Chapter 3 - Funding

3.1        Industry Skills Councils (ISCs) receive funding primarily from the commonwealth government through the Department of Education, Employment and Workplace Relations (DEEWR).[1] ISCs have a contractual arrangement with DEEWR which underpins the allocation of funding, and are accountable to the government for the funding received. Their accounts are audited and they are required to maintain their not-for-profit status.[2] Other sources of funding include other government contracts for which ISCs bid from time to time, as well as successful open tenders for industry-initiated training projects.[3] Sources of income are described in more detail during the course of this chapter.

3.2        Skills Australia noted that DEEWR has accountability under the Financial Management and Accountability Act 1997 (FMA Act) and has ultimate responsibility for the performance of the ISCs.[4]

3.3        The government has given a three year commitment to funding the service level agreement.[5] DEEWR advised that the total departmental commitment to ISCs as at 30 June 2010 was $5 749 662. The total forward estimate figures as at 30 June 2010 for ISCs is $45 596 797.[6]

3.4        ISCs receive commonwealth funding for general operations as well as specific project funding through DEEWR and other commonwealth organisations. For example, for Innovation and Business Skills Australia's (IBSA)  this includes funding to:

• administer the Enterprise Based Productivity places Program within IBSA industries;
• develop an online tool to measure innovative capacity;
• develop materials to support training and learning; and
• develop qualifications in business governance with the Office of the Registrar of Indigenous Corporations.[7]

3.5        AiGroup Chief Executive Heather Ridout submitted that the ISCs' work was undertaken in a transparent and accountable manner with strong governance arrangements.[8]

3.6        Submissions the committee received appeared to largely agree. However, some concerns were raised around accountability of funding arrangements across the ISCs.

Accountability of funding

3.7        Accountability mechanisms are specified by DEEWR in its contracts with the ISCs. IBSA reported that as part of the funding agreements with DEEWR, all ISCs are required to submit an annual report and audited financial statements by 15 November every year. In addition:

In their annual report, ISCs are required to demonstrate achievements against performance measures, summarise the outcomes of activities outlined in the annual business plan and summarise additional activities funding through sources other than DEEWR.[9]

3.8        All 11 ISCs advised that they fulfilled their reporting and accountability requirements. IBSA, for example, advised that there is a total separation between government-funded activities and the commercial activities which support delivery of its training packages. It emphasised that its annual reports are 'open, comprehensive and properly fulfil all accountability requirements to the Commonwealth Government'.[10]

3.9        EE-Oz summarised the accountability mechanisms it uses. These, as an example, include:

• periodic reporting against Key Performance Indicators (KPIs) and deliverables;
• provision of audited financial statement;
• acquittal of project funds;
• maintenance of a not-for-profit status as defined by ASIC;
• additional to reporting requirements of specific projects (the DEEWR funding agreement requires that 'You report the additional activities and their outcomes in Your Annual and Final Reports').[11]

3.10      Manufacturing Skills Australia (MSA) submitted that its funding agreement with DEEWR contains similar accountability requirements, including the provision of a three-year strategic plan subject to acceptance by DEEWR; the provision of annual business plans, also subject to acceptance; regular reporting to DEEWR against key performance indicators; and provision of audited financial statements. As it is a public company, MSA reports that it must also satisfy requirements set by the Australian Securities and Investments Commission (ASIC)'.[12] It added:

Detailed records of all transaction are maintained according to accepted accounting standards. All funds received by MSA, including those from the Commonwealth, are held in secure bank accounts.

Processing of all financial transactions is scrutinised on four separate occasions by three levels of ISC staff. All requests for payment are verified and correctly attributed to appropriate cost areas prior to final approval by the Chief Executive Officer.

The Chief Executive Officer is accountable to the Board, and presents a regular statement of compliance to the Board. The Board receives regular and detailed financial reports at its quarterly meetings for consideration and approval.

