government of Victoria and the results of its operations and its cash flows. The audit opinion expressed on the Annual Financial Statement has been formed on the above basis. Audit Opinion In my opinion, the financial statements present fairly the financial position of the Government of Victoria as at 30 June 1998 and the results of its operations and its cash flows for the year ended on that date in accordance with Australian Accounting Standards and other mandatory professional reporting requirements and comply with the requirements of the Financial Management Act Scope of the Annual Financial Statement 2.6 The Annual Financial Statement has been prepared in accordance with the requirements of the Financial Management Act 1994, relevant Australian Accounting Standards and, in particular, Australian Accounting Standard AAS31 Financial Reporting by Governments which requires the presentation by the Commonwealth and individual State and Territory Governments of general purpose whole-of-government financial reports for their relevant jurisdictions, prepared on the accrual basis of accounting. 2.7 In presenting the Government as a single economic entity, the Annual Financial Statement has been prepared by consolidating the financial statements of all public sector entities within the State, except for local government bodies, universities and certain parcels of Crown land managed by Committees of Management, which the Minister for Finance has determined not to include in these whole-of-government financial statements. 14 Auditor-General s Report on the Victorian Government s Finances,
15 AUDIT OPINION ON STATEMENT 2.8 Substantially due to the implementation of the Government s asset identification and valuation program in recent years, most of the State s assets have been appropriately recognised within the financial statements. The major asset group yet to be recognised as at 30 June 1998 represents certain Crown land parcels managed by Committees of Management which ultimately come under the responsibility of the Department of Natural Resources and Environment. Other assets also yet to be recognised by the State include the State s share of assets managed by the Murray-Darling Basin Commission and land under roads. Further comments on the progress made during the financial year in relation to the valuation and recognition of State assets are included in Part 7 of this Report. Auditor-General's Report on the Victorian Government s Finances 2.9 As mentioned earlier, the Government s Annual Financial Statement discloses the financial operations and financial position of the State, including the financial transactions of the Public Account. To assist in the analysis and assessment of the Statement, this Report to the Parliament is presented in a format consistent with that adopted for the Statement. The Report comments on: Operating result and financial position; Asset sales; Revenue; Expenditure; Assets of the State; and Liabilities and commitments. Auditor-General s Report on the Victorian Government s Finances,
16 PART 3 Operating Result and Financial Position Auditor-General s Report on the Victorian Government s Finances,
17 OPERATING RESULT AND FINANCIAL POSITION OPERATING RESULT AND FINANCIAL POSITION 3.1 Table 3A presents a summary of the operating result achieved by the State for the year and its financial position as at 30 June Operating result for the year TABLE 3A STATE OF VICTORIA OPERATING RESULT AND FINANCIAL POSITION ($billion) Item Operating result Revenues Expenses Operating surplus for the year before abnormal items Net abnormal items (a) Operating surplus for year Financial position Assets - Cash and Investments Physical assets Other Liabilities - Unfunded superannuation Borrowings Employee entitlements Other Net assets (a) Includes the impact of electricity industry privatisations of $1.4 billion ( , $2.2 billion), the recognition in the financial year of the present value of amounts receivable of $894 million mainly from electricity distribution companies to party offset the State s exposure under certain onerous contracts, and the PRRT dispute settlement during the financial year of $339 million. 3.2 The Consolidated Operating Statement provides information on the extent to which the costs of service delivery are covered by the revenues raised in the year, including movements in these items since the previous year. The difference between the revenues raised and expenses incurred in the year represents the operating result achieved by the State, which is a key measure of the Government s financial performance. In addition, when assessed over a number of years, the operating result is an important indicator of the financial impact and sustainability of the Government s financial strategies and policies. Auditor-General s Report on the Victorian Government s Finances,
18 OPERATING RESULT AND FINANCIAL POSITION 3.3 The Government s Annual Financial Statement discloses that the State achieved an operating surplus prior to abnormal items of $2 billion for the financial year, which was $410 million higher than the result achieved in the previous year. However, after taking account of the impact of abnormal transactions during the year, mainly relating to the impact of the electricity industry privatisation program and the recognition of a future revenue stream receivable mainly from electricity distribution companies, the overall operating surplus for the year was $4.2 billion ( , $3.4 billion). Detailed comment on the electricity industry privatisation program and the abovementioned receivable is provided in Part 4 and 8 of this Report, respectively. 