A standoff over the New South Wales government’s asset shuffling to bolster its budget bottomline has the potential to threaten political careers and put the state’s credit rating at risk if it is not resolved.
Margaret Crawford, NSW’s auditor general, this week announced she was refusing to sign off on the state’s 2020-21 financial report “due to significant accounting issues”.
At the centre of the dispute is the treatment of the innocuously named Transport Asset Holding Entity, or TAHE. It was known as Rail Corporation until its conversion to a state-owned corporation last year.
The Audit Office typically signs off on the government’s financial reporting by the end of each September or early October, so the process is months overdue.
Awkwardly for the NSW treasurer, Matt Kean, this week’s public declaration of the dispute comes just days before he releases the state’s mid-year review.
What is TAHE?
Pronounced “tah-hee”, the entity is a statutory state-owned corporation (SOC) that holds rail property assets, rolling stock and infrastructure in the Sydney metro area and limited country locations worth about $40bn.
TAHE makes these assets available to Sydney Trains and NSW Trains for their operations, as it has done for decades. It also provides rail infrastructure to other operators under access agreements.
In its submissions to a NSW upper house inquiry, the state government – now led by Dominic Perrottet – justified the creation of TAHE as part of a “critical reform” of the state’s transport cluster to “best optimise the use of state funds”.
“Appropriate commercial and economic drivers” would deliver a better return for taxpayers than the previous RailCorp, the submission argued.
What did it mean for the budget?
The auditor general was been wary of the implications for the state finances of such a change for years, not least because assets such as railroads typically need significant injections of government funding and aren’t typically profit making.
How these necessary payments are treated, though, has big implications for the budget bottom line being presented to the public.
Previously the government paid recurrent grants to RailCorp to deliver its capital program, and these showed up as expenses.
As former auditor general Tony Harris noted in his submission, from July 2015 onwards, new funding for capital projects could be treated as equity injections and not expenses once TAHE was born. This shift followed Australian accounting standards for corporations that are set up to generate commercial returns.
Big bickies
The status change to TAHE was very helpful for the budget.
“The reduction in budget expenses (and thus the improvement in the budget result) for the five years from 2015-16 to 2019-20 by classifying RailCorp as a commercial non-financial public corporation was $14,349m comprised of $5,829.4m in operating losses and $8,545.5m of equity injections for capital purposes,” Harris said in his submission.
“In none of those years did RailCorp make a profit, notwithstanding its ‘commercial’ characterisations,” he said.
Or as he told Guardian Australia: “It’s all a charade.”
“It’s a relatively complex issue because it’s so artificial,” Harris said.
Why the standoff?
The Audit Office had warned in its 2020 report on the state’s finances that “the accounting for further cash injections and the fair value of TAHE’s assets will be a key area of audit focus in 2020–21”.
Despite that alert, treasury officials dug in their heels, challenging Crawford to submit a qualified report on the states finances for the year to last 30 June.
Kean can sign off on such a report but to do so would raise “some ethical or behaviour issues”, former auditor general Harris says.
Kean could call for a review – something the Labor opposition says won’t wash with the public.
Or he could reject the treatment of TAHE as a commercial entity, and adjust the budget. That would mean, among other things, that current predictions of a return to an operating surplus by 2024 would probably be pushed back, potentially years.
That last path would embarrass Kean’s boss, Dominic Perrottet, who was steering the TAHE transition until his elevation from treasurer to premier following the October exit of Gladys Berejiklian before the Independent Commission Against Corruption hearings.
On Tuesday, the Australian reported transport department chief Michael Pratt was planning to retire. Kean’s office confirmed Pratt planned to go, saying he had informed the government of his decision several weeks ago but denied it was triggered by the probe into TAHE.
Political fallout
The Greens and the Shooters, Fishers and Farmers Party head the upper house public accountability inquiry looking into TAHE, and another hearing is due on Thursday.
With the accounts yet to be signed off, the auditor general will skip this week’s event, indicating the committee will last into next year, with lingering fallout.
Labor, too, is leading the charge with shadow treasurer Daniel Mookhey aware the wider media is now cottoning on.
“It’s hard to make an accounting scandal a front page story,” he said on Tuesday just after the issue led that day’s Sydney Morning Herald print edition.
“Why should the public care?” he said. “Well, this government has nominated itself as Australia’s best economic manager and the best manager of the books … but the emperor has no clothes. That’s the moral tale.”
Mookhey also tabled in parliament a critical report by accounting giant KPMG that disputed the treatment of TAHE’s accounts to make it appear a commercial entity.
The upper house inquiry later revealed how the supposedly independent advisory firm subsequently tried to quash its own negative report to favour the government’s approach.
After rail, hospitals and schools could be up for similar asset treatment, Labor warns, while Harris says roads could be added to the list.
Is there a safety issue?
Labor has warned that the public’s safety is at risk because the attempt to make TAHE a profitable entity would give incentives to managers to, say, develop land over rail stations rather than invest in loss-making and expensive maintenance.
Quick Guide
How to get the latest news from Guardian Australia
Show
The government rejects this. “[O]ver the three decades since the state-owned corporations act was introduced, SOCs have consistently and transparently demonstrated that they can consistently and safely manage public monopolies and partial monopolies such as water and energy”, it said in a submission.
The Audit Office, though, plans to find out whether there is an issue.
Along with its review of finances, it has launched a performance audit to “examine whether TAHE’s operating model is fit-for-purpose to effectively and efficiently achieve the outcomes intended by government, particularly in relation to rail safety”.
Do markets care?
Harris argues one motivation for improving the appearance of budgetary health was to increase the chances of NSW retaining its AAA credit rating with agencies such as Moody’s Investors Service and S&P Global.
Indeed, such a goal is the sole objective of the state’s Fiscal Responsibility Act 2012 because it implies a lower borrowing cost. That is handy as the Covid pandemic’s impacts include a blowout towards $100bn in net debt for the state.
So far, those agencies are not perturbed by the tantrums over TAHE.
Still, “we are trying to monitor developments quite closely”, Martin Foo, an associate director at S&P Global said.
Similarly, John Manning, a vice-president and senior credit officer at Moody’s, said “the focus is on the whole government” and the treatment of TAHE doesn’t affect the overall debt load.
However, Foo noted NSW’s and Australia’s ratings were underpinned by auditing that was “independent, timely and public”, a standard that was now in the spotlight.
