(1996) Report on Cash Management Issues Concerning Commonwealth Payments to Statutory Authorities and Specific Purpose Payments to the States

Report completed 31 January 1996 by a panel chaired by Michael Easson and administered and supported by the Department of Finance. Republished here is the body of the Report minus most of the Appendices.

[original] Table of Contents

Foreword

Executive Summary

Chapter 1: Overview and Main Findings

Background
The Terms of Reference
The Cash Management Problem
Principle Findings
Recommendations

Chapter 2: Statutory Authorities
Background Concerning Statutory Authorities
Methodology
Issues Concerning Statutory Authorities
Recommendations 1 and 2
The Cash Management Aspect of Funding Authorities
Recommendation 3
Appropriation and Commitment of Funds
Recommendations 4 and 5
The Payment Process
Recommendation 6
The Timing of Periodic Drawdowns
Cash Balances Currently Held
Recommendation 7
Adjust Appropriation Base Level
Recommendation 8
Government Policy Initiatives
Recommendation 9
Authorities that Distribute Payments on Behalf of the Commonwealth
Recommendation 10
Other Categories of Statutory Authorities
Recommendation 11
Conclusion

Chapter 3: Specific Purpose Payments

Background
Methodology
Categories of Specific Purpose Payments
Issues Concerning Specific Purpose Payments
Recommendations 12-13
Key Findings
Lack of Transparency
Recommendation 14
Payments Made in Advance or Retrospectively
Delays in Approval
Recommendations 15-17
Consolidation or Broad-Banding of Payments
Recommendation 18
Forward Planning
Receipts and Loan Payments
Recommendation 19
Matching Arrangements
Recommendation 20
Timing of Payments for New Policy Initiatives
Conclusion
Implementation
Recommendation 21

Chapter 4: Cash Management Functions of the Commonwealth

Introduction
The Treasury Function in Major Corporations
Treasury’s Role in Commonwealth Cash Management
Should the Commonwealth Establish a Treasury Corporation?
Corporate Treasury Functions in the Commonwealth
Recommendation 22

Appendices

Abbreviations
List of Consultations and Visits
Summary of Statutory Authorities’ Cash Balances
Summary and Comments on Statutory Authorities Examined
Australian Broadcasting Corporation
Australia Council
Australian National Training Authority
Australian Nuclear Science and Technology Organisation
Australian Tourist Commission
Aboriginal and Torres Strait Islander Commission
Austrade
Commonwealth Scientific and Industrial Research Organisation
Employment Services Regulatory authority
Health Insurance Commission
National Gallery of Australia
National Museum of Australia
Suggested Pro-Forma for Draw Downs by Authorities
The Legal Position Concerning Appropriations
Specific Purpose Payments by the Commonwealth 1991-92 to 1995-96
The Specific Purpose Payment Situation in Each State
Summary and Comments on Major Specific Purpose Payments
National Highways
Education – Schools
Education – Higher Education
Health – Medicare Agreements
Home and Community Care
Housing
Local Government
Commonwealth/State Program: Building Better Cities
Suggested Pro-Forma for Specific Purpose Payment Draw Downs
Aggregation of Account Balances
Is There a Case for a Federal Central Borrowing Authority?

Foreword

This Report represents the views of Task Force Members based on our analysis of the issues and the factual information examined during our deliberations.

As each of the seconded members of the Task Force (Mr David Knapp, Dr Elizabeth Casling, Mr Eddy Owen, Mr Glyn Tomlinson and Mr Ross Allamby) have had to perform their normal duties in addition to work on the Task Force, this has meant that each of them has devoted significant “out of hours” time to fully contribute to the enormous tasks associated with the review of cash management issues in the Commonwealth.

I am very grateful for their diligence, patience and dedication to the tasks at hand.

Mr Dean Wallace and Mr Phil Bowen in the Department of Finance also provided helpful assistance at various points of the Task Force’s enquiries. Officers of the Reserve Bank of Australia were also particularly helpful in making suggestions.

This Report was developed in a short time frame. The Task Force met for the first time late in July 1995 and prepared an issues paper for circulation in August. As the areas covered were vast, this means that priorities had to be selected. Much ground was covered, much more quickly passed over.

Informality was encouraged. Apart from a few formal letters no submissions were received – or encouraged by the Task Force. Much information was received in an informal, off-the-record basis. For the most part, the Task Force members went out to find for themselves the facts. An intensive array of meetings (highlighted in the attachments) was organised.

This was necessary because of the short time available to prepare a Report and the need to unearth the factual story quickly. This was not so much a search for “buried bodies” but a search for “buried analysis”; the formal, submission process sometimes obliterates what is useful to know.

Hence, this Report reflects and sometimes heavily relies on what others have told us. We were grateful for the input from many sources; the firms BZW and Bain and Company provided some observations on parts of this draft.

However, in the final result, in the development of our analysis, formulation of our views and the selection of information, it is the Task Force that is responsible for what follows.

Michael Easson, Chairman, 31 January 1996

Executive Summary

Statutory Authorities examined by the Task Force had cash balances in total of more than $700m. A large part of this is considered to be in excess of need.

There is a cost to the Commonwealth in allowing payments to be made to Authoritiesin advance of their need for cash. Ministers and Departments should exercise a reasonable level of control over their draw-downs to ensure that they do not accumulate surplus cash.

Incentives should be developed to discourage Authorities from drawing surplus cash from the Budget.

The government should approve levels of expenditure by Authorities for current and future years, but not provide cash in advance of need. These arrangements could be included in resource agreements approved by the appropriate Ministers.

Appropriations to Statutory Authorities should make clear that the full amount need not be paid during the Budget year if it is not required for expenditure.

The government should require Authorities to reduce their cash balances where they are considered excessive. This can be done by restricting payments from the Budget until the cash balances have been run down to acceptable levels.

The States and Territories held aggregate cash balances of at least $200m in relation to Specific Purpose Payments (SPPs), as at 30 June 1995. As several States and Territories were unable to provide this information, it seems likely that this figure could be much higher.

There is a serious lack of transparency in relation to SPPs, which made it difficult to track Commonwealth payments. This should be addressed as a matter of priority.

Payment arrangements for SPPs vary. Cash management concerns arise where payments are made in advance of need.

SPPs should be based on rolling programs that would give a degree of certainty to the States, for planning purposes, but cash should be provided only on the basis of need.

Funding for SPPs should not be provided in advance of need. Where excessive cash balances are held in relation to SPPs, they should be run down by restricting payments until they have reached acceptable levels.

Appropriations for SPPs should be worded so that the full amount need not be paid during the Budget year if it is not required for expenditure.

The government should consider establishing an Office of Cash Management to oversight these and other efficiency considerations in the use of cash.

A Task Force should be established to implement the recommendations of this Report. It is considered that savings of the order of $400m could be achieved in the 1996-97 Budget on a one-off basis, together with ongoing Public Debt Interest Savings of around $30m.

The detailed recommendations of the Task Force are listed at pages 6 to 9 of this Report.

Chapter 1. Overview and Main Findings

Background

The Task Force on Payments to Statutory Authorities and Specific Purpose Payments to the States was established after a Cabinet decision in the context of the 1995-96 Federal Budget. It was estimated by the Department of Finance that one-off savings of $50 million and on-going savings of $5 million might be achieved through better cash management of payments to Commonwealth Statutory Authorities and the funding of Special Purpose Payments (SPPs) to the States.

This insight was an estimate of possible efficiencies that might be obtained from better cash management, including responses to some of the criticisms of the Australian National Audit Office (ANAO).

For example, in the Auditor General’s Efficiency Audit Report No. 10 1994-95 on Cash Management in Commonwealth Government Departments, the comment is made:

3.20 The ANAO believes that an understanding of the [cash] flows is essential. There is a need to be aware of the revenue receipting patterns so that when program proposals are being reviewed, as per the Department of Finance’s role, then if regular payment dates cannot be set as late as possible (consistent with program objectives) they can at least be delayed to coincide with revenue receipting dates. This would be preferable to selecting an earlier payment date on arbitrary grounds, such as the first of the month.

The coinciding of payments with revenue peaks is just one area where improvements could be organised.

The Auditor-General’s Audit Report No. 6 1993-94, being An Audit Commentary on Aspects of Commonwealth-State Agreements, also contained suggestions about improvements relating to cash management.

Cabinet responded to the Expenditure Review Committee’s recommendation to follow up on the Department of Finance proposals by establishing a Task Force on Commonwealth Payments to Statutory Authorities and by way of Specific Purpose Payments to the States.

This Task Force commenced its activities in late July 1995 with a report required by 31 December 1995. Mr Michael Easson was appointed by the Minister of Finance, Mr Kim Beazley, as the Chairman of the Task Force. Other members were Mr David Knapp (Department of Finance); Dr Elizabeth Casling (Department of Transport); Mr Eddy Owen (Department of Veterans’ Affairs); Mr Glyn Tomlinson (Department of Employment, Education & Training) and Mr Ross Allamby (Department of Finance), the Secretary to the Task Force.

Following the issue of a draft Report to the Minister in mid-December, the Minister extended the time for a final report to the end of January 1996.

The Terms of Reference

The government determined the following Terms of Reference:

The Task Force should examine the Commonwealth’s current arrangements for making payments to Statutory Authorities and to the States by way of Specific Purpose Payments (SPPs), to determine whether the arrangements represent sound cash management and a cost effective means of achieving program outcomes.

The Task Force should give particular attention to areas it considers to have the greatest potential for savings to the Budget, but should examine a sufficiently representative cross-section of Authorities and SPPs to be able to recommend a policy framework for managing such payments.

In undertaking this inquiry, the Task Force should examine the following matters and any others that it sees as relevant to achieving the above objectives:

current procedures for making payments, with special attention to timing;
the level of cash and financial assets held by Statutory Authorities and recipients of SPPs;
present arrangements, if any, for identifying the periodic cash requirements of Statutory Authorities and SPPs;
matching or other financial obligations of recipients and whether these are being met in a timely way under current payment arrangements;
scope for one-off Budget savings in 1996-97, to allow for run down of any accumulated excess balances of cash and financial assets currently held by recipients:
- including the replacement of accumulated cash and financial assets with an undertaking by the government to provide cash (to agreed limits) from appropriations to meet accruing liabilities and provide for asset replacements, as they fall due;
scope for ongoing Public Debt Interest savings by making periodic payments to recipients only on the basis of certified need\ as supported by estimates of cash on hand, receipts and outlays for each period;
whether recipients would be adversely affected by any recommended changes in payment procedures;
the impact of any recommended changes on program delivery.

The Task Force should consult direct with Authorities and state government bodies as appropriate. If necessary it should ask the Prime Minister to formally request state governments to cooperate by allowing reasonable access to relevant official sand documentation, to assist the Task Force in its enquiries.

The Task Force should report to the Minister for Finance by 31 December 1995.

The Cash Management Problem

The timing of receipts and payments is the fundamental issue in cash management, due to the amount of interest that is associated with these cash flows. Receipts collected early can earn extra interest for the recipient, while payments made too early reduce the interest earned, or add to the interest that must be paid by the payer if the funds are raised by borrowing. It is therefore sound cash management for any organisation to collect receipts as early as possible and make payments as late as possible.

Consequently, it is in the Commonwealth’s financial interests to collect its receipts by the due date and make payments as late as possible, subject to meeting its contractual obligations and normal business standards. This will maintain the Commonwealth’s cash balances at the maximum level in the short term and reduce the Commonwealth’s borrowing requirements in the medium and longer term. The end result is that the Commonwealth’s net Public Debt Interest (PDI) is minimised.

It is important to the Commonwealth, for cash management reasons, that the payments referred to in the Terms of Reference are not made significantly in advance of need of the recipients. These types of payments are usually made by installments, so that they are spread over the year rather than paid as a single lump sum. The Commonwealth’s payments to Statutory Authorities and the States via Specific Purpose Payments (SPPs) run into billions of dollars each year.

The Commonwealth’s financial operations are transacted through receipts to and payments from the Commonwealth Public Account (CPA), and any deficiency of funds must be met by borrowings.

There is scope to significantly reduce the Public Debt Interest (PDI) cost of the Commonwealth’s borrowings, by better managing the timing of these payments.

The Commonwealth is typically a net borrower throughout the year. Its PDI bill can be minimised by making payments as late as possible consistent with effective program delivery objectives, thereby deferring the need to raise funds by borrowing. The legitimate activities of the Authorities and States should not be constrained by withholding monies appropriated by Parliament for payment to them. However, the timing of the payments should be such that the recipients receive the monies as they need them and not significantly before this. If payments are made before they are needed for genuine expenditure purposes, the States or Authorities are able to accumulate surplus funds at a significant cost to the Commonwealth. This reflects the fact that the Commonwealth will have had to borrow funds through the money markets for periods longer than would have been necessary had proper cash management practices been followed. Hence a “just-in-time” Cash Management approach is appropriate.