3.4 The key factors positively contributing to the improved operating result achieved in the financial year, compared with the previous year, were increased taxation revenues and a reduction in interest costs mainly resulting from lower State debt levels attained from the application of electricity business privatisation proceeds towards debt retirement. However, the impact of these items was to some extent offset by reduced revenues from the sale of goods and services and increased expenditure on supplies and consumables associated with the delivery of government programs. 3.5 The major revenue sources contributing to the year s outcome were State taxation, grants from the Commonwealth Government and proceeds from the sale of goods and services provided by public sector entities. Collectively, these items represented $23 billion or around 90 per cent of the revenues raised by the State during the financial year. The major components of the State s expenditure included costs incurred in relation to employee entitlements, the purchase of supplies and consumables, grants to third parties, and superannuation and financing costs. These items represented $21.6 billion or around 91 per cent of State operating expenditures for the financial year. A more detailed analysis of the State s revenues and expenses is provided in later Parts of this Report. Financial position 3.6 The Consolidated Statement of Financial Position discloses information on the level and composition of assets and liabilities held by the State as at 30 June 1998, including changes thereon since the previous year. Importantly, the statement serves as an indicator of the Government s financial strength and of changes in its overall financial position. In this regard, the Government s Annual Financial Statement shows that, as at 30 June 1998, the State held net assets of $28 billion (30 June 1997, $20.8 billion), comprising assets with an aggregate value of $77.1 billion, and liabilities with an aggregate value of $49.1 billion. The key factors contributing to the improvement in the State s net assets position during the financial year included: Increase in the State s asset holdings of $6.8 billion, mainly comprising an increase in the reported value of physical assets, and increased investment balances. Further analysis of the State s asset holdings is presented in Part 7 of this Report; and Decrease in the State s liabilities of $317 million, mainly comprising a decrease in the level of outstanding debt and unfunded superannuation liabilities, which was partly offset by an increase in the level of outstanding claims liabilities mainly relating to the State s transport accident and workers compensation schemes. Further analysis of the State s liabilities is presented in Part 7 of this Report. 20 Auditor-General s Report on the Victorian Government s Finances,
19 OPERATING RESULT AND FINANCIAL POSITION 3.7 The State s financial position is favourably impacted by the level of physical assets held, which mainly comprise Crown and freehold land and buildings, plant and equipment and other infrastructure, which collectively account for $56.1 billion or around 72 per cent of the State s aggregate assets. The major financial obligations of the State comprise unfunded superannuation liabilities and borrowings, which represent $33.9 billion or around 69 per cent of total liabilities. A further analysis of the State s assets and financial obligations is provided in later Parts of this Report. Analysis of the State s financial condition 3.8 While analyses of movements between years in the level of assets and liabilities, and the annual operating results achieved, are important measures of the State s financial performance and position, they do not necessarily provide a complete picture of its financial condition. Informed assessments of the State s financial condition also need to take into account other indicators of financial health and strength, focusing on: Sustainability - indicating movements in the degree to which the Government can maintain existing programs and operations, and meet existing creditor requirements without increasing the debt burden on taxpayers; Flexibility - indicating movements in the degree to which the Government can increase its financial resources to respond to rising commitments, by either expanding its revenues or increasing its debt burden; and Vulnerability - indicating movements in the degree to which the Government is dependent on, and therefore vulnerable to, sources of funding outside its direct control or influence. 3.9 Below, I have provided some key indicators relating to the State s finances. The analysis of these indicators which follows, together with a consideration of trends in the overall net assets position of the State and the operating results achieved by the Government, which were presented earlier in this Report, is aimed at providing additional information relating to the condition of the State s finances It needs to be recognised that the audit analysis focuses on historical financial information and, accordingly, its scope does not extend to assessments of the effectiveness of government programs and the associated revenue and expenditure decisions. Also, given that audited whole-of-government accrual-based financial information for the State is only available for the past 2 years, the analysis presented in this Report is necessarily limited to this timeframe. However, as the base of information grows over future years, longer-term trend analyses of financial performance and condition will become possible Table 3B presents some of the key indicators relating to the State s finances for the and financial years. Auditor-General s Report on the Victorian Government s Finances,