These policies, procedures and practices are maintained for all of MSA's activities and contracts.[13]

3.11      The Construction and Property Services Industry Skills Council (CPSISC) advised that audit statements show the funding received from DEEWR has been fully spent in accordance with the intended purpose. It took the view that grouping all funding into one pot provides a misleading picture of funding received. It added that the reason funding agreements cover three years is to assist strategic activities and retain staff.[14]

3.12      In a supplementary submission, CPSISC also advised that it has established a continuous improvement management system, the details of which are available on its website, which allows anyone to track an issue and provide input.[15] CPSISC added that their accounts have been submitted to ASIC each year and that it reports to DEEWR annually against all key performance indicators (KPIs), providing an audited acquittal of funds.[16]

3.13      The Transport and Logistics ISC (TLISC) reported that its primary funding contract with DEEWR details requirements regarding management and acquittal of contractual obligations and finances. It noted:

Accountability mechanisms for the use of contract funding are clearly outlined in the DEEWR/TLISC contract, such as direction on where funds must be held, financial reporting requirements and purposes for which the funds cannot be used.[17]

Committee view

3.14      The evidence before the committee indicates that ISCs are subject to a variety of accountability measures. However, as ISCs can have a number of contracts with different government agencies, there is a risk that accountability requirements may vary between agencies. To prevent possible inconsistencies, the committee believes that the government should establish standard contracts with consistent accountability requirements for all work contracted with government agencies.

Recommendation 3

3.15             The committee recommends that the government develops standard contracts with clauses detailing accountability and reporting requirements for all paid works undertaken by ISCs under contract to government agencies.  These standard clauses should be incorporated into the contracts between DEEWR and each ISC.

How are funding decisions made by the parties?

3.16      The committee received a number of submissions in relation to how funding decisions for ISCs are made. The answer to this question is not always clear. Qantas, for example—whilst supporting the current mechanism for funding allocation and praising its effectiveness—drew attention to the potential benefit of increased clarity around the process itself.[18]

3.17      AgriFood CEO Mr Arthur Blewitt explained that ISC funding was demand driven and therefore responsive to industry:

Our view is that we are demand driven. We do not do things unless industry wants them. We have broad based regional industry, obviously with some activity elsewhere. I think most of the proposals we put up are demand driven—our business plan is demand driven, our strategy is demand driven. How the government decides on that, I suppose, is across the 11 or 12 of us. That is how we operate. I do not quite know the intricacies of how the department decides between us.[19]

3.18      A small number of submissions questioned the underlying premises of funding allocation decisions, suggesting that commonwealth money was not being correctly divided between the ISCs. One such submission, a joint document from the Minerals Council of Australia (MCA), the Queensland Resources Council (QRC) and the South Australian Chamber of Mines & Energy (SACOME) argued that ISC funding should be based on demand and evidence-based information which takes into account Australia's economic priorities and costs involved for industries, rather than workforce numbers or the number of training packages covered by ISCs. This would ultimately result in ISC funding being commensurate with the contribution of any given sector to the national economy.[20]

3.19      Others, such as the Australian Hotels Association (AHA), hold the opposite view. AHA contended that funding for ISCs should be 'more equitable' and proportionate to the overall number of people employed in the workforce covered by each skills council. The submission explained that unless ISCs receive more equitable funding, an industry such as tourism and hospitality—which is largely comprised of small businesses—will be left with the responsibility of training employees without necessarily having the capacity to do so.[21]

Committee view

3.20      The committee believes that the issue of funding decisions is important, and that submissions have raised some valid questions. The committee's ability to consider these questions was impeded because DEEWR declined to make a submission to this inquiry.

