Report 7: 2020-21

Audit Results Report – Annual 2019-20 Financial Audits of State Government Entities

Audit of the Annual Report on State Finances

Introduction

The Annual Report on State Finances (ARSF) reports on the State’s annual financial results and financial position and explains significant variations from the prior year and from the annual budget estimates. Treasury prepares the ARSF and we audit key aspects under the Government Financial Responsibility Act 2000.

The ARSF brings together key financial information for the 3 sectors of government as shown in Figure 6. In addition to this consolidated financial reporting, each entity also prepares and tables its own annual report that provides detail of its individual finances.

Source: OAG based on ARSF

Figure 6: Financial relationships between sectors of Western Australian government

Audit opinion

We issued a clear (unqualified) audit opinion and the Treasurer released the ARSF on 25 September 2020, meeting the statutory reporting deadline of 90 days after the end of the financial year, being 28 September 2020.

The ARSF opinion contained an Emphasis of Matter paragraph for a contingent liability of the State. This related to a claim of $28 billion made against the State in respect of a legal dispute between the parties to a state agreement and the Western Australian Government recognised in the financial report of the Department of Jobs, Tourism, Science and Innovation.

Western Australia’s finances – selected key indicators

This section supplements information contained in the ARSF that Parliament and other readers might find useful:

  • net operating balance for general government and for the total public sector
  • infrastructure renewal ratio
  • borrowings and unfunded superannuation
  • debt sustainability
  • total borrowings and expense commitments
  • current trend in leave liability balances.

Net operating balance

Figure 7 shows the net operating balance for the general government sector and the total public sector. A large number of factors affect the result, including economic circumstances, the performance of the State’s main industries (e.g. mining, tourism, agriculture), interest rates, Australian Government funding and legislation. However, a surplus is generally an indicator of sound financial management and/or good budgeting.

Source: OAG based on ARSF

Figure 7: Net operating balance from 2003-04 to 2019-20

Infrastructure renewal

Governments face an ongoing challenge to maintain existing infrastructure and also develop and provide new assets to achieve desired social, economic and environmental outcomes.

The infrastructure renewal ratio is an indicator of the rate at which existing infrastructure is being replaced and increased compared with the rate at which it is being used up. The ratio compares the annual expenditure on assets with the annual depreciation charge on assets. A ratio higher than 1.00 indicates that overall the State’s infrastructure is increasing.

Infrastructure assets mainly include land, roads, ports, water and electricity assets and networks, hospitals and schools. These represent almost the entire balance of non-financial assets. In 2019-20 the value of non-financial assets for the total public sector increased from $153.0 billion to $159.3 billion.

Figure 8 indicates that although infrastructure renewal is slowing, it remains above the ratio of 1.00.

The infrastructure renewal rate is a high level indicator and caution is needed when interpreting the results. For example, this indicator does not inform on the extent to which maintenance of existing assets is prolonging their useful life.

Source: OAG based on ARSF

Figure 8: Infrastructure renewal ratios from 2005-06 to 2019-20

Borrowings and unfunded superannuation

Information on the State’s debt is contained in the ARSF. Borrowings and the State’s unfunded superannuation are significant components of this debt. The increase in 2019-20 was due to a $3.7 billion increase in borrowings.

Borrowings data in the following tables and charts excludes leases recognised for the first time in 2019-20 under the new accounting standard, AASB 16 – Leases. Under the new standard, leases previously excluded from the balance sheet as operating lease arrangements are now included as borrowings on the balance sheet (i.e. a lease liability with a corresponding right-of-use asset).

Source: OAG based on ARSF

Note: Refer explanation above on impact of AASB16 on 2020 borrowings amount.

Figure 9: Borrowings and unfunded superannuation from 2005-06 to 2019-20

Net assets

Net assets represent the total net worth (equity) of the State, total assets minus total liabilities. Figure 10 shows the movement in the State’s net assets position.

Source: OAG based on ARSF

Figure 10: Net assets from 2007-08 to 2019-20

Debt sustainability

The ARSF contains important information on the State’s net debt. Figure 11 reports another commonly used high level indicator relating to debt, the ‘debt sustainability’ ratio. In this graph, the debt sustainability ratio is the value of borrowings and unfunded superannuation liability of the total public sector as a percentage of gross state product (GSP).

It should be noted that measuring sustainable debt is difficult as the ability to pay debts involves factors such as economic growth, interest rates and the capacity of the State to generate revenue and surpluses in the future. As debt is repaid over a long period, these factors cannot be forecast reliably.

Source: OAG based on ARSF and Australian Bureau of Statistics

Note: As ABS data for 2019-20 is not yet available, 2019-20 is based on a Treasury estimate of GSP.
Note: Refer explanation above Table 9 on impact of AASB16 on 2020 borrowings amount.

Figure 11: Borrowings and unfunded superannuation as a percentage of GSP

Current trend in leave liability balances

The total public sector annual and long service leave liability owing to employees increased by $277 million, taking the balance to $3.3 billion at year end.

This increase is mainly due to employees not taking leave during the peak of the COVID-19 pandemic. In front-line entities especially, staff had to postpone their leave in order to continue to provide services to the public. In some entities additional staff were engaged to ensure that an increased volume of services could be provided to meet demand and deliver the new services required.

Source: OAG based on ARSF

Figure 12: WA public sector annual and long service leave liabilities 2007-08 to 2019-20

As the pandemic conditions ease, management at entities will need to review their leave position and proactively manage their leave liabilities. Staff will be more in need of leave for their health and well-being. It is important for staff to take regular leave and for the entity to develop staff to perform the tasks of others. It should also be noted that fraud can be more easily concealed by staff who do not take leave.

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