20 OPERATING RESULT AND FINANCIAL POSITION TABLE 3B STATE OF VICTORIA INDICATORS OF FINANCIAL CONDITION, AND Indicators (a) Sustainability of existing operations - Improvement/ (Deterioration) Operating result - level of surplus/(deficit) ($billion) Level of borrowings ($billion) Operating result (before abnormal items) to Victoria s GSP (per cent) Operating result (before abnormal items) to total revenues (per cent) Borrowings to Victoria s GSP (per cent) Total liabilities to Victoria s GSP (per cent) Total assets to total liabilities (per cent) Finance charges to total expenditure (per cent) Flexibility in increasing financial resources - Own source revenue to Victoria s GSP (per cent) (0.4) Own source revenue to total revenue (per cent) Finance charges to total revenue (per cent) Expenditure to Victoria s GSP (per cent) Level of fixed assets to net assets (per cent) Vulnerability to external sources of funding - Operating result (before abnormal items) to Victoria s GSP (per cent) Commonwealth revenues to total revenues (per cent) Finance charges to total revenue) (per cent) Current assets to current liabilities (per cent) (35) Borrowings to Victoria s GSP (per cent) Foreign currency borrowings to total borrowings (per cent) (a) A number of the indicators provide reference to Victoria s GSP. This reference relates to the size of the State economy and is sourced from statistics published by the Australian Bureau of Statistics for the financial year and estimates provided by the Department of Treasury and Finance for the financial year. 22 Auditor-General s Report on the Victorian Government s Finances,
21 OPERATING RESULT AND FINANCIAL POSITION 3.12 The information contained in the above table highlights that the State s financial condition has strengthened during the financial year, in that: The Government s capacity to maintain existing programs and operations has improved, as indicated by the improved operating result achieved in the year, the reduced level of outstanding borrowings, the lower call on State revenues to meet financing charges, and the reducing proportion of State liabilities compared with the size of Victoria s economy; The Government s flexibility in responding to future opportunities requiring increased financial resources has also improved, as indicated by the reducing proportion of State expenditures compared with the size of the State s economy, the increasing proportion of own-source revenue collections and the reducing debt burden on State finances; and The State s vulnerability to funding sources not directly within its control has decreased, as reflected in the reducing debt burden on Victorian taxpayers and the reducing reliance on Commonwealth revenues. However, there is an excess of current liabilities over current assets as at 30 June 1998, mainly brought about by the State s borrowings profile and a reduction in the level of current investments. Nevertheless, the State s total cash and investment holdings have increased substantially from $13.3 billion as at 30 June 1997 to $16.2 billion as at 30 June 1998, with a net amount of $4.1 billion held by the Treasury Corporation of Victoria awaiting application by the Government. Consolidated Fund result for the year 3.13 As highlighted earlier in this Report, in addition to the presentation within the Government s Annual Financial Statement of the State s consolidated operating result, the Financial Management Act 1994 requires the presentation of certain additional information relating to the financial operations of the Public Account, which comprises the Consolidated Fund and the Trust Fund. In this regard, Note 29 to the Government s Annual Financial Statement provides these statutory disclosures My previous Reports to the Parliament have commented on the absence of a clear differentiation between operating and capital items within the Consolidated Fund, which inhibited the ability of users of the Government s Annual Financial Statement to ascertain and assess the Fund's operating result for the year. A positive development in the financial year was the implementation of action by the Government to address this deficiency, with the allocation of receipt and payment transactions changed from the previous recurrent and works and services classifications, to the current and capital classifications. Under the revised regime, the classification of Consolidated Fund transactions is more closely aligned with conventional accounting principles. However, as indicated in Table 3E, further refinement was required in relation to the classification of transactions The Government s Annual Financial Statement discloses that the overall Consolidated Fund cash-based result for the financial year, not including receipts from borrowings, was a deficit of $309 million, compared with a balanced budget expected outcome. The key factor contributing to this outcome was the repayment of Consolidated Fund debt in excess of the surpluses generated by the Consolidated Fund in the year. Auditor-General s Report on the Victorian Government s Finances,
