Part 3: Results of audits of central government transport entities

Transport sector: Results of the 2011/12 audits.

Summary

3.1
Under section 15 of the Public Audit Act 2001, the Auditor-General audits the financial statements and other information that each of eight central government transport entities (see paragraphs 3.4 and 3.5) and their subsidiaries are required to have audited. Appendix 2 includes details of the subsidiaries for each of these entities.

3.2
Our annual audits of these entities are designed to give assurance that each entity's annual report fairly reflects its financial and service performance.

3.3
In this Part, we discuss the eight central government transport entities' audit results for 2011/12, including the audit opinion, our assessment of their management control environments, our assessment of their systems and controls for financial and (where required) service reporting, and significant matters arising from our audit work.

Audit opinions

3.4
We issued an unmodified audit opinion on the financial statements and service performance information of:

  • the CAA;
  • Maritime New Zealand;
  • the Ministry of Transport;
  • NZTA; and
  • the Transport Accident Investigation Commission.

3.5
We also issued an unmodified audit opinion on the financial statements of:

  • Airways Corporation of New Zealand Limited;
  • KiwiRail; and
  • the Road Safety Trust.12

3.6
An unmodified audit opinion means that the financial statements (and service performance information) complied with generally accepted accounting practice and fairly reflected the entities' performance for 2011/12.

3.7
Under the Land Transport Management Act 2003, we are required to separately audit the financial statements and statement of service performance of the NLTF.

3.8
We expressed an unmodified audit opinion on the NLTF's financial statements and statement of service performance for 2011/12.

Good systems and controls

3.9
In our view, all central government transport entities have good systems and controls.

3.10
As part of our annual audits, we assess and grade the management control environment of all public entities and their financial information systems and controls. (Appendix 3 contains more information about this, including explanations of the grades.) We assess and grade the service performance reporting of some central government transport entities (see Figure 1). We report our assessments to each entity's management and governing board (where appropriate) and to the relevant Ministers.

3.11
In 2011/12, the seven transport entities that we assessed had "very good" or "good" management control environments and financial information systems and controls. The Road Safety Trust was not assessed because of its small size and entity type.

3.12
The grades for service performance information and associated systems showed a significant improvement in 2011/12. Four of the five transport entities we assessed had "good" grades, and one entity was graded as "needs improvement". These entities are continuing to work to further improve their service performance information.

Figure 1
Summary of central government transport entities' 2011/12 grades for management control environment, financial information systems and controls, and service performance information and associated systems

Public entity Management control environment Financial information systems and controls Service performance information systems and controls
Airways Corporation of New Zealand Limited Very good Good N/A
Civil Aviation Authority Good Good Good
Maritime New Zealand Very good Very good Good
Ministry of Transport Very good Very good Good
KiwiRail Good Very good N/A
NZTA Good Good Good
Transport Accident Investigation Commission Very good Very good Needs improvement

Significant matters arising from the 2011/12 audits

3.13
Paragraphs 3.14-3.49 discuss the most significant matters arising from our 2011/12 audits of central government transport entities.

KiwiRail's balance sheet restructure

3.14
On 27 June 2012, the Government announced a balance sheet restructure of KiwiRail. There were two main parts of the restructure:

  • New Zealand Railways Corporation would continue to hold the 18,000 hectares of rail network land, from which no financial return is expected. After the restructuring of KiwiRail, the sole purpose of the New Zealand Railways Corporation would be to own the railway land.
  • From 1 January 2013, KiwiRail's freight, passenger, infrastructure, and ferry businesses, together with rolling stock, rail infrastructure, and plant and equipment, would be transferred to a new state-owned enterprise, KiwiRail Holdings Limited. New Zealand Railways Corporation would grant the use of the railway land to KiwiRail Holdings Limited, and all New Zealand Railways Corporation's employees were to be transferred to KiwiRail Holdings Limited on 1 January 2013.

3.15
In April 2012, we told KiwiRail's Board that, although KiwiRail Holdings Limited will be an entity with mixed objectives (because it will incorporate metropolitan and freight rail infrastructure), we were satisfied on balance that the Board's decision to designate KiwiRail Holdings Limited as a profit-oriented entity for financial reporting purposes was not unreasonable but marginal. We noted the importance of continuing to reassess the appropriateness of KiwiRail Holdings Limited being designated as a profit-oriented entity.