Over a longer period, consistently making payments earlier than is necessary to achieve program outcomes will also allow the recipients to accumulate surplus cash balances. It would clearly be anomalous for the Commonwealth, which itself has accumulated nearly $100b in net debt and finds it necessary to borrow approximately $1 b each week through the Treasury Note tender, to be consistently making payments early, thereby enabling the recipient to build up an interest free pool of funds which it can invest or leave in a bank account to earn interest.

In summary, the Commonwealth can achieve PDI savings by making payments to its Authorities and to the States, via SPPs, on a strict cash requirement (“just in time”) basis.

Principal Findings

Large balances of surplus cash, running into hundreds of millions of dollars, were held by the Statutory Authorities examined and the recipients of SPPs. There was more evidence to support this in the case of Authorities, because they provide information about their cash and investments in their published financial statements. There was generally a lack of transparency in the case of the SPPs, as most States do not provide published information concerning unspent balances of Commonwealth cash. Some State Treasuries indicated to the Task Force that this information was not available. However, there was information from several States and Territories which indicated that they held very large balances of unspent Commonwealth cash at year end, in recent years.

While it is not possible to be precise because of the large number of Authorities and SPPs and the lack of reliable, current information about SPPs, the Task Force concluded that cash balances, in excess of a reasonable working balance, held by the thirteen Statutory Authorities which were examined in detail, exceeded $700m at the end of June 1995 .

Overall, cash balances held by all Commonwealth Statutory Authorities, as recorded in their annual reports for 1994-95, exceeded $3 billion (see Appendix 3). However, this amount includes over $1 billion held by marketing bodies and industry research corporations. As such, it includes monies that were sourced from business operations and industry levies and it would therefore be incorrect to conclude that these cash balances represent monies sourced from the Budget.

Evidence available to the Task Force, in the form of published annual reports and data provided by some States indicated that the States as a group held significant unspent balances amounting to hundreds of millions of dollars, in relation to SPPs (see Appendix 8).

Although much is made of the idea of “best practice cash management”, this can be no more than a hollow phrase if a number of important changes to the culture, practices and activities of Departments and Authorities do not take place. Good cash management should be a feature of financial controls and the operating environment. The achievement of improvements in cash management requires a fundamental reassessment of the relationship between government funding and program outcomes; between the portfolio Departments and the Authorities or States that are charged with — and desirably contracted to — delivering those outcomes. The timing of funding must be closely linked to the delivery of program services.

It is apparent that the large balances in the hands of recipients were the result of Commonwealth payments being made well in advance of need – i.e., expenditure by the recipient — and of service delivery. In many cases, payments were made to Statutory Authorities throughout the year without any real attempt to monitor their spending patterns or the level of cash on hand. The practice in the case of Authorities and some SPPs was to pay, by the end of the financial year, the full annual appropriation or allocation regardless of whether this amount was likely to be spent during the year.

The end result is that the Authorities and States were able to accumulate cash balances that far exceeded their foreseeable needs for expenditure on core activities, thus giving them a pool of funds that they could invest or place in a bank account. The Commonwealth, which is a net borrower, bore the interest cost of raising these surplus funds while many Authorities and States reaped the benefit in the form of bank interest or investment earnings.

In many cases, the Departments responsible for administering these payments and the supply areas in the Department of Finance have not given a sufficiently high priority to efficient cash management practices. They have not sought to improve the transparency of accounting for SPPs to enable the Commonwealth to track the use of SPP monies. There has been insufficient examination of the balance sheets and other financial statements of Authorities to determine whether the level of retained funding is appropriate.

If the recommendations in this Report are adopted, one-off Budget savings of around $400m and recurrent PDI savings of $30m should be achieved from the Statutory Authorities that were examined. Additional one-off savings may be achievable from other Authorities that were not examined, together with unquantified savings from better cash management of SPPs.

To achieve the savings identified for SPPs it will be necessary to seek the co-operation of the States. There would be benefits to the States in the proposed arrangements in that there would be simplification of administration, consistency and greater certainty in relation to the support they receive via SPPs.

Recommendations

The Government should give consideration to the following recommendations:

Recommendation 1

The general principle governing the funding of Statutory Authorities which operate on their own bank accounts should be that payments to them are sufficient to meet their immediate cash needs and that they should not accumulate surplus balances of cash or financial assets as a result of early payment of Commonwealth monies.

Recommendation 2

Periodic payments to Statutory Authorities should be made on the basis of their immediate cash needs and the timing of such payments should therefore be carefully considered. There would be cash management advantages if they could be timed to coincide with Commonwealth revenue peaks each month and it is recommended that this be the norm.

Recommendation 3

In establishing Statutory Authorities, the Commonwealth should carefully consider whether there is a need for them to operate on a separate bank account, given the cash management costs of allowing cash balances to be held outside the Commonwealth’s aggregate balances with the Reserve Bank of Australia. Clear criteria need to be established. There should also be a review of those Authorities which currently have separate bank accounts to ascertain whether some could operate on the Commonwealth Public Account without detriment to their operations and need for independence.

Recommendation 4

The government should introduce a system of forward expenditure approval, which may take the form of ministerially approved resource agreements, for all Budget funded Authorities. The Budget papers should comprehend these agreements.

It should be possible for recipients to carry forward expenditure commitments into future years, thus avoiding the need to draw down cash in respect of those commitments until required.

Recommendation 5

The legislation providing for payments to Authorities and the States via SPPs should make clear that payments from appropriations will be made only to meet cash needs and that the appropriations need not be fully paid to Authorities or the States by the end of the year if the full amount of cash will not be required in that year. (Note: “cash needs” includes a reasonable level of working balance).

Recommendation 6

As an interim measure, each periodic payment to Authorities should be based on a cash flow statement to be prepared by the Authority taking into account cash on hand and forecast receipts and expenditure for the relevant period. In the longer term, the government should consider introducing incentives to discourage Authorities from drawing down payments from the Budget in advance of need.

Recommendation 7

Where Authorities are considered to have balances of cash and financial assets sourced from the Budget or Budget-funded activities that exceed their immediate requirements, they should not receive further monies from the Budget until those balances have been run down to an agreed level.

In some instances it may be appropriate to require the Authorities to run down their cash balances, but to allow them to draw an equivalent amount from the Budget in future years, when the cash is actually required for expenditure purposes.

Recommendation 8

Where there has been a history of significant under-spending by an Authority, there should be a review of the base level of the appropriation.

Recommendation 9

When the government announces policy initiatives that involve providing for additional levels of activity by Authorities or the States, the cash to support those initiatives should not be paid in advance of need for expenditure.

Recommendation 10

The benefit or payment component of the appropriation, currently made to those Authorities that disburse payments to final recipients should be retained by the Commonwealth, until the payment is actually made to the final recipient.

Recommendation 11

A further review should be conducted of the funding arrangements of those GBEs, marketing bodies and industry research corporations that receive monies from the Budget.

Recommendation 12

All new SPP Agreements should incorporate best practice cash management principles. Such principles include that, wherever feasible, payment schedules should coincide with monthly revenue peaks by the Commonwealth.

Recommendation 13

The Council of Australian Governments (COAG) should finalise a Protocol covering the cash management of SPPs to the States.

Recommendation 14

The States and Territories should be required to account for Commonwealth monies throughout the year, and report to the Commonwealth all receipts, expenditure and unspent balances of SPP monies throughout the year and as at year-end.

Recommendation 15

A multi-year, rolling program, including program outcomes and indicative annual funding levels be agreed between the Commonwealth and States in respect of each SPP, in the context of the annual Budget. This would provide each State with an approved level of expenditure for the current and future years for each SPP, as opposed to the provision of cash for future expenditure in the Budget year. Cash would be provided on the basis of need. Annual appropriations should then be based on estimated cash needs within each year.

Recommendation 16

If the approved level of expenditure for an SPP is not utilised in full in a year, then the balance of the expenditure approval should be carried forward to future years, without detriment to the next year’s appropriation. If necessary, a State could apply to bring forward approved expenditure from a future year, but this would be a matter for consideration by the government at that time.

Recommendation 17

Funding should not be provided to a State until it is required; payments should be based on a full acquittal of previous cash receipts and forecast cash requirements.

Where the States disburse Commonwealth monies to final recipients, the Agreements should specify that the States are responsible for sound cash management practices in relation to those monies and that the monies will not be paid to recipients significantly in advance of need. The States should be required to certify that this practice has been implemented in their periodical reporting to the Commonwealth.

Recommendation 18

All SPPs “to” the States might be aggregated into a single periodic payment to each State government should that be mutually agreed. Alternatively, SPPs for each Portfolio should be aggregated, so that efficiencies in cash management and administration are achieved.

Recommendation 19

Where receipts or repayments result from activity supported by SPPs, the Agreements covering those SPPs should specify the ownership of the monies, whether they should be offset against future cash requirements and the accounting and monitoring arrangements in relation to those monies.

Recommendation 20

Where relevant, the Agreements covering SPPs should specifically address the matching contributions by the States and Territories including the timing and monitoring of those contributions.

Recommendation 21

A Task Force representing appropriate policy and administrative areas of the Commonwealth be appointed to implement the recommendations of this report, in consultation with the Commonwealth’s Statutory Authorities, the States and Territories.

Recommendation 22

The government give consideration to the establishment of an Office of Cash Management in the light of the issues raised in this Report.

Chapter 2. Statutory Authorities

Background Concerning Statutory Authorities

The government supports the funding of over 100 Commonwealth Statutory Authorities which cover a wide range of activities including transport and communications, industrial and scientific research, the arts, aboriginal affairs, sport, health, education and justice. The funding arrangements are varied. Some details concerning the cash position of certain Authorities are provided in Appendix 3.

The functions and powers of Statutory Authorities are determined by the enabling legislation under which they are established. In most cases the legislation specifies the financial arrangements of the Authority, which may include provision for the Authority to open and operate its own bank account. Where this is the case, monies appropriated to the Authority by the Parliament are paid to the Authority, usually by installments, and deposited to the Authority’s bank account. Such Authorities may also have limited powers to invest their monies and to borrow. Authorities which operate their own bank accounts in this way do not operate on the Commonwealth Public Account (CPA), which is the Commonwealth’s own central repository of funds, and their final expenditure and receipts are not recorded in the Commonwealth’s financial systems, except for the funding advanced to them. Neither are they subject to the main financial provisions of the Audit Act 1901 or subsidiary legislation such as the Finance Regulations or Finance Directions.

Many Authorities have wide statutory powers, which could be interpreted as giving them authority to participate in activities outside their core functions. For instance, the enabling legislation often includes, in the list of powers of an Authority, the power to do all things necessary or convenient to be done in connection with the performance of its functions (or words to that effect). This can give Authorities considerable flexibility in the use of their finances for investment and acquisition of property and assets.

Different categories of Statutory Authorities face different financial situations and there may be a case for considering the circumstances of different groups, such as:

Government Business Enterprises (GBEs) which normally do not draw funds from the Budget (but may pay dividends to the Budget based on profits generated) are outside the Terms of Reference;
Statutory Marketing Authorities (SMAs) and industry research bodies which draw all or a major proportion of their funds from levies upon the (primary) industry concerned (in some cases the Budget also contributes funds on an agreed basis, say, 50:50) — only those that draw on the Budget fall within the Terms of Reference;
Authorities that operate on a quasi-commercial basis but draw primarily on the Budget for their funds — ABC, SBS, CSIRO, ANSTO; a major issue with these bodies is to consider a rationale for budgetary cash flows vis a vis “commercial business” cash flows;
Regulatory, advisory, etc., bodies more closely related to core government activity and which are virtually wholly Budget-dependent for their funding;
Bodies to which the Budget provides funds on a basis somewhat similar to a general purpose payment to a State/Territory.

Many Statutory Authorities that draw funds from the Budget have a provision in their enabling Acts along the lines: “Amounts appropriated by the Parliament for the purpose of the body shall be paid at such times and in such amounts as the Minister for Finance determines”.

This means that some control can be exercised over the flow of payments from a Parliamentary appropriation to an Authority, subject to legal advice to the effect that any amount appropriated for a financial year must be paid over in full by the end of that year, (see Appendix 6 for further discussion of the legal position).

Thus, the cash management task includes consideration of the amount to be appropriated each year, as well as the Minister’s power to allocate payments during the year.

Methodology

The Task Force examined the cash management of payments to Statutory Authorities operating on their own bank accounts, as opposed to Authorities which operate on the Commonwealth Public Account.

The annual reports and financial statements of a number of Authorities were examined and consultations subsequently held with administering departments, supply divisions of the Department of Finance and a number of the Authorities themselves. The cash draw-down schedules for those Authorities were examined and a set of fairly standard questions was put to them, modified to meet the circumstances of each one. Through this procedure, the Task Force sought to identify the payment processes followed in respect of each Authority under investigation, whether payments were being made in a timely manner on the basis of the Authority’s need for cash to meet its expenditure requirements, and whether the Authority had accumulated cash in excess of those requirements. Appendix 4 provides detailed information on the Authorities examined, and Table 1 indicates their reported balances of cash and financial assets as at 30 June 1995.

