Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18 Auditor-General’s Report on the Annual Financial October 2018 Report of the State of Victoria: 2017–18 October 2018 2018–19: 13 Independent assurance report to Parliament 2018–19: 13 18924 Vago_PB_Cover 6.2mm.pdf | Page 1 of 1 18924 Vago_PB_Cover 6.2mm.pdf | Page 1 of 1 Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18 Ordered to be published VICTORIAN GOVERNMENT PRINTER October 2018 PP no 464, Session 2014–18 This report is printed on Monza Recycled paper. Monza Recycled is certified Carbon Neutral by The Carbon Reduction Institute (CRI) in accordance with the global Greenhouse Gas Protocol and ISO 14040 framework. The Lifecycle Analysis for Monza Recycled is cradle to grave including Scopes 1, 2 and 3. It has FSC Mix Certification combined with 99% recycled content. ISBN 978 1 925678 37 6 The Hon Bruce Atkinson MLC The Hon Colin Brooks MP President Speaker Legislative Council Legislative Assembly Parliament House Parliament House Melbourne Melbourne Dear Presiding Officers Under the provisions of section 16AB of the Audit Act 1994, I transmit my report Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18. Yours faithfully Andrew Greaves Auditor-General 24 October 2018 Contents Overview ...................................................................................................................... 7 Conclusion ...................................................................................................................................... 7 Findings .......................................................................................................................................... 7 Submissions and comments received ........................................................................................... 10 1 Audit context ........................................................................................................... 11 1.1 Entities included in the AFR ................................................................................................. 1 1 1.2 Entities not in the AFR ......................................................................................................... 12 1.3 Results of the State of Victoria ............................................................................................. 1 3 1.4 Our audit ............................................................................................................................. 14 1.5 Report structure .................................................................................................................. 14 2 Results of audits ...................................................................................................... 15 2.1 Audit opinion for the year ended 30 June 2018 ................................................................... 15 2.2 Reliability of financial statements ........................................................................................ 15 2.3 Timeliness of financial statements ....................................................................................... 16 2.4 Significant transactions in 2017–18 ..................................................................................... 17 3 Better practice financial reporting .......................................................................... 25 3.1 Financial reporting processes .............................................................................................. 25 4 Internal controls ...................................................................................................... 31 4.1 Overall findings .................................................................................................................... 31 4.2 Internal control deficiencies ................................................................................................ 3 2 5 Financial sustainability of the general government sector ..................................... 39 5.1 Conclusion ........................................................................................................................... 39 5.2 The sector ............................................................................................................................ 39 5.3 Financial measures and outcomes ....................................................................................... 41 5.4 GGS operating sustainability ................................................................................................ 41 5.5 Debt sustainability ............................................................................................................... 49 5.6 Funding public hospitals ...................................................................................................... 55 6 Financial sustainability of public financial corporations ......................................... 57 6.1 Conclusion ........................................................................................................................... 57 6.2 The sector ............................................................................................................................ 57 6.3 Financial measures and outcomes ....................................................................................... 59 7 Financial sustainability of public non-financial corporations ................................. 65 7.1 The sector ............................................................................................................................ 65 7.2 Conclusion ........................................................................................................................... 67 7.3 The water sector .................................................................................................................. 67 7.4 Understanding financial performance ................................................................................. 68 7.5 Understanding the financial position ................................................................................... 70 Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18 5 Appendix A. Audit Act 1994 section 16—submissions and comments ..................... 75 Appendix B. AFR audit opinion................................................................................... 79 Appendix C. Audit opinions ........................................................................................ 85 Appendix D. Financial reporting maturity framework ............................................... 99 Appendix E. Management letter risk rating definitions ........................................... 101 Appendix F. Water sector financial sustainability risk indicators ............................ 103 Appendix G. Glossary ............................................................................................... 105 Acronyms AFR Annual Financial Report of the State of Victoria DET Department of Education and Training DJR Department of Justice and Regulation DTF Department of Treasury and Finance EBITDA earnings before interest, tax, depreciation and amortisation ESC Essential Services Commission FSCP financial statement close process FTE full-time equivalent GGS general government sector GSP gross state product IT information technology PFC public financial corporation PNFC public non-financial corporation PPE property, plant and equipment PPP public private partnership VAGO Victorian Auditor-General’s Office WGT West Gate Tunnel 6 Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2017–18 Overview The Treasurer tabled the 2017–18 Annual Financial Report of the State of Victoria (AFR) in Parliament on 20 September 2018. The AFR includes the financial statements of the State of Victoria (the state) and the general government sector (GGS). This report provides Parliament with information about matters arising from our financial audit of the 2017–18 AFR. It also provides our assessment of the financial sustainability of the three sectors that make up the state at 30 June 2018—the GGS, public financial corporations (PFC) and public non-financial corporations (PNFC). This year, we provided clear audit opinions on the financial statements of the Conclusion 33 significant state-controlled entities included in the AFR and, consequently, on the AFR. The state continues to operate sustainably and is well positioned financially. Significant transactions in 2017–18 Findings As part of our financial audit of the 2017–18 AFR, we considered the following significant transactions: the West Gate Tunnel (WGT) project the Metro Tunnel project the sale of the state’s investment in Snowy Hydro Limited. West Gate Tunnel project On 11 December 2017, the state entered a public private partnership (PPP) contract with Transurban for the construction of a road tunnel, widening of the West Gate Freeway and an elevated motorway that will link the West Gate Freeway to the CityLink tollway and the Port of Melbourne. The project is expected to be completed by 2022. Construction will cost an estimated $6.7 billion. The estimated state contribution to the project is $2.7 billion, with the remaining construction costs and operating and maintenance costs over the term of the contract to be funded by Transurban through tolling revenue collected from users of the WGT and CityLink. The tolling