Chapter 2

Selected reports of departments and agencies

2.1 The committee has selected the reports of the following departments and agencies for detailed examination on this occasion:

Department of Finance and Deregulation;
Department of the Prime Minister and Cabinet;
Australian Electoral Commission; and
Future Fund Management Agency.

Department of Finance and Deregulation

2.2 The Secretary's review provides a comprehensive summary of the major achievements and challenges of the Department of Finance and Deregulation (Finance) for 2011–12. Items of particular note were:

the delivery of the 2012–13 budget in accordance with the government's fiscal policy objective of a return to surplus in 2012–13 and the forward years;
development of new savings proposals for consideration by government in collaboration with other departments and agencies and continued work on improving the efficiency of government operations;
continued work on the Commonwealth Financial Accountability Review, including the release of seven further issues papers to Commonwealth agencies and informed development of the discussion paper Is less more? Towards better Commonwealth performance; and
outposting of officers from the Office of Best Practice Regulation to assist agencies in preparing regulation impact statements and post-implementation reviews.[1]

2.3 The Secretary noted the challenging environment that the department has operated in during 2011–12:

During the past 12 months the Department of Finance and Deregulation (Finance) has faced significant challenges against a backdrop of economically demanding cyclical and structural change, both here and overseas. Events in Europe and the international environment, marked by uncertainty and rapid change, have posed major challenges for government and public administration.[2]

2.4 Finance incorporated sustainability reporting in the 2011–12 annual report. The report explains that sustainability reporting will bring to the forefront economic, social and environmental impacts of the way the department conducts its internal operations to ensure that sustainability is an integral element of decision-making processes. Finance is one of a number of Australian government agencies which is piloting a sustainability reporting framework in annual reports for the 2011–12 reporting period.[3]

Financial reporting

2.5 The department reported an operating surplus of $42.2 million for the 2011-12 financial year. This result was $11.0 million more than the revised estimate published in the 2012–13 Portfolio Budget Statements and was attributed to a number of year-end valuation adjustments and higher revenue than expected.[4] This compares to an operating deficit of $29.7 million 2010–11. The report's discussion of financial performance for the year was informative and provides satisfactory explanations for variations to estimates and comparisons to the previous year. The use of tables representing trend information over several years was a useful inclusion.[5]

2.6 Finance received an unqualified audit on the 2011–12 financial statements from the Australian National Audit Office.

Performance reporting

2.7 Performance reporting on Finance's three outcomes is clearly presented and provides a good assessment of how the department has progressed in achieving its outcomes. This section of the report provides a 'clear read' between the performance information set out in the Portfolio Budget Statements (PBS) and the results presented in the annual report. Finance uses an appropriate balance of both qualitative and quantitative measures, including targets, for key performance indicators (KPIs) which provides a suitable basis for making an assessment of the effectiveness of programs in achieving objectives.

2.8 The presentation of performance results is in tabular format, making the information readily accessible and aiding the reader. This is consistent with the formatting guidance provided in the PM&C Requirements.[6]

2.9 The committee notes that Finance achieved the majority of KPIs across the department's outcomes and the report generally included relevant commentary to provide further explanation where necessary to demonstrate how the result was arrived at. However, the committee notes that the eighteen KPIs which were achieved for Outcome 3 did not present any supporting commentary or evidence in the table to demonstrate how the assessment was made, it was simply described as 'achieved'.[7] The committee points to Finance's 2009–10 annual report where the equivalent performance table for Outcome 3 provided supporting comments on the methodology for assessment for most of the KPIs presented. The committee suggests that Finance consider following this approach in future reports.[8]

2.10 For KPIs which are not achieved, the inclusion of a brief explanation on the reasons for failure and the strategies to improve performance is a helpful inclusion. The report generally provided some explanatory comment for KPIs which were not achieved. One KPI under Outcome 1 which was not achieved was the subject of questions at the committee's recent additional estimates hearing where the committee sought further explanation not provided in the report.

2.11 This KPI concerned the provision of monthly general government sector financial reports within 21 days following the month end. The report indicated that Finance took on average 35 days to provide the statements to the minister but did not elaborate on the reasons why the target was not achieved.[9] At estimates hearings, Finance gave a detailed explanation as to why the target was not achieved:

Mr Gibson:...we have a fixed process that we go through each month, according to a pre-set timetable, that aims to get them completed within the time frame. To go back to your earlier question, one of the factors that heavily increases that measure is the July and August monthly financial statements, where we prepare them a little later than average because we are also, at the same time, trying to complete the annual financial statement. We have special dispensation with IMF and the Bureau of Statistics to work to that sort of timetable. [10]

Mr Helgeby:...In fact, it is almost a tale in two parts of the year. Through to December we have been well over, and largely July August are the worst in terms of time frames taken. But if I take last year, for example, January, February, March, April, May, they ran at 27 days, 23, 26, 32 and 33 days. So they are below the 35 figure. [11]

2.12 When asked how the department could improve performance to meet this KPI, the Secretary informed the committee that he was not optimistic about achieving it in the future:

The KPI is set by an international standard of some kind, as I understand it.