Table 1: Statutory Authorities Examined by the Task Force

Organisation	Appropriations 1995 – 96 $m	Cash and Investments 30 June 1995 $m
Austrade	401	195
Aboriginal and Torres Strait Islander Commission	894	84
Australian National Training Authority	925	35
Commonwealth Scientific and Industrial Research Organisation	423	146
Australian Nuclear Science and Technology Organisation	66	25
Health Insurance Commission (est.)	8,000	151
Australian Broadcasting Corporation (ABC)	622	29
Special Broadcasting Service	83	3
Australia Council	73	7
Employment Services Regulatory Authority	45	4
National Museum of Australia	6	3
Australian National Gallery	24	5
Australian Tourist Commission	80	12
TOTAL:	11,642	699

Issues Concerning Statutory Authorities

In examining the group of Authorities, the Task Force considered the following key issues:

DO AUTHORITIES PROVIDE A SCHEDULE OF FORECAST CASH REQUIREMENTS?

Many Authorities provide a schedule of cash requirements, mainly pro rata with adjustments for any lumpy payments. There appears to be scant monitoring or review of these schedules during the year, as payments are simply made on the basis of the originally agreed schedule. Authorities generally draw down funds for capital expenditure in equal instalments, without providing any forecast of when these payments will fall due, implying that they accumulate cash to meet these costs as they arise.

COULD DRAW-DOWNS BE MORE FREQUENT?

For large Authorities which currently receive monthly or quarterly instalments in advance of need, it appears to be feasible to provide fortnightly instalments which would result in deferring the borrowing requirement until a time closer to need, thus reducing Public Debt Interest. For example, where an Authority receives some of its program funding quarterly in advance, this should probably be rescheduled to provide it fortnightly on the basis of need. (An examination of each of the major Authorities occurs at Appendix 4).

DO DRAW-DOWN SCHEDULES TAKE ACCOUNT OF FUNDS ON HAND?

No. Authorities which have been examined have not been required to spend cash balances before drawing down their next instalment, nor have instalments been reduced in any way to allow for cash on hand.

COULD DRAW-DOWNS TAKE PLACE TO COINCIDE WITH COMMONWEALTH REVENUE PEAKS?

This would help to match the pattern of the Commonwealth’s expenditure with revenue – i.e., with taxation receipts which have peaks around the 1^st, 8^thand 22^nd. It would be consistent with recommendations by the ANAO that Departments should match expenditure and revenue patterns to reduce Commonwealth borrowing requirements. If necessary, the first payment of the year in which the change was introduced could be adjusted to ensure that the effect of the change was neutral for Authorities, where an Authority’s working balance was insufficient to meet wage and salary and other recurrent commitments in the adjustment period.

SHOULD AUTHORITIES SET ASIDE CASH AGAINST SPECIFIC COMMITMENTS?

Some Authorities have earmarked accumulated cash for specific commitments, even holding such cash in separate bank accounts for subsequent expenditure on each major commitment or activity. This would be unnecessary, if those Authorities could be certain that cash would be available as required to meet maturing accruals, especially where commitments extend into future years. A firm commitment by the government to provide the cash as it is required to meet maturing accruals, within approved expenditure limits, would give this certainty. It may be necessary to provide the commitment in some formal document such as a resource agreement between the responsible Minister and the Authority.

HOW CAN AUTHORITIES PROVIDE FOR CAPITAL REPLACEMENT AND OTHER MATURING LIABILITIES?

Instead of drawing down cash in advance of need, Authorities should draw down funds as required for expenditure. Where large outlays are necessary, e.g., to replace major capital assets, the cost of which could not currently be met from a single year’s appropriation, Authorities could provide a forecast of such outlays based on agreed asset replacement plans and seek a formal undertaking by the government, such as a ministerial resource agreement, to provide funds when required. This would result in deferral of the draw-down until the funds are actually required to pay contractors, etc. Thus, while the recurrent provision may remain fairly constant over the years, the provision for capital expenditure may vary from year to year according to an approved forecast of capital expenditure, with funds only to be drawn down as required to meet payments.

DO AUTHORITIES HAVE SEPARATE BANK ACCOUNTS FOR VARIOUS PROGRAMS/ACTIVITIES?

Some Authorities hold funds for various programs or activities in separate bank accounts. This can have the disadvantage that they need a “buffer” of cash for each such activity. If they operated all programs and activities from a single bank account, they would only need a single “buffer” and hence could operate on a lower cash balance.

DO THEY HAVE GROUP SET-OFF ARRANGEMENTS FOR BANK ACCOUNTS/OVERDRAFTS?

As an alternative to the previous comment, Authorities could operate on a group set-off arrangement with their banker (many of the private banks and the Reserve Bank of Australia (RBA) are willing to provide such an arrangement for large clients). This allows the client to operate a number of accounts as if they were one. This would enable Authorities to operate on a lower working balance than if each account was treated separately, because the balance of each account need not hold such a high buffer. It is not known whether many Authorities have availed themselves of this arrangement.

WHAT INTEREST RATE DO AUTHORITIES RECEIVE ON THEIR CASH?

Those Authorities which have provided this information generally receive lower interest rates than that paid by the Commonwealth on its borrowings, so from a whole-of-government perspective there is an actual loss on cash balances. The significance of this is discussed later in this Report.

COULD BETTER ACCOUNTING SYSTEMS ENABLE THEM TO MANAGE WITH LESS CASH?

If there was an incentive for the Authorities to operate on a lower cash balance (or disincentive to maintain large cash balances), they may wish to upgrade their accounting systems to forecast future cash requirements and hence operate on lower “buffers”. At present many are practising a form of “jam jar accounting” by setting aside cash for each future payment, instead of drawing cash as it is required.

[The Department of Finance has evaluated many commercial accounting packages (see Towards Better Financial Management, Department of Finance, Canberra, 1995) and can provide advice to Authorities on systems that would meet their needs. An appropriate FMIS would provide information on cash, accruals and commitments.]

CAN AUTHORITIES SEEK AN EMERGENCY DRAW-DOWN?

Authorities would also be encouraged to operate on lower cash balances if there were more flexibility in the draw-down procedure — i.e., if Authorities are genuinely short of funds in the middle of a draw-down period they can access a supplementary instalment at short (e.g., 48 hour) notice. Departmental systems can provide for this.

SHOULD AUTHORITIES PAY SUPPLIERS EARLY WHEN A DISCOUNT IS OFFERED?

Many Authorities seek a large payment as their first instalment for the year so that they can pay large accounts to Telstra, Comcare, etc., in advance and obtain a discount. The discount may be less than the cost to the Commonwealth of borrowing the funds. As the discount represents a windfall gain to the Authorities at the expense of the Commonwealth in those instances, such large initial draw-downs should not be provided. In particular, Authorities should not be able to draw such large initial payments if they are carrying forward significant levels of cash. Draw-downs could be provided in advance where the Authority met the additional, nominal borrowing cost.

SHOULD REVENUE BE TREATED AS “SEPARATE CASH”?

Some Authorities have represented revenue earned from Budget-funded activities — e.g., licence fees, gate money – as non-Budget money which should be excluded from consideration of appropriation and draw-down levels. While there may be a case for treating revenue from privately-funded activities as “separate” for these purposes, revenue from Budget-funded activities should logically be treated as being sourced indirectly from the Budget. Accordingly, it should be taken into account in determining the annual cash needs of Authorities and should be applied by the Authorities to their Budget-funded activities.

SHOULD AUTHORITIES BE ABLE TO CARRY FORWARD CASH?

Some Authorities have referred to arrangements with the Department of Finance, which allow them to carry forward cash balances from one year to the next as part of their resource agreement with that Department. They are legally entitled to any monies that have been appropriated to them within the Budget year, and once they have received those monies they may spend them or carry them forward as unspent cash or investments. However, the Commonwealth should take steps to limit the amount of cash that Authorities hold at any time by controlling the timing of draw-downs.

SHOULD AUTHORITIES WHICH HAVE EXPOSURE TO FOREIGN EXCHANGE RISK BE ABLE TO DRAW DOWN EARLIER THAN OTHER AUTHORITIES?

The Australian Tourist Commission (ATC) has been able to receive its appropriation in two six-monthly instalments on the basis that it must enter into forward contracts to hedge against its foreign exchange exposure. Advice from the Reserve Bank indicates that it is possible to hedge exchange rate risk without making advance payments – forward contracts are settled at a pre-determined exchange rate at the time foreign currency is received. The rationale for large draw-downs in advance is not warranted.

SHOULD AUTHORITIES PAY INTEREST TO THE COMMONWEALTH FOR CASH RECEIVED IN ADVANCE OF EXPENDITURE?

The ATC and Health Insurance Commission pay interest to the Commonwealth for cash received in advance of need. There is a case for this principle to be extended to other Authorities.

SHOULD THE COMMONWEALTH PAY INTEREST TO AUTHORITIES ON CASH THAT THEY “BANK” WITH THE COMMONWEALTH?

It has been suggested by some Authorities that they could pay back surplus cash to the Commonwealth and receive interest from the Commonwealth equivalent to the bank interest forgone. There seems to be no justification for the Commonwealth paying interest on surplus cash as the Commonwealth generally provides it to the Authorities, in the first instance, free of interest. As there is no obligation on the Commonwealth to provide cash to the Authorities in advance of need, except at the end of the financial year, the best strategy would be to ensure that cash balances are not accumulated in the first place or that they are wound down before further cash is provided.

WHAT SHOULD BE DONE ABOUT VERY LARGE CASH BALANCES HELD BY SOME AUTHORITIES?

The government could indicate in writing to these Authorities that it was never intended that they accumulate large balances of cash (and financial assets) drawn from the Budget, and could seek their co-operation in returning surplus funds through one of the three options outlined later in this report (see paragraphs 12.1 to 12.8).

WHAT SHOULD ADMINISTERING DEPARTMENTS AND DEPARTMENT OF FINANCE SUPPLY DIVISIONS TAKE INTO ACCOUNT IN DETERMINING APPROPRIATIONS TO AUTHORITIES?

To accurately determine the annual cash needs of an Authority, it is necessary to obtain from the Authority an annual cash flow statement which would take into account the following:

cash balances (including financial assets) carried forward;
forecast revenue available to the Authority, including accounts receivable;
forecast expenditure for the year.

To obtain a comprehensive picture of each Authority’s operational requirements, it would also be necessary to obtain information concerning cash forecasts for future years.

WHAT ABOUT SPECIAL “DEALS” WITH THE DEPARTMENT OF FINANCE?

Several Authorities have referred to unique arrangements that they have entered into with the Department of Finance — e.g., the National Gallery of Australia was allowed to draw down $3m to pay for building extensions well in advance of need, on the basis that it would not seek supplementation for cost escalation. ATSIC also referred to long-standing arrangements with Finance for drawing down its funds. The Task Force does not feel bound by any such “deals” but addresses this issue in this report. Specifically, it recommends a policy framework that would comprehend various categories of Authorities and the issues that have given rise to these piecemeal arrangements.

SHOULDN’T THE MANAGERS MANAGE?

One canard is that centralised financial controls might cause particular Authorities to lose some of their administrative responsibilities, hence contributing to the inefficiency of government. The argument runs that the managers should be allowed to manage.

A number of things can be said about this argument.

First, some Authorities are not managed well, from an overall cost of government perspective, if significant amounts of surplus cash are under-utilised.

Second, there is no proposal inherent in this Report that there be a return to the “old days”. The problem with “straw man” arguments is that the straw man has no brains.

Third, corporate treasury functions (beyond maintaining “normal” cash balances) are not and should not be a core business of the Authorities. Considerable management time and other resources can be diverted to such activities.

Fourth, it is interesting that, in the private sector, companies like BHP and Woolworths centralise their accounting and cash management responsibilities. While there are significant differences between the government and private sectors, including taxation requirements and the markets in which companies and governments operate — and those differences are relevant to sound cash management — there are some general lessons to be learnt. The Managers of Woolworth’s Big W or BHP’s Australian Iron and Steel do not appear to be handicapped by those “centralised” controls. They appear to get on with the job of managing their businesses. Those business units receive credit for their cash and pay for borrowed funds within the company “central” account.

Recommendation 1

Recommendation 2

The Cash Management Aspect of Funding Authorities

In the case of those Statutory Authorities and bodies that do not have their own bank accounts, i.e., operate directly on the CPA, expenditure is made directly by drawing cheques or electronic payments from the CPA and the funds therefore do not have to be raised by the Commonwealth in advance of need. It is preferable for Authorities to operate directly on the CPA, from a cash management perspective.

Authorities which have their own bank accounts draw public monies from the Commonwealth Public Account and pay them into their account, pending expenditure. Any such payment therefore represents an outlay from the Budget. Transferring the funds before the Authority needs to spend them will result in the

Commonwealth having to raise the funds earlier than necessary and therefore increases the PDI bill.

It is worth considering whether Authorities currently operating on separate bank accounts need to have this degree of financial separation from the Commonwealth, and this is certainly a question that needs to be addressed when new Authorities are being created. It may be that many Authorities would not be disadvantaged if they did not have the power to open and operate their own bank accounts. This would avoid the present situation where large aggregate balances are held in the bankaccounts of Authorities at a significant cost to the Commonwealth.

