V I C T O R I A Auditor-General of Victoria AUDITOR-GENERAL’S REPORT on the VICTORIAN GOVERNMENT’S FINANCES 1997-98 Ordered to printed by Authority. Government Printer for the State of Victoria No. 41 - Session 1998 ISSN 1327-6905 ISBN 0 7306 9303 1 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, 1997-98 iii PART 1 Executive Summary Auditor-General’s Report on the Victorian Government’s Finances, 1997-98 1 Overview This Report to the Parliament which is entitled the Auditor-General’s Report on the Victorian Government's Finances, 1997-98 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 1997-98 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, 1997-98 3 Summary of major findings OPERATING RESULT AND FINANCIAL POSITION Page 17 l 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 l The State achieved an operating surplus prior to abnormal items of $2 billion for the 1997-98 financial year, which was $410 million higher than the result achieved in the previous year. Paras 3.2 to 3.5 l 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 l The State’s financial condition has strengthened during the 1997-98 financial year, in that: l the Government’s capacity to maintain existing programs and operations has improved; l the Government’s flexibility in responding to future opportunities requiring increased financial resources has also improved; and l the State’s vulnerability to funding sources not directly within its control has decreased. Paras 3.8 to 3.12 l 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. 3.12 l 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 l 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, 1997-98 5 EXECUTIVE SUMMARY ASSET SALES Page 29 l l 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 l l It was estimated that the State derived annual net savings of approximately $760 million during the 1997-98 financial year from electricity privatisations that have occurred to date. Paras 4.35 to 4.38 l l 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 l l 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 l l 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 1998. Paras 4.57 to 4.65 l l 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. 4.65 l l 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 4.104 l l 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. 4.102 6 Auditor-General’s Report on the Victorian Government’s Finances, 1997-98 EXECUTIVE SUMMARY ASSET SALES - continued Page 29 l l 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. 4.104 l l 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 4.105 to 4.124 l l 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 4.136 to 4.167 l l 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.