3.16
The main considerations in reaching our view were:

  • although the intentions of the Government, the Board, and management are clearly in line, it was difficult to assess how realistic those intentions are for the medium to long term;
  • as an asset-intensive business, KiwiRail will continue to have significant renewal and replacement "capital expenditure" and will need to account appropriately for this;
  • KiwiRail is more than a commercially focused freight business – it has responsibility for metropolitan passenger services and significant metropolitan infrastructure assets; and
  • the rail infrastructure assets (metropolitan and freight) represent a significant asset management challenge for KiwiRail, irrespective of how those assets are valued.

3.17
Our concerns included that a significant recent financial investment in public benefit assets (metropolitan rail infrastructure) would effectively be written off and dilute accountability for those assets. However, the subsequent treatment of metropolitan rail assets within the Government's financial statements as public benefit assets means that this is now less of a concern to us. If much of what would normally be accounted for as capital expenditure had to be expensed in future, it would not sit comfortably with KiwiRail Holdings Limited being a commercially focused business.

3.18
Because the Government's decision on the balance sheet restructure happened before the end of 2011/12, the infrastructure and rolling stock assets that were to be transferred to KiwiRail Holdings Limited (as a profit-oriented entity) had to be tested for impairments to take into account future cashflows. The results of these impairment tests are reflected in the 2011/12 financial statements.

3.19
KiwiRail wrote down the value of the infrastructure and rolling stock assets by $7 billion. In our view, the $7 billion asset impairment in KiwiRail's 2011/12 financial statements complied with generally accepted accounting practice.

3.20
KiwiRail offset almost $5 billion of the impairment against revaluation reserves.13 The remaining $2 billion was expensed through the statement of financial performance.

3.21
We note that, in the Government's 2011/12 financial statements, the metropolitan-only rail infrastructure assets have been accounted for differently than in KiwiRail's financial statements. KiwiRail has treated these assets purely commercially, consistent with the Government's expectation that KiwiRail generate a commercial return from the whole rail network.

3.22
The metropolitan-only rail infrastructure assets are recognised differently in the Government's financial statements because, despite the Government's expectation, the primary purpose for those assets at a whole-of-government level is a public benefit purpose (such as reduced congestion on roads and, therefore, reduced travel times) rather than generating a commercial return from the use of those assets. This has resulted in the metropolitan-only rail assets being valued higher by $0.5 billion in the Government's financial statements than in KiwiRail's financial statements.

KiwiRail's progress with managing assets

3.23
KiwiRail is steadily improving how it manages assets, particularly in the Freight and Infrastructure and Engineering business units. We note the internal advice to Kiwirail's Infrastructure and Asset Management Committee at its February 2012 meeting that "asset management planning is in a varying state of development".

3.24
We recommended that KiwiRail consider strengthening its asset information database and prepare asset management plans for the Interislander business unit and for Property (Land and Commercial Building) assets. In our view, KiwiRail has addressed five of the nine recommendations from our 2010/11 audit. We consider that KiwiRail could address the remaining "open" recommendations when the next round of asset management plans are released.

3.25
KiwiRail faces significant financial constraints. When the Crown bought back the rail network, many catch-up renewals were required. Managers said that clearing this legacy would take 20 to 40 years. Funding for asset renewals and maintenance for the three years 2012/13 to 2014/15 is short of what is required to address the legacy of deferred maintenance. However, managers told us that it is plans to increase funding from 2015/16 to address backlog maintenance and renewal requirements. To ensure that greater earnings growth is realised before over-extending the business with capital expenditure, the Infrastructure and Engineering business unit is reducing capital expenditure by $200 million in the three years 2012/13 to 2014/15, including track renewal reductions of 20% in 2012/13, 45% in 2013/14, and 50% in 2014/15. Planned expenditure for these three years is $750 million ($550 million capital expenditure and $200 million maintenance).14

3.26
KiwiRail has advised us that it took into account how budget decisions affect service. We note that there could be increased risks of unexpected failure of assets. Managers told us that KiwiRail's inspection and maintenance procedures will secure safe operations and that - mostly - this should not affect the most important train corridors in terms of service performance.

How the New Zealand Transport Agency manages cashflow

3.27
NZTA uses a borrowing facility with the New Zealand Debt Management Office. NZTA may borrow up to $250 million to help pay for the delivery of activities funded by the NLTF.

3.28
To use the borrowing facility, NZTA must manage cash well.

3.29
Recognising the need to better manage cash, NZTA commissioned an independent review to contribute to the overall management of the NLTF and related cashflows.

3.30
The review identified the need for a more formal system and better forecasts of cashflow.

3.31
NZTA has made good progress in addressing the review's recommendations and is working to formalise how it manages cashflow and make cash requirements forecasting more reliable. We plan to review the changes as part of our 2012/13 annual audit of NZTA.