Authorities would argue that their need for independence is compromised by not having separate bank accounts. However, a large degree of flexibility and autonomy is available in using the Commonwealth Public Account.

Recommendation 3

Appropriation and Commitment of Funds

Many Authorities examined by the Task Force seemed to be of the view that they should be provided with cash, via Parliamentary appropriations, to cover their outstanding commitments. There was some evidence that the States took the same view in relation to SPPs.

The Task Force considered that this represents a basic misunderstanding of the appropriation process. The findings of the Task Force raise several fundamental issues concerning the nature of Budgetary practice that need to be clarified.

The first issue is raised by the fact that, in relation to payments to Statutory Authorities and SPPs to the States, Commonwealth monies have been appropriated and drawn from the Commonwealth treasury to meet program expenditure, in excess of cash need for that particular financial year. This is illustrated by the fairly common practice of providing, via appropriations, for the estimated annual expenditure of a Statutory Authority without taking into account cash carried forward by the Authority from previous years. Clearly, the cash carried forward is also available for expenditure in that year. In many cases, the full amount of the appropriation has been paid to the Authority within each financial year, allowing the Authority to carry forward large cash balances, year after year.

Similarly, with some SPPs, the amount of cash paid to the States clearly exceeds the amount that they are likely to spend in that financial year, with the result that they carry forward a surplus balance into the next financial year.

This cannot though be compared to the running cost arrangements, where a department is able to carry forward unspent funds from the previous year’s appropriation. The difference is that in the latter case, the cash remains in the Commonwealth Public Account until it is required for expenditure purposes, whereas in the former, the cash has been paid to separate entities.

The annual Federal Budget is clearly a cash Budget, covering receipts and payments for a given financial year. Given the cost to the Commonwealth of raising funds, and the addition to PDI that arises when funds are raised earlier than necessary, it is clearly inefficient to draw the funds from the treasury of the Commonwealth prior to need. Moreover, it could be misleading to Parliament if the Executive Government were to seek, through the annual appropriations, more than it expected to spend or more than was necessary to spend in that year.

Accordingly, the Budget presented to Parliament should represent the Executive Government’s best estimates of receipts and payments for that financial year. It should not seek to draw more than is necessary to provide for the services of government in that year as determined by the government. This does not imply that there should be a return to the examination of detailed estimates, or any notion of zero based budgeting. However, in pursuing current Budget practices, the government should ensure that appropriations are sufficient to meet current expenditure requirements only, i.e., they should not provide for forward expenditure and should not allow the recipients to accumulate surplus cash. In determining the needs of recipients such as Statutory Authorities and the States (in relation to SPPs), the estimates should make allowance for cash on hand carried over by Authorities and States from previous Budgets.

This arrangement should apply to the appropriations for Statutory Authorities and any other payments such as SPPs. Of course, some allowance would have to be made for reasonable working cash balances to be carried over where cash is drawn periodically from the Budget, such as for Authorities and SPPs, but these should be set at a level only to meet the ongoing operational requirements of the recipient.

This raises the issue of carrying forward of funding from one year to the next to meet future expenditure. It is important that Statutory Authorities and the States should have a sound basis for planning activities for future years. Accordingly, the government should indicate each year the level of forward year expenditure that it is prepared to support, for each Budget-funded Authority. (The situation relating to SPPs is dealt with elsewhere in this report.) To give added certainty to these approvals, the government may wish, in some cases, to formalise them in resource agreements, three-year rolling programs etc.

At first glance, it might be argued that these arrangements are already in place. However, it is clear that the way that the present arrangements work is far from satisfactory. For example, a number of Authorities have indicated that they consider it is correct practice for them to draw cash in order to cover commitments that will not mature until future years, or to provide for disbursements that they plan to make in future years. In the case of some SPPs, the agreement with the States provides for the Commonwealth to fully disburse the annual appropriation before the end of the financial year, even though it may be clear that the States will not spend the funds in that year. Similarly, with the three-year rolling programs agreed with some Authorities, these have been interpreted as guaranteeing the allocation of certain levels of cash over those years, regardless of whether the Authorities appear likely to need or to spend that level of cash.

In the case of capital expenditure, it has been a common practice among Authorities to draw cash from the Budget and set it aside to build up a reserve of funds for infrastructure replacement and other future requirements.

In each case, it would be possible for the government to approve levels of expenditure for future years, to give Authorities or States a sound basis for planning, without appropriating and providing cash for that expenditure in the current year. This would enable Authorities and States to enter into obligations or plan expenditure for future years, in the expectation that they will receive cash as and when required. The Task Force considered that there was a very strong need to change the basis for planning to the provision of cash when it is required.

It would assist the government to determine the level of annual appropriations to Authorities if Authorities were required to provide, in support of their estimates:

business plans, setting out details of major activities and forecasts of revenue and expenditure;
cash management plans, specifying the levels of commitments and other accruals due to mature in the current and future years and the timing of cash requirements to meet those maturing accruals;
service delivery plans, which would indicate the levels of performance to be achieved during the year, including performance measures against which the Authorities would be held accountable.

This proposal would avoid the need to draw down cash for expenditure in future years, e.g., for infrastructure replacement, and would have significant cash management benefits in the form of PDI savings. However, there would be a need for the change to be very carefully explained and for the process to be seen as binding on the Commonwealth, otherwise Authorities and the States will feel exposed to the risk of default and will attempt to continue with the existing “cash culture”. The effect of this arrangement is illustrated in the following diagram:

Diagram 1: Separation of Cash Appropriation from Current
Base Funding Over a Five Year Period

Current Base Funding Level ——— Actual Cash Requirement to be
met by Annual Appropriation

The solid line shows how the current base funding level for a typical Authority would be expected to increase in future years as a result of indexation to match cost increases. The broken line indicates how planned expenditure by an Authority might vary over those years, with year 3 indicating a large increase due to, perhaps, a capital outlay such as the purchase of a large piece of equipment.

Currently, the Authority would accumulate funds over a number of years to meet the large outlay in year 3. This would involve drawing down funds from appropriations years in advance of the need for those funds for expenditure — adding unnecessarily to the Authority’s cash balances over those years. It would be much better cash management for the government to provide the funds on a “just-in-time” basis. To overcome the problem, the government would agree to an expenditure profile over the relevant future years and agree to provide the funds up to that level, as required, in a ministerially endorsed resource agreement. This would give the Authority the degree of certainty necessary to plan future activities and expenditure, without drawing the funds from appropriations in advance of need.

Recommendation 4

It should be possible for recipients to carry forward expenditure commitments into future years, thus avoiding the need to draw down cash in respect of those commitments until required.

Recommendation 5

The legislation providing for payments to Authorities and the States via SPPs should make clear that payments from appropriations will be made only to meet cash needs and that the appropriations need not he fully paid to Authorities or the States by the end of the year if the full amount of cash will not be required in that year. (Note: “cash needs” includes a reasonable level of working balance).

The Payment Process

Payments to Authorities are generally made fortnightly or monthly by the administering department, but in some cases they are made quarterly.

Many Authorities provide a schedule of cash requirements, mainly on a pro-rata basis with adjustments for any variations to their cash flows. There is little or no monitoring or review of these schedules during the year and payments are simply made on the basis of the originally agreed schedule. Authorities examined generally draw down funds for capital expenditure in equal instalments, without providing any forecast of when these payments will fall due, implying that they accumulate cash over a period of time to meet these costs as they arise.

The Authorities that have been examined have not been required to spend cash balances before drawing down their next instalment, nor have instalments been reduced in any way to allow for cash on hand or short-term liabilities.

There is currently a financial incentive for agencies to draw down cash from the Budget as early as possible during the year, so as to maximise their interest earnings on their unspent cash and investments.

The Task Force heard a view, put by officers of the Department of Finance, that rather than direct controls on cash draw-downs, the Task Force should recommend the implementation of incentives that would encourage Authorities not to draw funds in advance of need. The view was that direct controls run against the main thrust of the government’s management reforms.

While the Task Force accepts this view, it noted that there is an urgent need for remedial action in the light of the situation that has currently developed and considered that the government will need to rely on direct controls in the short term to ensure that cash draw-downs are more closely linked to expenditure requirements. It would take some time to develop and test a system of incentives that would introduce the level of certainty that is required to improve the timing of cash flows and be simple to administer. The Task Force did not consider that the government should delay in seeking the improvements that it recommends.

The relationship between the Executive Government and the Statutory Authorities should be similar to a contractual relationship for the provision of services. The Task Force considered that any system of incentives introduced to control payments to Authorities would need to be appropriate to that relationship. Payments to Authorities require a similar degree of monitoring and control to those applied to other contractors to the government.

Authorities are different from Departments of State in that they are separate legal entities and not part of the Executive Government. It is therefore appropriate that the provision of public monies to Authorities be more closely controlled than Budget allocations to Departments. The Task Force noted that as an interim measure, improved cash management could be quickly and simply implemented by administering Departments requiring Authorities to apply for each draw down by advising details of expenditure, receipts and cash on hand. An example of a possible pro-forma is at Appendix 5.

Recommendation 6

The Timing of Periodic Drawdowns

In the case of large Authorities that are currently funded in monthly or quarterly instalments in advance of need, it appears feasible to provide fortnightly instalments. This would result in deferring the borrowing requirement until a time closer to need, thus reducing PDI. For example, ATSIC receives most of its program funding quarterly in advance. This could probably be rescheduled to fortnightly on the basis of need, providing this did not impede program delivery or add to program costs.

Cash Balances Currently Held

The Task Force examined in detail thirteen Commonwealth Authorities. The cash balances (including financial investments) of each of those Authorities, as reported at 30 June 1995, are indicated in Table 1, paragraph 6.2. It is clear that some of those Authorities have accumulated cash far in excess of their day-to-day operational requirements. In aggregate, their cash balances exceeded $700m as at 30 June 1995. It was claimed by some Authorities that these cash balances were fully committed against future expenditure requirements and could not therefore be regarded as being surplus cash. In other cases, the Authorities agreed that the cash balances were excessive.

In some cases, where payments have been received from private sources by Authorities to undertake specific projects or joint ventures, these receipts could be excluded from the calculations of Budget appropriations and cash needs. However, revenue generated by Budget-funded activities should not be excluded.

Some Authorities argued that they need the interest that they earn on their cash balances to supplement Budget appropriations in order to meet program objectives. It was suggested by some Authorities that they could pay back surplus cash to the Commonwealth and receive a payment in lieu of the interest that they would have received from investing the cash. The Task Force makes the following observations:

The cash balances held by Authorities could be utilised to reduce the Commonwealth’s net borrowings. It is anomalous that the Authorities hold large cash balances, which exceed their immediate needs, at a time when the Commonwealth has accumulated a large volume of debt.

The cost to the Commonwealth of allowing the Authorities to continue to hold these cash balances is equivalent to the net cost of borrowing an equivalent aggregate amount through the money market. Unless the cash is returned to the Commonwealth by, for example, reducing the level of funds appropriated to the Authorities, they could hold similar or increasing levels of cash in perpetuity. The interest rate which most accurately reflects the cost to the Commonwealth of allowing these balances to be held would therefore be the cost of raising funds over the longest period covered by Treasury Bonds, currently the ten-year Bond rate.

It is illogical for any Authority to claim that they need the interest on these cash balances if they are currently under-spending their annual appropriations. To use a metaphor, they would have to demonstrate that they needed the icing, even though they had not eaten the cake!

There seems to be no justification for the Commonwealth paying interest on the surplus cash balances of Authorities as the Commonwealth generally provides it to the Authorities, in the first place, free of interest.

If there is a genuine need to supplement the appropriations, it would be more economical to do so by increasing the level of the appropriations and paying the monies to the Authorities only when needed.

If interest was paid on balances clawed back to the CPA at a rate which reflected the cost to the Commonwealth of borrowing the funds (i.e., the bond rate), there would be no cash management saving. For there to be any saving, the interest paid would have to be less than the cost of borrowing.

While Authorities generally have wide ranging powers, these should be exercised in the pursuit of their core activities in the most cost effective way possible. It is not core business of the Authorities to act as investment bankers or money market dealers or to run substantial “cottage” treasury operations. The effective management of the large balances held by some Authorities would require the utilisation of resources that more appropriately should be used for core activities, and also divert the attention of senior management and the Authorities’ Boards/Commissions from those activities.

As there is no obligation on the Commonwealth to provide cash to the Authorities in advance of need, except at the end of the financial year, the best strategy would be to ensure that excessive cash balances are not accumulated in the first place or that they are run down before further cash is provided.

The Task Force identified various options for returning any cash balances that are considered to be excessive to the Commonwealth.

OPTION A: REDUCE 1996-97 APPROPRIATIONS

The most obvious and simple solution is to reduce 1996-97 appropriations to Authorities to allow for cash balances carried forward and to allow no further draw-down payments until cash levels had fallen to “working balances”. But for the legal difficulties outlined in Appendix 6, the full amount of the 1995-96 appropriations need not be advanced.