...

For us at least it is almost an impossible thing. But we have to report against it, so we are up against it, I am sorry.[12]

2.13 The committee considers that a more detailed explanation in the annual report would have been beneficial.

Conclusion

2.14 The committee commends the department for the high standard of this year's annual report which closely complies with the PM&C Requirements and considers it to be 'apparently satisfactory'.

Department of the Prime Minister and Cabinet

2.15 The Secretary's review highlighted a range of activities of the Department of the Prime Minister and Cabinet (PM&C) for 2011–12 in responding to the challenges and competing priorities of the Government agenda, including:

supporting the implementation of the Government's national security and global engagement priorities;
provision of advice and support on machinery of government and public sector governance across the APS;
provision of advice on the Government's legislation program, parliamentary matters, ministerial arrangements and legal and constitutional matters; and
collaboration with agencies across the APS on a range of issues of national significance, such as the 2012–13 Budget, Cyber White Paper, the Australia in the Asian Century White Paper, and the National Disability Insurance Scheme Taskforce.[13]

2.16 The Secretary also noted the results of the capability review of the department which came out of a recommendation of the Ahead of the Game: Blueprint for the Reform of Australian Government Administration. The Blueprint recommended that all departments undertake a capability review and PM&C was the first department to undergo a formal, independent review by a team from the Australian Public Service Commission.[14] While the review praised PM&C for its 'many strengths' and made a number of positive comments, it also identified ways which PM&C could improve its practices through:

senior leadership communicating their expectations of PM&C officers more clearly and frequently;
greater clarity of purpose and all PM&C officers becoming better at knowing what the Review called the 'PM&C Craft';
taking a more strategic approach to recruitment and development of staff; and
better organisation of corporate systems.[15]

2.17 The Secretary reported that the department is focussing on implementing strategies to address these findings. The committee appreciates the Secretary's openness in highlighting not only the positive outcomes of the review, but also areas which were identified for improvement. The committee considers annual reports to be an important vehicle for presenting not only achievements and successes, but also for addressing issues where performance can be improved. The committee looks forward to further updates on progress in addressing the review's findings in future reports.

Portfolio and departmental restructure

2.18 The report outlined the significant changes to the Prime Minister and Cabinet Portfolio during 2011–12 as a result of machinery of government changes. A number of agencies and responsibilities were transferred out of the portfolio, including:

Office of the Australian Information Commissioner;
The privacy and freedom of information policy function;
Australian Institute of Family Studies;
National security science and innovation function; and
Department of Regional Australia, Regional Development and Local Government and related entity the National Capital Authority to a new portfolio, the Regional Australia, Local Government, Arts and Sports Portfolio, which would also have responsibility for cultural affairs, sport and recreation, the National Archives of Australia, and Old Parliament House.

2.19 The portfolio has gained two additional functions: cyber security policy and the National Mental Health Commission. The inclusion of a diagram to represent these portfolio changes assisted the reader by making the information readily accessible.[16]

2.20 PM&C also underwent a restructure during 2011–12 which included a new reporting structure within the department. As at 30 June 2012, the department has three groups: Domestic Policy Group, National Security and International Policy Group, and Governance Group. The Secretary in his review explained that 'the restructure enabled us to better align our policy functions with the Prime Minister's priorities while ensuring we maintained our focus on delivering our core responsibilities'.[17]

Financial performance

2.21 PM&C's funding increased by $32.3 million in 2011–12 to $207.9 million. This was attributed to the delivery of the Commonwealth Heads of Government Meeting (CHOGM) in 2011 and an increase in the recovery of pass through costs to other agencies.[18]

2.22 A deficit of $10.5 million was reported for the 2011–12 financial year. This compares to a $5.5 million surplus for the previous year. The report explained that the deficit included $8.2 million of non-appropriated depreciation and amortisation expense and a $2.6 million approved operating loss relating to timing of costs associated with the successful delivery of CHOGM in 2011.[19]

2.23 The discussion on financial performance also noted that equity decreased significantly in 2011–12, from $189.4 million in 2010–11 to $27.3 million. This was due primarily to the net assets that were relinquished under the machinery of government changes during the year and the deficit incurred.[20]

2.24 The department received an unqualified audit on the 2011–12 financial statements from the Australian National Audit Office.