Other sources of funding

3.21      ISCs receive most of their funding from DEEWR, although the exact percentage varies. Government Skills Australia, for example, receives 15 per cent of its funding from sources other than DEEWR,[22] whereas ForestWorks advised that up to 40 per cent of its money does not come from its funding agreement with DEEWR. Other sources of income include but are not limited to service contracts with state governments, as well as federal government departments other than DEEWR for ISC-related additional work.[23] ForestWorks stated that

We hold contracts with the state training authorities in Queensland, New South Wales, Victoria and we are working on one in South Australia. That is the equivalent of a state ITAB contract. Our committees that we run at a state level are partially funded by those state government contracts and we use a team of people to carry out that work. That basically gives us a lot of capacity in a local region. We employ four people in Tasmania, two in Queensland, three in New South Wales and about 15 in our head office. So we try to spread people and keep them close and connected to industry. We use state government funds to assist in that process.[24]

3.23      The Community Services and Health ISC (CS&HISC) reported that it also accumulates reserves through the sale of value-added resources supporting the core training package qualification and skills sets; the provision of workshops and seminars; contract management fees; and investment. It sources additional funding through competitive grants and tenders. It has audited financial statements. CS&HISC pointed out that the accumulated reserves are not built on non-acquitted or unspent public funding.

Reserves have been accumulated to position CS&HISC to respond to immediate industry needs over and above those predicted in the triennial funding, and in the event that ISC funding through DEEWR be reduced or removed to enable CS&HISC to provide ongoing support to its industries until further funding can be secured, or while the organisation is wound-down.[25]

3.24      EE-Oz was in a similar position:

We do generate some small amounts of money. Some industry donations come in, and we run a conference that operates at a surplus. This year a number of sponsors put money into the bin for the conference and we charged the nearly 240 people who turned up at the conference venue. That generates some additional capital. We are very careful how we manage that capital. None of the board members receives a stipend; the arrangements are that if they have to travel interstate their airfares and accommodation are picked up. The limited amounts that we have over we keep in a little bucket for just such things as the NBN forum and the gas industry forum, because we think they are good ways to communicate with the sectors, and the sectors appreciate that we are proactive in those areas.[26]

3.25      The joint submission from the MCA, the QRC and the SACOME informed the committee that:

[T]he minerals industry continues to invest significant cash and 'in-kind resources to the activities of SkillsDMC in the form of personnel to take part in consultation and advisory activities and projects, travel and accommodation costs, and hosting activities. This continuing investment and support is reflective of SkillsDMC's ongoing delivery of outcomes valued by industry, and evidence of its commercial accountability practice and culture.[27]

3.26      DEEWR explained that the department's acquittal process does not extend to any funding ISCs may receive from commercial activities, but that such funding would be covered in the ISCs' reports to ASIC, which enforces company and financial services laws.[28] The department also advised other government agencies would have the same scrutiny and acquittal processes in place for funding they provide to ISCs:

Those contracts are with that agency by there is a scrutiny process across government about how contracts are managed and how the deliverables are delivered. The Financial Management and Accountability Act requires certain processes which all government agencies must go through. The scrutiny of government funding follows the contract, the acquittals et cetera—those processes.[29]

3.27        ACCI concluded that:

We do not want ISCs to be micromanaged to the point that you hamstring ISCs and their boards and directors from being able to build business models and be creative, but there is a point of accountability for the distinction between public funds and private funds. I think that can be done through some criteria set by the department in terms of tagging their own funding arrangements.[30]

Reserves

3.28      The committee understands that the accrual of surpluses through efficient management is provided for in the ISCs' contracts with DEEWR, but that the use of reserves is limited to furthering the objectives of the company as identified in the constitution.[31] Mechanisms within the ISCs' contracts with DEEWR allow—in fact encourage—the accrual and rollover of surpluses 'for allocation to high priority functions, consistent with...contractual obligations with the Commonwealth'.[32] IBSA commented that:

It is common for committed funds to be rolled over to the next financial year where a project crosses more than one financial year. Where there are surplus funds and where it is considered appropriate by DEEWR those surplus funds are reallocated to new projects under the same process as described previously and in line with our contractual obligations to DEEWR.[33]

3.29      Surpluses may not be distributed among the board or members of the company. All activities which generate a surplus must be reported in the annual and financial reports as a condition of the funding agreement with DEEWR,[34] which is a key condition of DEEWR's funding agreements with the ISCs and its mechanism for ensuring ISC accountability.[35] ISCs are also bound by the Corporations Act 2001 and the Australian Accounting Standards.