OPTION B: PAY SURPLUS CASH INTO A TRUST ACCOUNT

An option for some Authorities, if it was not considered appropriate to reduce their surplus cash balances, would be to require them to hold those balances, pending expenditure, in a Trust Account established under section 62 of the Audit Act. This would avoid the potential difficulties, political or bureaucratic, of clawing back the surplus monies to the Budget. However, it would involve a transfer of monies, which had been paid out of the CPA (Consolidated Revenue Fund) to the Authorities’ bank accounts, back to the CPA (Trust Fund). It could be argued that it would be better if the monies had not left the CPA in the first place, i.e., by adopting Option A (above) and reducing the annual appropriations.

If the Trust Account option was to be adopted in some cases, a decision would have to be made on whether to pay interest on the balances of the Trust Account(s). The decision should take account of whether the Authorities could demonstrate that they needed the interest. It would be difficult for those Authorities that had accumulated funds by consistently underspending their appropriations, to argue convincingly that they needed the interest. They have not even spent the appropriations which were available to them each year.

OPTION C: RETURN THE SURPLUS CASH TO THE BUDGET BUT ALLOW AUTHORITIES TO UTILISE IT FOR PROGRAM EXPENDITURE OVER THREE TO FIVE YEARS

Under this option, the government could indicate in writing to the Authorities that it was never intended that they accumulate large balances of cash (and financial assets) drawn from the Budget. Authorities would be required to submit detailed plans indicating how they would utilise the cash balances over the next three to five years, to achieve program outcomes. Pending the actual need for the cash to achieve these outcomes, the government could require the bulk of the cash balances to be “repaid” to the Budget by reducing the annual appropriations (as in Option A). Appropriations would then be allowed to increase during the three to five year period as the cash is required for program expenditure. At the end of the period, the level of appropriations would return to base level.

Recommendation 7

Adjust Appropriation Base Level

Some Authorities have accumulated large balances of surplus cash by underspending their annual appropriations over a number of years. Where this has happened, the level of the appropriation should be reviewed, to determine whether a structural adjustment should be made. The cause of the underspending may be administrative bottlenecks, overestimation of program parameters or a deliberate policy of withholding funds to develop a “nest egg”.

Recommendation 8

Where there has been a history of significant underspending by an Authority, there should be a review of the base level of the appropriation.

Government Policy Initiatives

Several Authorities and States referred to major government policy initiatives, under which they had been provided with large lump sum payments well in advance of need. These included the Australian National Training Authority and payments under the Building Better Cities Program. There is no need to provide Authorities and States with extra cash at the time these policy initiatives are announced. It would be better cash management for the government to simply approve additional expenditure by the Authorities, with the funds to be provided as required for payments.

Recommendation 9

When the government announces policy initiatives that involve providing for additional levels of activity by Authorities or the states, the cash to support those initiatives should not be paid in advance of need for expenditure.

Authorities that Distribute Payments on Behalf of the Commonwealth

Some Authorities examined by the Task Force have, as one of their major functions, the distribution of payments on behalf of the Commonwealth. For example, the Health Insurance Commission (HIC) pays Medicare benefits and the Childcare Rebate, Austrade makes payments in support of trade promotion and the Australia Council makes grants and payments in relation to the arts.

Each of these Authorities has large cash balances which could be returned to the Budget by the adoption of different payment arrangements. At 30 June 1995, Austrade had a cash balance of $195m, the Australia Council had a cash balance of $7m while the HIC, which is one of the largest Authorities in terms of its cash flow, had end-of-month cash balances which did not fall below $150m during 1994-95.

While it may be appropriate to provide these bodies with their administrative costs, the Task Force considered that it was unnecessary to pay the “benefit” component of the cash flows into the Authorities’ own bank accounts, pending payment to the final recipient. It would be much better cash management for the Commonwealth to retain the “benefit” component for as long as possible, rather than pay it into the Authority’s bank account.

In the case of HIC, which receives over $8b from the Budget each year, approximately $700m is drawn down monthly, most of which is subsequently disbursed to final beneficiaries throughout the month. There seems to be no practical need to pay the benefit component to HIC, as the payments could be arranged by HIC direct from the Commonwealth’s accounts. By retaining this money, it would be possible for the Commonwealth to defer borrowings until the payments were actually made to beneficiaries. In addition, the working balance of around $150m would be returned to the Budget. This would provide a one-off saving to the Budget of $150m and ongoing PDI savings.

Austrade clearly has surplus cash balances but even after these have been adjusted, it could operate on a very low working balance, if the program component of its current funding were retained by the Commonwealth. There would be similar, but much smaller, savings for the Australia Council.

Recommendation 10

The benefit or payment component of the appropriation currently made to those Authorities that disburse payments to final recipients should be retained by the Commonwealth, until the payment is actually made to the final recipient.

Other Categories of Statutory Authorities

The Task Force did not undertake a detailed examination of any government Business Enterprises, marketing bodies or industry research corporations which draw funds from the Budget. It noted from their annual reports that many of these bodies have very large balances of cash and other financial assets. It considered that a further review should be undertaken of these bodies to assess the reason for their high level of cash and determine whether there is a need to make policy changes in relation to the timing and amounts of their funding from the Budget.

Recommendation 11

A further review should be conducted of the funding arrangements of those GBEs, marketing bodies and industry research corporations that receive monies from the Budget.

Conclusion

The Task Force considered that there is scope to significantly improve the cash management of payments to Statutory Authorities. It noted the potential for substantial savings to the Budget by providing monies on a strict cash flow basis which would require the Authorities to utilise their cash balances before they receive any further Budget support. It also noted the need to provide a certain and flexible basis for planning future expenditure which would not involve drawing monies from the Budget to cover commitments.

The Task Force noted that its recommendations would not have any effect on the viability of the recipients, nor would it have an impact on program outcomes. They would, however, reduce the cost of those outcomes and would result in substantial savings to the Budget. It needs to be recognised that the proposed changes should be implemented with a degree of sensitivity that would ensure, for the Authorities, predictability of administration formal recognition of sound cash management principles in resource agreements.

Chapter 3. Specific Purpose Payments

Background

The Commonwealth provides financial assistance to the States, Territories and Local Government in the form of General Purpose Payments (GPPs) and Specific Purpose Payments (SPPs). GPPs take the form of untied funding, while SPPs are provided under Section 96 of the Australian Constitution which reads:

96. During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.

This section has been utilised to provide SPPs to the states, as well as other payments to the state governments.

The 1929 Report of the Royal Commission on the Constitution referred to the origin of SPPs and the Commonwealth’s Main Roads Development Act 1923, which authorised the payment of certain maximum amounts to each State. The conditions were inter alia that each State receiving a grant should spend from its own revenues an amount equal to the amount of the grant, and that before any payment was made to a State, that State should submit for the approval of the Commonwealth Minister a detailed plan of the expenditure of the money granted. This legislation was subsequently complemented by the Federal Aid Roads Act 1926, by which the Commonwealth assumed a share in the construction and maintenance of roads.

The June 1928 Premiers’ Conference debated at some length the issue of Specific Purpose funding with respect to the Commonwealth’s Wire and Wire Netting Act 1927. The Commonwealth made available £3,000,000 spread over six years for advances to be made to settlers in the several States to enable them to obtain wire-netting. The terms under which this money was advanced were objected to by a number of the States. The Premier of Victoria, Mr Hogan, objected to the duplication of State responsibilities. This debate centred on whether the conditions proposed by the Federal government were unnecessarily presumptive and an interference in the State’s responsibilities to be responsible for wire netting. The States, however, could not agree on what ought to be done. Queensland explicitly stated it wanted the money despite its “reservations”. In the end, the Conference passed a resolution placing on record “its disapproval of the principle of the grant of Commonwealth moneys to the States to be expended on functions which the Constitution reserves to the States, and under conditions laid down by the Commonwealth, and urges upon the Federal government that there should be no further extensions of this principle…”

Here is not the place for an extended history lesson. Suffice to say that some of the interesting features of the development of SPPs are that:

the Commonwealth desired to achieve specific policy objectives through such programs;
the Commonwealth desired to give effect to its policy objectives by way of financial incentives (matching grants and allocation of financial resources which the States did not have);
the principle of the States matching resources provided by the Commonwealth has generally been a feature of Specific Purpose Programs. However, this is not any more the golden rule. For example, funding to universities — where the Commonwealth’s financial role has almost completely replaced the States — is a case in point. But the payments to the States as distinct from payments through the States (about which more later) usually require matching funding;
frequently there have been battles between the States and the Commonwealth at the political and administrative levels concerning merits of the specific purposes, the detail of conditions and the issue of where the States and the Commonwealth’s responsibilities do and should begin, overlap and end. SPP agreements between the States and the Commonwealth are an attempt to reach an understanding between some of the issues. Such agreements have and do vary in detail and quality. Sometimes they mask a compromise or an administrative settlement whereby the States and the Commonwealth, on the issues, are in dispute.
the distinction between SPPs and GPPs has become blurred — for example, the Building Better Cities program, which is classified as a GPP, imposes certain conditions on the States.

As indicated earlier, Section 96 does not limit the Commonwealth to the means by which financial assistance may be rendered to the States.

The composition of payments to the States and to local government consists of:

CATEGORY	DESCRIPTION
General Revenue Payments	Per capita general revenue support payments to each State based on decisions at Premiers Conferences and the Commonwealth Grants Commission.
General Purpose Capital	Per capita general revenue support for capital purposes to the States as decided from time to time.
Specific Purpose Payments “through” the States	Payments which the States pass directly on to other agencies. However, since 1993 payments to universities are made direct to those institutions by the Commonwealth.
Direct Payments to Local Government “through” the States	Subsidy payments allocated by the Commonwealth direct to Local Governments and not described in the Budget Papers as SPPs.

Most SPPs are paid to the States on the basis that policy objectives set by the Commonwealth, or national policy objectives agreed between the Commonwealth and the States, are met. It is because of the conditions attached to SPPs that they are sometimes called “tied grants”.

The conditions imposed on individual SPPs vary considerably in both degree and form. They may involve:

a requirement that the payment be expended for a specified activity, with varying degrees of budgetary discretion available to the States according to the conditions placed on payments; or
general policy requirements on States (for example, that the States provide free public hospital treatment to Medicare patients as a condition of receiving hospital funding grants).

Some SPPs include conditions on State own-purpose outlays through the use of “matching” funding requirements. These conditions are commonly expressed in terms of expenditures rather than outcomes. These arrangements have been questioned on the grounds that they may reduce the incentive for the States to pursue efficiency measures. This is because the States cannot direct productivity gains to other expenditure priorities or use them for deficit reduction. In some areas of shared responsibility, the use of outcome measures would allow the Commonwealth’s broader policy interests to be satisfied while providing States with greater medium-term flexibility in and improved incentives for management of their budgets. Nevertheless, expenditure is often used as a proxy for a performance indicator because of the difficulty inherent in defining and agreeing an output or outcome indicator for a program.

The Commonwealth is currently examining, through the Council of Australian Governments (COAG) forum, the conditions attached to SPPs with the intention of improving their quality in a number of areas and on a case-by-case basis.

In February 1995, the Australian National Audit Office (ANAO), in conjunction with the Joint Committee of Public Accounts, completed a project audit of the administration of SPPs. ANAO concluded that pockets of good performance exist across SPP programs, but found some SPP agreements are not sufficiently comprehensive to be useful as a management tool. The survey also found failings in relation to accountability mechanisms and that financial arrangements need closer scrutiny. The survey results should allow individual Commonwealth departments to assess the areas in which their performance requires improvement.

ANAO made a number of recommendations to improve program administration and to highlight better practices across SPPs, which are relevant to better cash management policies and outcomes.

Gross payments by the government to and through the States are estimated to total $33.9 billion in 1995-96. Almost all payments involve some form of agreement between the Commonwealth and the States. About 53.3 per cent or $18.6 billion of these payments were classified as Specific Purpose Payments (SPPs). General Purpose Payments (GPPs) make up the bulk of the remainder. However those payments are outside the terms of reference of this Task Force.

SPPs are made for designated purposes in areas where the Commonwealth wants involvement in the nature or direction of expenditure by the States. These payments cover a wide range of programs and have a variety of administrative arrangements divided across different levels of government. In 1994-95 there were around 90 SPP programs in existence. However, about 80 per cent of the annual SPP expenditure is incurred on only four major programs — education, hospitals, housing and roads.

SPPs “to” the States are expected to total $11 billion in 1995-96, while SPPs “through” the States are expected to be $7 billion. The following chart shows trends in SPPs as a proportion of total gross payments to the States. The chart abstracts from a number of classification changes which would complicate the analysis;

Chart 1: Specific Purpose Payments as a Percentage of Total Gross Payments to the States, 1976-77 to 1995-96.

The major issue here is to match budgetary payments with cash flows needs (this is discussed in general terms in Audit Report No. 6,1993-94 of the Auditor General):

where an SPP is to further a Commonwealth objective it may be difficult to postulate that a State should put its money up-front and be reimbursed in arrears, but otherwise the issue is whether, how far ahead on what criteria advance payments might be made;
cash flow budgets and acquittal procedures should generally be put in place;
a general “protocol” covering SPPs is being considered in the COAG context;
the principle that fiduciary efficiency should not unnecessarily hinder the government’s specific policy or program objectives, and any other relevant policy issues;
how best practice, comparative and benchmarking principles might be considered in a cash management context.