Performance reporting

2.25 PM&C continues to predominantly use qualitative KPIs to measure performance. The measure of 'high level of satisfaction' is again used for a number of KPIs with the corresponding result indicating that the feedback received reported that the relevant individual or group was/were satisfied. The committee commented on this in its previous report, encouraging the department to move to more quantitative measures where appropriate.[21] The performance reports distinguish between 'feedback' and 'informal feedback', but details on how feedback was sought by, or provided to, the department to assess performance against these qualitative KPIs did not appear to have been included. The committee would find the inclusion of a methodology for measuring the qualitative KPIs helpful.

2.26 Where a quantitative KPI measure with a target is used in the PBS, the target measure should be included in the annual when presenting the result. For example, the performance report on the KPI on the 'Number of individuals assisted toward volunteering: Volunteer management' reported a result of 'around 260,000 individuals were assisted towards volunteering in 2011–12'. The PBS indicates that a target of 190,000 was set for this particular item, but the target was not referred to in the performance report in the annual report.[22] It is unfortunate that this impressive result, which far exceeded the target, was not presented against the target in the annual report.

2.27 The presentation of performance results is in shaded text boxes which break up the KPIs throughout the section according to the division they relate to, rather than the order presented in the PBS.

2.28 The committee notes the high level of achievement of the KPIs in contributing to the achievement of the departmental outcome and acknowledges the department's work in 2011–12, particularly during extensive portfolio and departmental restructures.

Conclusion

2.29 The 2011–12 annual report provides an informative account of the year under review and closely complies with the PM&C Requirements. Accordingly, the committee considers the annual report to be 'apparently satisfactory'

Australian Electoral Commission

2.30 The Electoral Commissioner's review provides an informative overview of the work of the Australian Electoral Commission (AEC) for 2011–12. The Commissioner noted that preparing for the next election had been a focus of the year. The Commissioner remarked that 'in 2011–12 the implications of a hung parliament meant we needed to be ready to deliver an election at any time'.[23] Accordingly, the agency brought forward a range of election-critical activities.

2.31 During the year, the AEC focussed on increasing the level of enrolment. The AEC estimates that the number of people not on the electoral roll is approximately 1.5 million, up from about 1.4 million from the previous year. 2012 was designated as the Year of Enrolment by the AEC and involved a wide-ranging program of initiatives to prompt people to enrol or update their enrolment. These included a comprehensive national mail-out and an online advertising campaign for people aged 18-24. Early indications are that these strategies are achieving some successes.[24] The committee looks forward to further updates in the next report.

2.32 Other activities within the Commission during the year included:

engaging with young Indigenous Australians through the National Indigenous Youth Parliament in Canberra in May 2012;
redevelopment of the Schools and Community Visits Program;
implementation of legislative reform recommended by the Joint Standing Committee on Electoral Matters;
an Election-Ready Assurance Review and a simulated election exercise as preparation for the forthcoming election; and
an independent review of baseline funding for the Commission, which resulted in a $10 million supplementation to the 2012–13 budget.[25]

2.33 The report provides easy access to key information. For example, the report helpfully included page references to the discussion within the body of report for each of the 2011–12 highlights listed at the front pages.[26] Also, key performance results were listed at the front of the report.[27]

2.34 It is also noted that this year's annual report included QR codes throughout. These codes can be scanned by smartphones to view videos which relate to particular sections of the report. This is a highly innovative approach to providing more detail on activities of the organisation without taking up space in the report.

Performance reporting

2.35 The report on performance was detailed and provided results against all KPIs listed in the PBS. The KPIs were a balance of quantitative and qualitative measures. Results were presented in tabular format which made them readily accessible and included performance results for the previous one or two years for comparative purposes. This year's report did not present the KPIs by program as set out in the PBS, but rather by activity under the broad headings of 'Engaging Australians' and 'Our partnerships'.

2.36 The majority of KPIs were achieved and for those which were not, the target was close to being met. The supporting discussion of performance was informative and addressed the reasons why some KPIs were not met. The report on performance also provided a range of useful statistics and graphs on aspects of enrolment, elections and educational activities.

Financial reporting

2.37 The AEC recorded an operating deficit of $9.2 million for 2011–12, and compares to an operating deficit of $16.6 million for the previous year. This was attributed to:

the increase in long service leave provisions as a result of the decrease in the treasury bond rate;
the focus on roll stimulation, including the conduct of the Count Me In campaign; and
the maintenance of our election-ready status, which includes the commencement of a simulated election.[28]

Conclusion

2.38 The AEC's 2011–12 annual report includes all mandatory requirements for annual reporting and the committee considers the report to be 'apparently satisfactory'.