3.30      Where surpluses are rolled over the TLISC reported that 'ISC financials have been adjusted to reflect this and ISC contractual KPIs are aligned to include the rolled-over surplus funding'.[36] It added:

Any financial surpluses generated by the TLISC have been achieved through its non-core funding. This has been done with the express purpose of ensuring the organisation's long-term stability, to provide high-level corporate protection to the business, and as a means of ensuring the ongoing provision of industry services where government contracts are in transition or under review.[37]

3.31      Government Skills Australia (GSA) Chair Janice Andrews added that:

...surplus or carryover funds are not regarded lightly by us. They will occur because of a timing issue in project management or some other untoward event, because all of our funds are acquitted in the planning process.[38]

3.32      Conversely, money not spent by ForestWorks during the contract period or on contract deliverables is returned to the relevant department as a contractual commitment:[39]

Independent and certified Auditors undertake an extensive auditing process for each contract to ensure that government funds are only applied to the contract deliverables. This does not allow ForestWorks to accumulate reserves from government funds beyond the life of individual contracts.[40]

3.33      MSA explained in greater detail that reserve funds evolved along with ISCs, and that it did not initially have a reserve fund. A delay in the renewal of MSA's contract with DEEWR in 2006 led the MSA Board of Directors to implement a strategy to manage what were then dwindling resources. This management strategy which included staff redundancies and sub-contractor reductions. Although the contract was ultimately renewed in late 2006, the episode led the Board to establish and maintain a reserve fund in order to be better prepared for similar challenges in the future:

Based on staffing and other structures and arrangements at the time, an amount of $900 000 was established by the Board as an appropriate amount for this reserve...This amount was built up in the following years and is now maintained and indexed annually by CPI amounts...The MSA Board  of Directors is conscious of the financial commitment by the  Australian Government to industry through ISCs and makes strategic and financial decisions based on providing value for money and gaining the greatest possible benefit. As a declared not-for-profit public entity, any surplus funds beyond those needed to maintain the reserve fund, are allocated to activities in core ISC work.[41]

Committee view

3.34      In light of evidence outlined above the committee believes that it is critical for each ISC to maintain a reserve fund to ensure it can comply with statutory requirements to ensure financial stability and discharge responsibilities. These reserve funds should be used exclusively for the ISCs' core work, and not be used to generate additional, non-government income. To ensure that ISCs continue to focus the funds available on their core objectives, the committee believes that ISCs should be prohibited from owning physical assets such as real estate.

3.35      The committee also believes that the government must find the right balance between ensuring uncompromised ISC accountability and not stymieing their ability to make warranted business decisions designed to further core objectives.

Recommendation 4

3.36             The committee recommends that future contracts between DEEWR and ISCs require the holding of sufficient funds to comply with statutory obligations of the directors under relevant corporate legislation, and prohibit the ownership by ISCs of physical assets, such as real estate, that are not directly related to the effective performance of their role.

Conclusion

3.37      ISCs are contracted by the federal government and funded by the taxpayer. As such, they should be unfailingly accountable for public monies and transparent in the public domain. Information must be readily available for all stakeholders and not subject to board approval.

3.38      ISC funding arrangements and practices are visibly inconsistent, and the committee questions the benefit of allowing these inconsistencies to continue unchecked. Although accountability requirements are specified by DEEWR, there is variable opportunity for industry to provide feedback directly to DEEWR to inform its future performance management arrangements. This, combined with the ISCs' equally inconsistent consultation practices, explains why certain sectors are frustrated by their inability to be heard and to have their concerns addressed, while many others are satisfied.

3.39      With such inconsistencies present it is difficult to broadly assess the funding arrangements of ISCs as a group. The committee believes the federal government must do more to ensure that all ISCs are held up to the same standards, thereby delivering a more consistent service to the industries they cover.

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