It may be possible to have cash management principles built into the protocol or guidelines issued to Commonwealth Departments for application, case-by-case, in the context of the protocol; this issue is addressed in this Report.

According to ANAO Report No. 21 of 1994-95, “the term Specific Purpose Payments includes a diverse range of payments. Most are payments made from the Commonwealth to the States with conditions attached. However, it also includes a payment from the States to the Commonwealth, programs with similar arrangements which relate to the transfer of revenue collected under various regulatory arrangements and generally not subject to conditions.”

Agreements between the Commonwealth and States are made in a large number of program areas, with a range of terms and conditions, payment arrangements and level of Commonwealth involvement. SPPs may be for specific activities or to meet general policy objectives and vary in size. They may be payments to the States or payments through the States to a final recipient. They range from very small (less than $100,000) up to $3.8 billion (1995-96) for hospital funding under Medicare. Some involve payments to one final recipient, others to more than 2,500, as in the case of education. Together, the Department of Employment, Education and Training and the Department of Human Services and Health administer some 50 per cent of the SPPs and about 70 per cent of the funds paid. Details of current SPPs are at Appendix 7.

In some instances, the States are required to contribute to the activity under a variety of matching arrangements, but this does not apply to all SPPs. In many cases, the Commonwealth contributes less than the full cost of the program such as schools and hospital funding.

In Audit Report No. 21, the ANAO estimates that about $14 billion of the $16.68 billion SPPs to or through the States in 1993-94 were made either in advance or included an in-advance component.

Since SPPs account for about 15% of the Commonwealth’s total expenditure, best practice cash management is important. In particular, where an SPP has an in-advance component, if the payment is made too far in advance of need, there is an unnecessary cost to the Commonwealth, because the funds must be raised earlier than necessary with resultant additions to PDI. The recipient State could accumulate a cash balance or defer expenditure from its own sources. These States can therefore earn interest on invested funds, or save interest by deferring borrowings, at the Commonwealth’s expense.

Methodology

As with Statutory Authorities, attention was focussed on those areas considered to have the greatest implications for effective cash management, e.g., the areas of health, housing, welfare, education and road funding. The following SPPs were examined in detail:

Table 2. Specific Purpose Payments Examined in Detail by the Taskforce

Program	1995-96 Estimate ($m)
Medicare — Hospital and Health Services Agreements	4,700
Home and Community Care	424
Government Schools	1,397
Non-Government Schools	1,863
Higher Education	3,678
Commonwealth/State Housing Agreement	1,077
Local Government	1,165
Australian Land Transport Development Program	835
Building Better Cities Program*	140
TOTAL	15,279

* Classified as a GPP, although conditions similar to many SPPs apply

Background research involved examination of Commonwealth and State Budget Papers, annual reports and ANAO, JCPA and other relevant reports. These gave an indication of the level of funding provided to the States by way of SPPs for various program areas, the payment arrangements and whether some of the States were accumulating large cash balances.

Consultations were held with officials handling SPPs and cash management in Commonwealth Departments and the States, including those from the State Treasuries and selected State Departments in receipt of SPPs. The Task Force also held discussions with the final recipient institutions for some SPPs and several large corporations to identity best practice and the scope for benchmarking against the private sector. The schedule of visits is at Appendix 2.

Letters were written to each State and Territory Treasury asking what levels of unspent Commonwealth funds were held at the end of 1995-96. Based on the information which was available, the Task Force estimated that there might be considerable sums being held by the States (See Appendix 8). For example, published statistics from WA and Tasmania indicated that $116m and $11.5m respectively were held at the end of 1994-95 in respect of all SPPs, while Victoria and the Northern Territory indicated in letters to the Task Force that $58m and $13m were held at the end of 1994-95.

Categories of Specific Purpose Payments

The Task Force identified several categories of SPPs with varying implications from a cash management perspective.

RECIPIENT OPERATIONAL COSTS

In the case of SPPs for programs in areas such as recurrent funding to hospitals and government schools, the payment primarily supplements running costs and contributes less than 50% to total program expenditure. There would seem to be little scope for a State to accumulate a cash balance since the Commonwealth payments meet less than the full amount and the States must therefore contribute the balances required to meet ongoing expenditure. However, cash surpluses for schools were carried over at 30 June 1995 by some States, and this needs to be examined further in the context of program delivery. Overall, the Task Force was satisfied that there is little scope to achieve savings other than by, perhaps, changing the dates of payment to coincide with the Commonwealth’s monthly revenue peaks.

PROJECT-ORIENTED PAYMENTS

Many SPPs, or components of SPPs, are made for projects nominated by the States and approved by the Commonwealth. Examples include the Medicare Agreements for Hospitals and other Health Services and the Home and Community Care SPP. The Task Force found that funds received from the Commonwealth may lag behind expenditure by the States. Where this occurs, there is a retrospective element to the payment which, again, would indicate that the timing of payments is satisfactory from the Commonwealth’s viewpoint. However, evidence from some of the States indicated that much of the unspent balances of Commonwealth funds as at year-end related to these type of SPPs (see Appendix 8).

Administering Departments need to monitor aggregate expenditure on these type of SPPs very carefully, to ensure that the States or project sponsors are not getting a significant benefit, at the Commonwealth’s expense, by receiving monies well in advance of need.

CAPITAL EXPENDITURE

The lumpy nature of capital expenditure makes it more likely that payment would be made in advance of need, particularly where payments are made to the States on a pro-rata basis. Therefore, there may be scope for improved cash management practices for this category of payment, by making the payments to the States “just-in-time” to enable them to expend the cash on the due date.

With some payments, such as housing and roads, a proportion of the SPP is paid in advance, with the current cash management arrangements appearing to offer little or no scope to accumulate cash during the financial year. However, because the full amount of the appropriation is required to be disbursed to the States by year-end, the final payment often exceeds the cash requirements of the States, providing them with an unintended benefit.

PAYMENTS “THROUGH” THE STATES

These SPPs are passed on by the State to final recipients such as project sponsors, educational institutions, contractors, etc. The States may receive the payment in advance of disbursement, thereby accumulating a surplus balance of funds. Several States indicated that, where this is the case, they could ensure that they expended the Commonwealth’s payments within the relevant year by disbursing the funds to the final recipients before year-end. There was, of course, no certainty that the recipients needed the funds or would spend them within that year, so the proposed practice would not represent sound cash management.

To avoid this, the Agreements should specify that Commonwealth fundings should not be disbursed to final recipients by the States significantly in advance of need for final expenditure. Further, the States should accept that they will be responsible for the sound cash management of the Commonwealth’s monies and will ensure that the final recipients are not able to accumulate surplus cash balances. The States should, to the extent possible, exercise “just-in-time” cash management practices.

Issues Concerning Specific Purpose Payments

In examining SPPs, the Task Force considered the following key issues:

DO THE STATES PROVIDE A SCHEDULE OF FORECAST CASH REQUIREMENTS?

SPPs are generally paid in equal instalments or on the basis of an agreed schedule of forecast cash requirements made prior to the funding year. In many cases there appeared to be no monitoring or review of these schedules during the year to confirm their accuracy, with payments made according to their original forecast.

DO DRAW-DOWN SCHEDULES TAKE ACCOUNT OF FUNDS ON HAND?

In the case of several SPPs (e.g., Housing and Road Funding), cash on hand is taken into account in determining the required draw down of funds. However, it would appear that in the majority of cases, particularly where the SPP is paid in equal instalments, this is not done.

In the case of the Commonwealth/State Housing Agreement, it appears that some components of cash on hand are not offset against draw-downs (see next point).

SHOULD REVENUE OR REPAYMENTS RELATED TO COMMONWEALTH FUNDING BE TREATED AS SEPARATE CASH?

It appears that, in the case of Western Australia, mortgage repayments on funds provided under the Commonwealth/State Housing Agreement have accumulated in the State’s account, allowing the State to earn interest on a significant cash balance. It is not clear whether this situation has occurred in other States. Further, the accumulation of funds is not taken into account in determining future draw-downs. As these balances are Commonwealth funds, they should be offset against draw-downs.

SHOULD APPROPRIATIONS BE DISTRIBUTED IN FULL AT YEAR-END?

Many SPPs would appear to be administered on the assumption that appropriation must be distributed in full at the end of the funding year. This often leads to a rush of expenditure at the end of the year and/or an accumulation of unspent Commonwealth funds in the States’ accounts. Neither situation is efficient program management, particularly where hasty spending decisions need to be made. From a program management perspective, an administrative system for some SPPs based on an annual, multi-year rolling program or agreed level of forward commitments, which allowed some flexibility in the timing and cash-flow requirements of the projects approved, would appear preferable.

To avoid the disbursement of Commonwealth funds in advance of need, agreements and appropriations should make it clear that the annual allocations will not be disbursed during the current financial year if they are not required for making payments.

ARE MATCHING REQUIREMENTS MONITORED AND TAKEN INTO ACCOUNT IN THE DRAW-DOWN SCHEDULES?

For a number of SPPs, the States are required to match (e.g., 1:1 or 1:2, State: Commonwealth) the funds provided by the Commonwealth. There appears to be no formal monitoring of this requirement throughout the year. Rather, compliance with matching requirements is assumed when the draw-down schedule is determined. An implicit issue in this is whether State accounting identifies Commonwealth funds separately. In some States, as the Commonwealth’s funds are not separately identified, it is not possible to confirm that matching is occurring or if the State is holding accumulated Commonwealth funds. In the latter situation, the State is benefiting at the Commonwealth’s expense by earning interest on the cash balance or deferring utilisation of funds from its own sources.

IS IT POSSIBLE FOR CERTAIN SPPS TO BE AGGREGATED INTO ONE PAYMENT?

In several program areas a large number of separate SPPs are paid by the Commonwealth to a State, with each one generating a separate payment. From a cash management perspective, the aggregation of the separate payments into one, with each component clearly identified, would appear more efficient. Further, where all or a large number of SPPs across a range of program areas are paid into the State’s consolidated fund and not to individual State agencies, similar payment arrangements would also appear to be appropriate. The conditions attaching to each of the SPPs would be unaffected by this arrangement.

Recommendation 12

Recommendation 13

The Council of Australian Governments (COAG) should finalise a Protocol covering the cash management of SPPs to the States.

Key Findings

Only four of the States and Territories were able to provide any data concerning unspent balances of Commonwealth funds in relation to SPPs (see Appendix 8). In each case, the only available figures related to year end balances. In aggregate, the unspent balances as at 30 June 1995 were Western Australia $116m, Victoria $58m, Northern Territory $12.6m and Tasmania $11.5m, a total of $198m. If figures for NSW, South Australia, Queensland and ACT had been available it seems likely that the total year-end figure would be much higher.

In the course of its consultations with officers of the State and Territory

governments, the Task Force was conscious of a degree of suspicion by some of the officials. They felt that the Task Force was there to take away a benefit that the States and Territories currently enjoyed. One State Treasury went so far as to write to the Task Force indicating that any tightening up of the cash management arrangements by the Commonwealth could jeopardise the State’s ability to meet its financial objectives.

There is a need for the Commonwealth to emphasise in its discussions and negotiations with these governments regarding SPPs, perhaps in the COAG context, that the purpose of the SPPs is solely tomeet specified and agreed program objectives as set out in the Agreements. It is not to give disguised supplementation to State and Territory budgets. The Commonwealth’s objective should be to provide financial support to the achievement of program outcomes, via SPPs, in the most efficient way possible — not to provide a windfall gain to the States and Territories through loose cash management arrangements.

The major issue here is to match budgetary payments with cash flow needs (this is discussed in general terms in Audit Report No 6, 1993-94 of the Auditor General):

where an SPP is to further a Commonwealth objective it may be difficult to postulate that a State should put its money up-front and be reimbursed in arrears, but otherwise the issue is whether, how far ahead and on what criteria advance payments might be made;

cash flow budgets and acquittal procedures should generally be put in place;

a general “protocol” covering SPPs is being considered in the COAG context;

the principle that fiduciary efficiency should not unnecessarily hinder the government’s specific policy or program objectives, and any other relevant policy issues;

how best practice, comparative and benchmarking principles might be considered in a cash management context.

Lack of Transparency

There is a lack of transparency in accounting for the cash flows from the Commonwealth to the final recipient in many SPPs, which makes it difficult to analyse whether efficient cash management practices are being observed. It is difficult to determine whether the States are receiving a disproportionate benefit from the arrangements, but the documentary evidence that is available demonstrates that a considerable amount of surplus cash has been accumulated by some of the States, which is at a cost to the Commonwealth.

There is a need to improve the level of transparency of these payments. The States should be accountable for Commonwealth monies throughout the year. Agreements should reflect this. It may not be possible or desirable to impose the same draw-down conditions on the States as are recommended for Statutory Authorities because of the need to negotiate mutually agreed conditions with the States, but the same principles apply. Improved transparency would enable Commonwealth Departments to assess their needs at each draw-down. The States should provide information periodically and at year end concerning receipts, expenditure and unspent cash balances in relation to each of the SPPs. In order to do this, the States and Territories may find it necessary to improve their accounting for SPPs, but this should not be too difficult to achieve.