22 OPERATING RESULT AND FINANCIAL POSITION 3.16 Table 3C presents the Consolidated Fund result for the year, segmented according to operating and capital transactions, and highlights transactions that are not of an ongoing nature, which are known in accounting terms as "abnormal items". TABLE 3C AUDIT RE-STATEMENT OF CONSOLIDATED FUND RESULT FOR YEAR (a) ($million) Item Operating transactions - Receipts Payments Operating surplus prior to abnormal items Add - Abnormal items (b) Operating surplus for the year Capital transactions (excluding borrowing transactions) - Receipts Payments Capital deficit prior to abnormal items (1 247) (1 184) Add/(Less) - Abnormal items (c) (567) 34 Capital deficit for year (excluding borrowing transactions) (1 814) (1 150) Consolidated Fund surplus prior to borrowing transactions Borrowing repayments (3 263) (5 999) Overall Consolidated Fund surplus / (deficit) funded from borrowings for year (309) (543) (a) Table 3E provides a summary of inappropriately classified receipts and payments, as identified by audit. (b) Abnormal items of an operating nature include the receipt of $2.1 billion from the sale of State-owned business enterprises ($4.4 billion, ), employee departure program payments of $20 million ( , $149 million), special dividends of $173 million received from public bodies ($135 million, ), a contribution of $159 million ( , $154 million) to the Commonwealth Government in relation to its deficit reduction program, and costs of $50 million ( , $94 million) associated with electricity industry privatisation. (c) Abnormal items of a capital nature comprise capital grant payments of $410 million to rural water authorities, additional payments of $490 million made to the Emergency Services Superannuation Board and the Hospitals Superannuation Board to reduce the State s unfunded superannuation liabilities, the additional receipt of $299 million from the Director of Housing representing a part repayment of outstanding advances from the Consolidated Fund, and the receipt from Crown Casino of $34 million ( , $34 million) for the right to operate the new casino An analysis of the Consolidated Fund result indicates that the operating surplus for the year prior to abnormal items was $2.7 billion, compared with $2.5 billion in the financial year. The improved outcome achieved in the financial year was mainly due to higher taxation receipts and increased operating grants from the Commonwealth Government. However, after taking account of abnormal items, mainly relating to proceeds of $2.1 billion ( , $4.4 billion) received as a result of the Government's privatisation program, the operating result was $4.8 billion ( , $6.6 billion). 24 Auditor-General s Report on the Victorian Government s Finances,
23 OPERATING RESULT AND FINANCIAL POSITION 3.18 Chart 3D illustrates the significant improvement that has occurred over recent years in the Consolidated Fund operating results achieved by the Government, reflecting the positive impact of major budget and financial management reforms, and the improved economic conditions within the State. (Surplus) 7 CHART 3D CONSOLIDATED FUND OPERATING RESULT, TO ($billion) 6 5 (a) 4 3 (b) (Deficit) -3 (a) Consolidated Fund result after taking into account abnormal items. (b) Consolidated Fund operating result prior to abnormal items In relation to the capital sector of the Consolidated Fund, the result achieved prior to debt repayment transactions and abnormal items in the financial year was a deficit of $1.2 billion, which was broadly consistent with the result achieved in the previous year. Re-classified transactions 3.20 In Table 3E, audit has presented a re-statement of the Consolidated Fund result, which differentiates between operating and capital transactions. Table 3E below details those transactions which have been re-classified by audit. Auditor-General s Report on the Victorian Government s Finances,
24 OPERATING RESULT AND FINANCIAL POSITION TABLE 3E RE-CLASSIFIED CONSOLIDATED FUND TRANSACTIONS, ($million) Item Amount Receipts Operating receipts classified as capital - Privatisation proceeds Capital receipts classified as current - Special dividends (a) 173 Casino premium payment 34 Re-classified receipts Payments Operating payments classified as capital - 52 Less - Capital payments classified as current - Additional superannuation payments to reduce State liabilities (963) Capital grants and other payments (416) Re-classified payments (net) (1 327) (a) Received from the Rural Finance Corporation, the Treasury Corporation of Victoria and the Urban Land Corporation. 26 Auditor-General s Report on the Victorian Government s Finances,
25 OPERATING RESULT AND FINANCIAL POSITION FINANCIAL MANAGEMENT REFORM 3.21 The legislative accountability framework provides for specific disclosures in the Government s Annual Financial Statement in relation to the operations of the Consolidated Fund and Trust Fund, given that their financial operations are integral to the administration of budget sector finances The Consolidated Fund is established as the Government's main operating account and records the collection of all departmental revenues such as State taxes, Commonwealth grants and asset sale proceeds. Fundamental to the legislative framework is the principle that only the Parliament can authorise expenditure from the Consolidated Fund via the passing of Appropriation Acts, which provide the key means by which parliamentary control is exercised over public finances. The Trust Fund comprises various specific purpose trust accounts, mainly relating to the on-passing of certain Commonwealth grants to specified recipients, the operation of departmental suspense and working accounts, and the receipt and payment of moneys of a trust nature As part of the Government s Management Reform Program, a package of initiatives including legislative reforms was implemented with effect from the financial year, involving a fundamental shift away from traditional cashbased appropriations and financial management to accrual-based appropriations and financial management, focusing on the delivery of outputs. Under the new arrangements, which came into effect as from 1 July 1998, parliamentary appropriations provide for the allocation of Consolidated Fund revenues towards meeting the full costs incurred during a financial year relating to the purposes specified in the relevant Appropriation Acts. These costs will include both cash and non-cash components which may be paid in either the current or future years, including