3.32
As part of our 2011/12 audit, we looked at the processes in place to ensure that the financial records of NZTA and the Ministry of Transport reconciled.

3.33
We recommended that the Ministry of Transport advise NZTA the balance available for the NLTF each month. We understand that the entities have addressed our recommendation.

The New Zealand Transport Agency's future work on the state highway valuation

3.34
NZTA is working with external valuers, Opus Limited, to improve the asset and financial records of the state highway assets.

3.35
A key component of the proposed changes is to include a calculation of the "brownfield" costs of roadwork.15 These costs are not currently incorporated in the valuation.

3.36
NZTA plans to set up a project team to review the external valuer's assessment of brownfield costs. The project team will ensure that the valuer's assessments of costs meet the definition of property, plant, and equipment in New Zealand Accounting Standard NZ IAS 16: Property, Plant and Equipment.

3.37
We understand that, when the review is complete, NZTA plans to capitalise the costs as part of its regular valuation of state highways.

How the New Zealand Transport Agency procures and manages contracts

3.38
Funding, procuring, and managing contracts effectively remains a focus throughout the public sector and is significant for NZTA.

3.39
Our previous reviews of NZTA's procurement policies led us to conclude that they were consistent with good practice. Our review of related assurance activity in 2010/11 led us to conclude that NZTA had adequate assurance mechanisms in place for all major procurement work, including new work, renewals, and maintaining state highways.

3.40
In 2011/12, we followed up on NZTA's progress in addressing previous audit recommendations and reviewed a sample of projects to ensure that the policies were being followed. We did not find any significant discrepancies.

The Civil Aviation Authority's financial viability and funding review

3.41
In July 2011, the Government decided to reduce passenger security charges at airports, so as to reduce the significant amounts in the domestic and international passenger security charge accounts by the end of 2012/13. In deciding to reduce the charges, the Government recognised that they would not fully recover current costs until the account balances were sufficiently reduced. Charges would then be increased to fully recover costs. Reducing the charges successfully reduced the passenger security account balances. However, because passenger volumes were lower than forecast, this happened three months earlier than expected.

3.42
The CAA's longer-term financial viability needs to be addressed. The Minister of Transport is working with the CAA Board to change the passenger security charges to allow operations to continue sustainably. The Minister and Board are finalising the review of passenger security charges that the Aviation Security Services sets. New security charges are expected to be set before the end of 2012/13.

How the Civil Aviation Authority is responding to our performance audit recommendations

3.43
Having put in place changes to improve performance and work culture, the CAA was required to report to the Minister of Transport each quarter about how it was addressing the recommendations included in the report on our June 2010 performance audit.16 In our view, cultural change in the organisation was required to make these changes permanent.

3.44
We worked with the CAA to complete our quarterly reports review, which was then provided to the Minister of Transport. We provided feedback on the CAA's work to address the recommendations in our performance audit. The CAA has made good progress in responding to these recommendations. As at 30 June 2012, the CAA had addressed nine recommendations, with four remaining.

3.45
As part of our annual audits of the CAA, we will continue to monitor progress on the outstanding recommendations.

Maritime New Zealand's response to the Rena grounding

3.46
On 4 October 2011, New Zealand experienced its worst marine environmental disaster when the MV Rena hit the Astrolabe Reef near Tauranga.

3.47
Maritime New Zealand and the New Zealand Oil Pollution Fund put in place emergency measures to manage the resulting oil spill and oversee the salvage operations of the vessel and cargo.

3.48
We extended the scope of our audit of Maritime New Zealand and the New Zealand Oil Pollution Fund to assure those concerned that the financial management of the response was appropriate.

3.49
We found that Maritime New Zealand and the New Zealand Oil Pollution Fund put in place appropriate systems and controls to manage expenditure and revenue. We are satisfied that there were appropriate systems in place to record, collate, and report on the financial transactions involved in managing the response to the Rena grounding.

12: These three public entities do not have to have their service performance information audited. The Road Safety Trust is a Crown-established Trust that is to be wound up by June 2013. NZTA is to take over the Road Safety Trust's functions.

13: KiwiRail, 2012 Annual Report, note 17 Impairment of property, plant, and equipment, page 74.

14: The capital expenditure of $550 million includes $91.5 million for metropolitan rail infrastructure renewals.

15: "Brownfields" in the NZTA context are where highways have been built through built-up areas, resulting in movement of buildings and services.

16: The Civil Aviation Authority's progress with improving certification and surveillance, June 2010.

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