Recommendation 14

Payments made in Advance or Retrospectively

In Audit Report No 21, the ANAO estimates that about $14 billion of the $16.68 billion SPPs to or through the States in 1993-94 were made either in advance or included an in-advance component. The ANAO did not draw any specific conclusions. In many cases, it is appropriate to pay in advance; sometimes it is not clear whether payments are made in advance of expenditure by the States. However, it is where payments are made in advance that the cash management problem is likely to occur and the Task Force identified a number of such delinquent cases.

Delays in Approval

A problem raised in several States is the result of the annual funding cycle for SPPs. Delays in project approval frequently occur, leading to a rush of expenditure at the end of the financial year. This was particularly noticeable in the roads and housing SPPs (see Appendix 9).

It seems to be general practice — and feature of agreements — that the full cash allocation for a SPP must be spent within the financial year. Any delay in the program approval process shortens the time in which the States believe they have to spend the allocations, as do delays in implementing approved projects.

The result is that cash draw-downs peak at the end of the financial year, suggesting that either there is a rush to spend the cash, or the State accumulates unspent Commonwealth funds. Neither is good practice, in terms of either program outcomes or Commonwealth cash management. To overcome these problems, there is a need to introduce a form of rolling program so that projects or activities can be submitted and approved in advance and held in the “pipeline”, to be brought forward in an orderly fashion as funding permits. Under the proposed arrangements for approving future expenditure, it should be possible to carry forward outstanding obligations, to be met in future years. Cash should not be drawn down in advance of need.

There should be smoother draw-down schedules, without a peak at the end of the financial year as a result of trying to spend an allocation in full within the year and a consequent accumulation of unspent and uncommitted Commonwealth funds.

This issue has been addressed earlier in this report.

Recommendation 15

Recommendation 16

Recommendation 17

Funding should not be provided to a State until it is required; payments should be based on a full acquittal of previous cash receipts and forecast cash requirements.

Consolidation or Broad-banding of Payments

The arrangements for administering SPPs are very complex and administratively burdensome because there are so many SPPs and each is managed and paid separately. This complexity also impacts on the transparency and cash management of the payments.

There is a legitimate requirement for the States and Territories to hold a working cash balance in respect of most of those SPPs that are paid in advance of expenditure. It would be difficult, if not impossible, to run the SPPs on a “zero” cash balance.

There may be scope for rationalisation of these cash balances by mutual consent, consolidating the periodic payments, under the SPPs, into a single periodic payment to each State or Territory, to be administered centrally. This would streamline the payment procedure and enable easy monitoring of the aggregate cash balance held in each State or Territory.

This arrangement would not supplant any existing control arrangements in place under the terms of Agreements. It would, however, change the arrangements for delivery of payments to the States/Territories. Rather than a large number of separate payments being made on a weekly, fortnightly or monthly basis, to a number of different recipients within each constituency, administering Commonwealth agencies would advise the central paying agency of the payments to be made each period. These would then be aggregated into a single electronic payment to be made weekly to each of the Treasuries, supported by a facsimile message indicating the breakdown by individual SPP. It would then be the responsibility of each Treasury to allocate the payment to the administering State/Territory agency.

Payments that are currently made weekly, fortnightly, monthly etc., would still be paid on that cyclical basis. They would simply be included in the weekly payment that was made on the date that they were due. The weekly payment proposal does not imply that all payments would be made weekly — only that an aggregate payment would be made each week of all payments falling due in that particular week. Nor would other responsibilities of administering agencies change as a result of consolidating the payments.

The advantage of this arrangement would be that all SPPs made to a particular State/Territory would operate on a single cash working balance, which could be held at a lower level than that aggregation of all working balances currently held by SPPs. It should be made possible for the Commonwealth to monitor the aggregate level of this working balance on a week-by-week basis, to ensure that it is kept within reasonable limits.

This would be consistent with current arrangements in many constituencies where all SPPs are paid into their Consolidated Fund — a single bank account — pending expenditure. Expenditure by the States/Territories on activities supported by SPPs would be facilitated by this arrangement as it would mean that, within limits set by the annual allocations by the Commonwealth for each SPP, there would be greater flexibility to the States in utilising the Commonwealth’s cash. Most States/Territories seemed to be supportive of this suggestion as they saw scope for rationalising the payment process and potential benefits in greater flexibility. However, they would want to see the details of any proposed change before reaching agreement. There would be a clear need to develop appropriate accounting and payment arrangements in consultation with the States/Territories.

If it proves to be impracticable to aggregate across portfolios, then it may be possible to aggregate all payments made within individual portfolios so as to at least obtain some of the benefits of rationalisation.

This could occur through aggregating payments by portfolio area or through a single periodic payment from the Commonwealth to the state government. The option to vary existing arrangements along these lines would need to be considered in detail by the Federal government and the individual states to determine its feasibility.

The States consider the certainty of the timing of the payments to be important and the idea of aggregation could be of some assistance.

In some areas there is not an exact correlation between the State Departments and the Federal portfolio. But this should not be an insurmountable barrier to more flexible arrangements.

Recommendation 18

All SPPs “to” the States might be aggregated into a single periodic payment to each state government, should that be mutually agreed. Alternatively, SPPs for each Portfolio should be aggregated, so that efficiencies in cash management and administration are achieved.

Forward Planning

A smoother pattern of activity and expenditure would result from the Commonwealth agreeing to levels of forward commitment that the States can enter into both in the current and future years, in the expectation that funding will be provided to meet those commitments as they fall due. The objective would be to give the States a firm basis for planning future activity but allowing some flexibility so that the States are not locked into future plans. It would assist in this process if States were able to have a level of approved activity or projects “in the pipeline” so that they are not put in a situation of having to await approvals at the start of each year and then rush to expend all available funds before the end of the year.

27.2 The Agreements covering SPPs could include arrangements for providing the States with cash when required. If the States are able to plan ahead for cash requirements in future years, Departments will not need to issue funds at the end of the year to exhaust the appropriations. In these circumstances, the Commonwealth should not pay out the full level of the appropriation by the end of the financial year unless it is clear that the States will require the full allocation of cash in that year (see recommendation 5).

Receipts and Loan Repayments

28.1 In one instance a State reported a significant carryover of cash for a major SPP over a number of years. Enquiries with the administering Commonwealth department indicated that the carry-over related to loan repayments, which can be recycled by the State as future expenditure under the program.

28.2 It is clearly necessary that any receipts from program generated activity, or loan repayments resulting from program outlays, must be comprehended by the Agreements covering SPPs. Matters that need to be included in the Agreements would include:

who owns the receipts or repayments;
the issue of offsetting against future cash draw-downs; and
relevant accounting and monitoring arrangements.

28.3 There would seem to be a case for generally considering that such receipts or repayments belong to the Commonwealth and should therefore be offset against future cash requirements.

Recommendation 19

Matching Arrangements

There is a variety of matching arrangements in relation to SPPs, some more formal than others. For example, in the case of Medicare Hospital Funding, the Commonwealth provides a level of funding determined by the Agreement and the states provide the balance. A similar arrangement exists in relation to government schools. While contributions by both levels of government are clearly envisaged, there is no formal matching arrangement. With other SPPs the individual contributions of each level of government are more explicit.

In drawing up Agreements, Commonwealth departments need to specifically address the matching issue. There is a danger that the States could draw down and spend Commonwealth funds earlier than their own contributions thereby adding to the Commonwealth’s costs, compared to more equal cash flows from each party to the Agreement.

The Task Force was unable to establish whether the Commonwealth’s interests were currently being protected in this way because the States were generally unable to account for the relative timing of expenditure of the Commonwealth’s, and their own, monies in relation to activities supported by SPPs.

Recommendation 20

Where relevant, the Agreements covering SPPs should specifically address the matching contributions by the States and Territories including the timing and monitoring of those contributions.

Timing of Payments for New Policy Initiatives

The Task Force became aware of a situation where, as a result of a policy initiative by the Commonwealth, payments had been made to the States well in advance of their need for, or capacity to spend, the funds. This gave the States a windfall benefit at the expense of the Commonwealth.

In announcing new policy initiatives, the Commonwealth government should address the question of whether it is intended to give the states a benefit or only to provide the cash to support the initiative when it is required for expenditure (see recommendation 9).

Conclusion

The Task Force considered that there is scope to significantly improve the cash management of Specific Purpose Payments. It noted the potential for substantial savings to the Federal Budget by providing monies on a strict cash flow basis which would require the states to utilise their cash balances before they receive any further Budget support. It also noted the need to provide a certain and flexible basis for planning future expenditure, which would not involve drawing monies from the Budget to cover commitments.

The Task Force noted that its recommendations would not have any effect on the viability of the recipients, nor would it have an impact on program outcomes. They would, however, reduce the cost of those outcomes and would result in substantial savings to the Budget. It needs to be recognised that the proposed changes should be implemented with a degree of sensitivity that would ensure, for the States, predictability of administration and formal recognition of sound cash management principles in SPP agreements.

Implementation

In view of the wide range of activities covered by this report, it is recommended that a Task Force be appointed to oversight the implementation of the recommendations. It will be necessary to consult further with the Authorities, States and Territories and administering Commonwealth agencies to ensure that appropriate measures and systems are implemented. This will be a substantial task, but one that is necessary to ensure that sound cash management practices underpin the Commonwealth’s financial support for these activities. In the light of the very substantial potential savings that have been identified in this review, it is recommended that adequate resources be allocated to meet this challenge.

Recommendation 21

Chapter 4: Cash Management Functions of the Commonwealth

Introduction

Currently the main cash management functions of the Commonwealth are divided between the two economic departments, the Treasury and the Department of Finance. Payments to Statutory Authorities and for Specific Purpose Payments are made through the relevant Ministers via appropriations by the Parliament; in practice many of the details are handled by the relevant portfolio departments.

A key conceptual issue for the Task Force was whether the cash management issue is narrowly viewed — as a question of when to pay the relevant Authority or State — or, alternatively, in the wider context of the providing government services in the most efficient and cost effective manner possible. The wider context includes consideration of forecasting cash needs, the raising and banking of funds, minimising cash requirements through optimal timing and matching, where possible, of receipts and outlays. It also involves the management of temporary cash surpluses that may be held by the government from time to time. Because these tasks are the key functions of Corporate Treasurers in the private sector, the Task Force considered that it was appropriate to discuss these matters with relevant officials from major Australian corporations.

The Treasury Function in Major Corporations

The Task Force held discussions with senior finance officials from BHP and Woolworths to ascertain how cash is managed in a corporate environment where a large parent company has a number of subsidiaries. The Task Force considered that this may be analogous to the Commonwealth’s relationship with its Statutory Authorities.

In the companies examined, all entities within the group came under centralised financial and banking control headed by a Corporate Treasurer. While the operations of the group were segmented, they operated, in effect, on a centralised pool of cash. This ensured that the group’s financial assets were managed to the best advantage of the shareholders by eliminating idle cash and making sure that all cash was working for the group. The interests of the subsidiary companies were clearly secondary to those of the group as a whole. BHP indicated that it had a charter to ensure that there was no idle cash in the company. Efficient cash management was a basic responsibility of centralised financial control.

The Reserve Bank advised that there are important policy considerations that make the Commonwealth’s relations with the Reserve Bank different from the normal relations between a commercial customer and its banker. For this reason, some commercial practices do not translate readily into this arena; in particular there are no significant savings to be had for the Commonwealth from reducing its average level of cash balances at the central bank. While lower cash balances might reduce the level of public debt interest there would also be a reduction in the Reserve Bank’s earnings of approximately the same amount. This stems from the fact that the Bank responds to a fall in cash balances by selling an equal amount of Treasury notes to the public, thus reducing its own revenues. Since the Commonwealth owns the central bank, it receives a correspondingly lower dividend. Corporations and state governments, on the other hand, do not own the banks they deal with and therefore their cash management practices can have a big influence on profit.

This is not to suggest that the Commonwealth should be indifferent to how large its cash balances become or to the consistent control of all cash resources available to it. For this reason, the Task Force considered that, in most respects, centralised financial control was an appropriate model for the Commonwealth. It considered that a broad perspective to cash management issues across the Commonwealth should be taken by a centralised office. It also addressed the issue of whether economies could be achieved if the financial resources of all Commonwealth bodies, including Statutory Authorities, were brought within the Commonwealth’s aggregate cash balances, ensuring that the Reserve Bank counted them as part of the “overdraft group of accounts” which represent the funds available to the Commonwealth at any time. In this way, the full financial resources of the “group” would be available to the Commonwealth as a centralised pool.