Future Fund

2.39 The Chairman’s letter of transmittal indicates that the annual report of the Future Fund Board of Guardians and the Future Fund Management Agency is prepared in accordance with section 81 of the Future Fund Act 2006, and the PM&C Requirements.[29]

2.40 The Board of Guardians, supported by the agency, has responsibility for investing the assets of the Future Fund and the three National-building Funds. The Future Fund does not receive any annual appropriations and its outputs are funded through the Future Fund Act as payments from the Future Fund Special Account.[30] The report notes that:

All costs for investment activity and the operations of the Board and Agency are met from the assets of the Funds rather than from [appropriations] through Parliament. The Board monitors the annual operating budget of the Agency to ensure the appropriate use of resources consistent with the organisation’s objective.[31]

2.41 The agency has one outcome: Make provision for the Commonwealth's unfunded superannuation liabilities and payments for the creation and development of infrastructure, by managing the operational activities of the Future Fund and the Nation-Building Funds, in line with the Government's investment mandates. This outcome is supported by two outputs: Program 1.1 Management of the investment of the Future Fund and Program 1.2 Management of the investment of the Building Australia Fund, Education Investment Fund and Health and Hospitals Fund.

2.42 The KPIs for the agency's programs specify the provision of assistance and advice to the Board in pursuit of achieving the Investment Mandate target returns. For program 1.2 the Investment Mandate target return is at least 4.5 to 5.5 per cent above the Consumer Price Index over the long term (interpreted as rolling 10 year periods) with acceptable but not excessive risk. For program 1.2 the Investment Mandate target return for each fund of the Australian three month bank bill swap rate plus 0.3 per cent per annum, calculated on a rolling 12 month basis while minimising the probability of capital loss over a 12 month horizon.[32]

2.43 The report provided reasonable detail of performance against each program's KPIs. The Future Fund performance report advised that the return on the Future Fund portfolio over the 2011–12 year was 2.1 per cent, and since May 2006 the return has averaged 4.7 per cent per annum net of costs. It was further noted that over the same period the CPI has averaged 2.7 per cent. Over the period 1 July 2007 to 30 June 2012, the return (after all operating costs) averaged 4.4 per cent per annum.[33] The report noted that:

These returns remain below the benchmark return established in the Investment Mandate. However, in the context of the turbulence that has characterised markets since the establishment of the Fund, performance has been respectable and the portfolio remains prudently positioned in line with its long-term mandate.[34]

2.44 In addressing the level of returns on the Future Fund, the Chairman noted in his report that:

This highlights the extremely challenging investment environment that has characterised the Fund’s early years.

It is also important to recognise that the investment Mandate Directions require that the Board should take acceptable but not excessive levels of risk. Accordingly the portfolio has been positioned in such a way as to be capable of generating strong returns in positive markets while moderating the impact on market fails.

The portfolio has performed well given the extent of the uncertainty and market volatility that has prevailed over the last five years and the Board remains focused on its task of achieving the target returns over rolling 10 year periods.[35]

2.45 The performance result for Program 1.2 was reported as exceeding the benchmarked return of 5 per cent for each fund the 2011–12 financial year. The Building Australia Fund and Education Investment Fund both generated a return of 5.3 per cent, and the Health and Hospitals Fund generated a return of 5.2 per cent.[36]

2.46 A matter noted by the committee was the large increase in performance pay from the previous financial year, from $5,400,528 in 2010–11 (paid to 80 employees) to $7,273,706 (paid to 86 employees) in 2011–12. The maximum amount of performance pay in 2011–12 was $536,760.[37] The Managing Director provided more detail to the committee in response to questions at estimates concerning this increase in performance pay from the previous year and expectation about the rate of future increases:

...We would not expect it to increase at that rate. There are two dynamics going on there. One is that the fund has been growing. Its team in size now has plateaued but the number of members of the team has gone up about 10 per cent in the last 12 months. So you will naturally get an increase in total compensation and part of that will be performance based.

But very early on, the fund thought very carefully about the way remuneration should work for any of our staff members, and that includes the variable remuneration that staff receive, the amount that you are alluding to. That variable performance is measured on three broad factors. First of all, the way the individual has performed personally over the 12-month period. That is a relatively small part of the total performance for our senior investment people, for example.

The second part, though, relates to the performance of the fund—in other words they do not get compensated if the fund is not performing. The way we measure that is over a three-year period. This is because we want our staff to take a medium- to long-term view of investing and, therefore, measuring them over one-year periods would be inappropriate. We looked at it some time ago; our remuneration committee is assessing it again to ensure that it is best practice. But it is very clear that a three-year horizon at least broadens out our approach to investment taking and the focus of the individual staff in terms of their remuneration.

If you make the remuneration too short—say, for a one-year performance number—you could get behaviours or outcomes that are, say, risk taking. So you want to align your remuneration directly with the style of investing that we have, which is long-term in nature. Secondly, you only want to remunerate if the fund is doing well, and that is how that is structured.[38]

2.47 The agency's financial statements received an unqualified audit report from the Australian National Audit Office.

2.48 The report presents a fair account of performance and operations for the year, which complies with the relevant reporting requirements. The committee considers the report to be ‘apparently satisfactory’.

Senator Helen Polley
Chair

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