costs associated with depreciation and employee entitlements The new appropriation arrangements will assist in enhancing financial management within the budget sector by ensuring that the financial reporting arrangements for departments, which provide for the presentation of accrual-based financial statements to the Parliament, are aligned with the resource allocation and financial management processes within Government which will also be based on accrual principles Under the previous parliamentary appropriation system, appropriations were applied when payments were made. While it may have been expected that by shifting to accrual-based arrangements, the appropriations would be applied when expenditure was incurred, the Government s framework for the operation of appropriations as from 1 July 1998 provides that the Treasurer will determine when parliamentary appropriations will be applied, which will be when the Treasurer determines whether or not particular outputs have been delivered. Accordingly, under the new framework, the funding of Government operations will be initially dependent on the provision of advances to enable the incurring of expenditure to deliver outputs. Auditor-General s Report on the Victorian Government s Finances,
26 PART 4 Asset Sales Auditor-General s Report on the Victorian Government s Finances,
27 ASSET SALES GOVERNMENT ASSET SALES PROGRAM 4.1 In recent years, the privatisation of government business enterprises and the sale of surplus and underutilised properties have been key elements of the Government s program associated with the implementation of its economic and budget strategies. In particular, the application of privatisation proceeds towards the reduction of State debt has been a major factor contributing to the strengthening of the State's financial position. 4.2 Among the key objectives of the privatisation program have been the maximisation of: efficiency and effectiveness in service delivery; competition within the economy; and the value of previously publicly-owned businesses to taxpayers. 4.3 The sale of surplus and underutilised assets has been focused at improving asset management and the financial performance of the public sector. 4.4 This Part of the Report outlines the major business and property sales undertaken or completed by the Government during the financial year, and up to the date of preparation of this Report. The sales covered in this Report include: Business sales Electricity businesses; and Streamline Australia. Property and equipment sales Former SECV building; South Melbourne Tram Depot site; Met Buses; Former Port Melbourne gasworks sites Newport railway site; VicRoads precinct in Carlton; Wellington Parade property; Spring Street property; and Former Melbourne Magistrates Court site. Auditor-General s Report on the Victorian Government s Finances,
28 ASSET SALES Victorian electricity industry privatisation 4.5 My previous Reports to the Parliament have provided detailed comment on the Government s extensive electricity industry restructure program which commenced in The program initially involved the disaggregation of the State Electricity Commission of Victoria (SECV) to a new competitive structure, mainly comprising electricity distribution businesses and generation companies and, subsequently, the progressive privatisation of these businesses. 4.6 Under the restructure program, the State s 5 electricity distribution businesses were privatised during the financial year, followed by the privatisation of the State s major electricity generation companies also during the financial year and in the financial year. Comprehensive analyses of these sales, including the financial results achieved by the State and their impact on Victoria s finances, were provided to the Parliament in my past Reports on Ministerial Portfolios and my Reports on the Government s Annual Financial Statement (referred to prior to the financial year as my Reports on the Statement of Financial Operations). 4.7 During the financial year, a further 3 Victorian electricity industry entities were privatised, namely: PowerNet Victoria - which owned and maintained the high voltage electricity transmission grid which provides transmission services to electricity market participants by transmitting electricity from the generators to the distributors; and Southern Hydro Ltd - which owned and operated 3 hydro-electricity schemes at Kiewa, Dartmouth and Eildon, as well as some minor plants at other locations; and Victorian Electricity Metering Pty Ltd - which provided electricity metering services to the Victorian electricity industry. 4.8 While my May 1998 Report on Ministerial Portfolios provided a comprehensive analysis of the above 2 larger privatisations, given that these transactions have had a significant impact on the financial result achieved by the State in the financial year, I have also outlined the key elements of the transactions below. PowerNet Victoria 4.9 PowerNet Victoria (PowerNet) was established in October 1994 following the disaggregation of the SECV, with the primary function to own and maintain the existing high voltage electricity transmission system in Victoria As the sole supplier of high voltage transmission services in Victoria, PowerNet received the bulk of its revenue from Victorian Power Exchange (VPX) which operates the transmission system under the terms of a network agreement between the various parties. The next largest source of revenue for the business comprised network connection fees which are levied on the electricity distribution companies, the electricity generation companies and the large customers which are directly connected to the network. 32 Auditor-General s Report on the Victorian Government s Finances,