The advantage of including these balances within the “overdraft group” would be that they would come within the “group set-off” arrangement under which the Commonwealth’s aggregate balances in all bank accounts with the Reserve Bank determine the Commonwealth’s net position with the Bank. Therefore, an overdraft is only considered to occur if that aggregate balance goes into overdraft. Including the Authorities’ balances within the “group set-off’ would increase the Commonwealth’s aggregate balance significantly. This would mean that it would not have to borrow as much from the money market to meet its day-to-day requirements and would avoid going into overdraft with the Reserve Bank.

The Task Force has been advised that the Minister for Finance has the power to make banking arrangements under section 20 of the Audit Act 1901, but only in respect of “public monies” as defined in the Act. As the monies of Statutory Authorities are not “public monies”, the government has no power to give directions as to their banking arrangements. The constitutional concept of the treasury of the Commonwealth does not encompass these monies.

The only feasible way for the Commonwealth to include these monies in its bank accounts would be as loans from the Authorities, in which case they would be credited to the Loan Fund. The same result could be achieved by requiring Authorities to invest their surplus cash in Commonwealth securities, but it is not clear that this would be more advantageous to the Commonwealth than raising the funds through the money market.

Accordingly, the Task Force makes no recommendation on this matter. However, it recommends that the level of funds made available to Authorities by the Commonwealth, and hence their cash balances, be kept to a minimum consistent with their needs. In some cases this would mean that certain categories of payments not be made available to Authorities in future, e.g., monies for payment to final recipients or clients.

Treasury’s Role in Commonwealth Cash Management

The Commonwealth Treasury provided written advice to the Task Force in which it described its role in the forecasting of cash needs and raising of short term funding requirements as follows.

The timing of the Commonwealth’s taxation receipts rarely matches the daily disbursement pattern of its outlays and debt repayments. To cover any shortfall that arises from such mismatches, the Commonwealth is required to borrow short-term funds from the money market. Treasury’s primary role in cash management is to forecast and monitor the Commonwealth’s cash balances held in accounts with the Reserve Bank of Australia and, on the basis of cash projections, make decisions as to the Commonwealth’s short-term borrowing requirements. (Appendix 11 provides some information on this activity in the period 1994-95).

The objective of cash balance management is to match receipts from Commonwealth debt issue as closely as possible to within-month and within-year swings in cash needs.

The challenge is to minimise debt issuance to cover cash needs and hence minimise Public Debt Interest, while at the same time avoiding unanticipated shortfalls in cash balances which would necessitate use of the Commonwealth’s overdraft facility at the RBA, which carries a higher interest rate than the Commonwealth pays for its borrowings.

The daily cash forecasts also form an important input into decisions regarding the annual Budget financing strategy.

Short-term funding requirements are met through the issue of Treasury Notes. These are short-term discount securities, with maturities of 5, 13 and 26 weeks, which are issued weekly through a tender process. The interest expense incurred through issuing Treasury Notes arises from the notes being issued at a discount – that is, the cash value received for the Notes is less than their face value. For example, $100 million of 13 week Treasury Notes issued at a yield of 7.5 per cent (which is close to current yields) realises a cash value of $98.16 million. This is equivalent to the Commonwealth incurring an interest expense over the course of the 13 weeks of $1.84 million on the $100 million borrowed. Over the past few months of 1995, the average size of weekly Treasury Note tenders has been around $1,000 million, with an average interest expense per tender in excess of $20 million.

In 1994-95, a total of $56.7 billion (face value) of Treasury Notes were issued over the course of the year, which will result in a total interest expense of $1.15 billion once all the Notes have matured.

Decisions on the size and composition of the weekly Note tender are usually taken each Tuesday, with the tender conducted on Wednesday. Proceeds from the tender become available to the Commonwealth on the Thursday. (The “tender week” is therefore Thursday through Wednesday). In taking this weekly tender decision, paramount importance is placed on the expected daily pattern of outlays and receipts over the coming tender week, as well as in the weeks immediately following. Accordingly, a significant amount of time and resources are devoted to obtaining reliable daily estimates of outlays and receipts.

Outlays forecasts are derived in two steps. First, annual program estimates for Commonwealth outlays are obtained from the Budget documents. These aggregate program estimates are then broken down according to an expected quarterly, monthly, fortnightly or weekly draw-down pattern. Schedules detailing the timing of the draw-down of individual budgets are provided directly to Treasury (as requested) by the relevant Commonwealth Departments and agencies. Monthly revenue forecasts are obtained from Treasury’s Fiscal Policy Division in consultation with the Australian Tax Office. Historical banking and collections patterns are used to forecast the within-month pattern of tax receipts. Both outlays and revenue forecasts are evaluated and updated of an ongoing basis, and differences with actual outcomes reconciled on a daily basis. The timing and volume of debt repayments are known.

Through the course of the year, there will invariably be cyclical patterns and lumpiness affecting the receipts of taxes, etc., and the disbursements of outlays, etc. Moreover, this cyclical pattern will vary from year to year, reflecting not just periodic changes to the timing of established outlay or revenue heads, but also the impact on the cash position of, say, lumpy, one-off asset sales or Commonwealth government Security maturities. Accepting this, and recognising the need to issue debt to match debt proceeds to cash needs as accurately as possible, it becomes of paramount importance that mismatches between the timing of receipts and outlays be predictable.

While cashflow predictability is a cornerstone of cost effective cash management, better matching of the timing of outlays and receipts can also reduce the need for the Commonwealth to borrow funds in the short term. (Better matching reduces the gaps between revenues and outlays that drive the short term borrowing requirements). Treasury has taken a range of initiatives in recent years to assist better matching and will continue to identify possible opportunities for better matching. Realistically, however and as noted above, there will remain adistinct cyclical pattern to the timing of individual revenue collections and outlays.

The greatest scope for improving matching lies in shifting the timing of outlays disbursements to coincide with established revenue peaks.

The timing of revenues exhibits a reasonably stable historical pattern, with PAYE collections being the main source of monthly revenue. (These are usually received around the 7^th-8^th and 21^st-22^nd of each month). Sales tax receipts are also collected around the 21^st of each month. Company tax collections are also significant, but exhibit large variations between months, with billions of dollars being received on some payment dates and only a few million dollars on other payment dates. Typically, company tax payments have been made around the middle and end of each month, however changes to company tax payments currently being implemented will move company tax collections to the beginning of each month. By far the largest payments are expected to be made in the final month of each quarter. The timing of receipts from asset sales is usually reasonably predictable as it is geared to a sales schedule established on a case-by-case basis.

Chart 2: Current Pattern of Daily Revenue Receipts and Outlays Disbursements (Through a typical month).

The above chart, depicting the current pattern of daily revenue receipts and outlays disbursements, reveals the extent of cash-flow mismatches through a typical month. It further shows that significant advantages may arise, from a cash management perspective, if outlays disbursements can be shifted, where possible, to coincide either with the revenue peaks or the days immediately following the peaks. Thus, in future (once the company tax changes are fully in place), it may be most advantageous to disburse monthly outlays, wherever possible, on or just following the 7^th and 21^st of each month and quarterly outlays at the commencement of the final month of the quarter.

Should the Commonwealth Establish a Treasury Corporation?

Several state governments have now established Treasury Corporations to manage their aggregate loan raisings and investments. This raises the obvious question of whether the Commonwealth should establish an independent body with similar powers. However, given that the Commonwealth is almost always a net borrower and only has temporary cash surpluses which it could consider investing — and it would usually be more rational to utilise these surpluses to reduce debt — the main function of a Commonwealth Treasury corporation would be as a Central Borrowing Authority. It could, however, also have responsibility for the oversight of cash management generally — a function which, in the private sector, is usually the role of the Corporate Treasurer.

Informal views on this question were provided to the Task Force by several participants in the domestic financial markets, including a State Treasury Corporation and the Reserve Bank. Arguments put forward in support of, and against, the formation of a Commonwealth Central Borrowing Authority are summarised in Appendix 13.

The Reserve Bank saw serious difficulties with the notion of an independent Central Borrowing Authority for the Commonwealth, due to the danger that such a body could be seen to be taking a strategic position in the capital markets based on inside knowledge of economic policy. As such it could become a market leader, creating volatility and instability in the markets. Current arrangements for short term debt management avoid this situation by undertaking regular, weekly Treasury Note tenders which provide minimal or no information to the market based on inside knowledge.

The Task Force found the Reserve Bank’s views to be persuasive.

Corporate Treasury Functions in the Commonwealth

Currently, functions which are the responsibility of a Corporate Treasurer in the private sector, or the Treasury Corporation of a state government, are fragmented among a number of Commonwealth agencies. For example, some of these responsibilities are administered as follows:

Forecasting Cash Requirements	Department of the Treasury
Borrowing	Department of the Treasury
Banking	All agencies under delegation of the Minister for Finance
Timing of Major Payments	All agencies
Timing of Revenue Collection	Most Agencies
Cash Balances	Commonwealth is a ‘passive’ investor, receiving interest on deposits with RBA.

All of these functions are inter-related and have a common focus in sound cash management; specifically that they should be conducted so as to minimise costs to the Commonwealth.

Under present arrangements, there is no central focus on these activities, although the Department of Finance has a Cash Management and Banking Section which oversights and provides advice on these matters, and the Treasury has a Debt Management Branch responsible for borrowing activities. There is no single Senior Executive Officer in the Commonwealth who has across-the-board responsibility for monitoring and managing these activities.

The Task Force considered that this lack of central focus has had a seriously detrimental impact on the Commonwealth. This is illustrated by many of the findings of the Task Force in relation to payments to Statutory Authorities and the States. As this report demonstrates, there are opportunities for the Commonwealth to save hundreds of millions of dollars through improved cash management.

The Task Force considered the possibility of the Commonwealth establishing an independent Treasury Corporation along the lines of the New South Wales model, however in the light of the Reserve Bank’s reservations, noted above, it did not favour the adoption of this model. Instead, it considered that a centralised Office of Cash Management should be created as a part of the Executive Government, e.g., within either the Treasury or Finance portfolio. It would bring together the specialised functions and skills, related to cash management, of both portfolios. It would incorporate the functions of a debt management office as one of its main functions — in this regard it would be similar to the debt management offices of New Zealand, Ireland and Canada.

It seems to be illogical and counter-productive to continue the fragmented approach to cash management that currently exists. The establishment of an Office of Cash Management would focus greater emphasis and policy attention by the government on optimising cash management opportunities. It would identify these opportunities and manage their implementation across the Public Service. The senior management of the Office would have high-level financial skills and knowledge of treasury operations in both the public and private sector. They would develop broad, expert knowledge of the Commonwealth’s major financial operations. While many of the operational activities that would come under the purview of the Office would, of necessity, continue to be decentralised and undertaken by the relevant portfolio agencies — e.g., revenue collection, banking and payment for goods and services — the Office of Cash Management would have the responsibility of administering and monitoring the policy framework within which these and other related activities take place.

The ongoing implementation of measures recommended in this report in relation to Authorities and SPPs is, of course, one of the responsibilities with which the Office of Cash Management would be charged. (Note, however that Recommendation 21 envisages a Task Force being established to undertake the immediate implementation as there is a high degree of urgency associated with some of these issues). By bringing a centralised focus to the issues raised in the report, the Office would provide expert advice to the disparate portfolio agencies that administer the SPPs and payments to Authorities. One of its roles would be to determine best practice and benchmarking of cash management practices.

Another key responsibility would be to develop and advise on banking practice throughout the Commonwealth. While the Department of Finance has a broad responsibility for administering the banking provisions of the Audit Act 1901 (and replacement legislation currently before the Parliament) there are many complex aspects to banking that must be arranged or negotiated with the Reserve Bank, commercial banks, Commonwealth agencies and others. Examples that are covered in this report are the banking arrangements for funds to be paid to final recipients by some agencies such as the HIC, Austrade and the Australia Council. It is necessary to approach these issues with broad expert, knowledge to ensure that best practices and value for money are achieved.

To optimise the opportunity to develop a centralised pool of expertise and knowledge of the major issues related to cash management, it would also be necessary to bring responsibility for cash forecasting, borrowing and debt management within the purview of the Cash Management Office. While the present arrangements for undertaking these activities would not change — e.g., the weekly Treasury Note tender — they would be administered with a sharper focus on cash management. The Reserve Bank expressed concerns about these activities being undertaken by an independent body such as a Treasury Corporation, but what is proposed here is an arrangement that would still be within the day-to-day control of the Executive Government with very close links to the Departments of Finance and the Treasury, as well as other portfolio agencies. Indeed, it may be located within Finance or Treasury.

The Task Force has no particular preference concerning the location of the Cash Management Office within the Commonwealth bureaucracy. However it noted the need for the Office to be headed by a very senior officer with substantial professional expertise in this area who would be able to bring a business-like approach to the activities and exercise authority across the Commonwealth Public Service. It may be appropriate that the Office be headed by a Statutory Office holder who would exercise the functions of “Corporate Treasurer of the Commonwealth” and report directly to both the Treasurer and the Minister for Finance. This would give the Office holder statutory powers and would provide him or her with the necessary authority to intervene in the Commonwealth’s financial activities wherever appropriate. Without such authority, the Office holder and the Office would lack the “teeth” necessary to achieve better cash management across the Commonwealth.

The Statutory powers of such an Office holder would clearly prescribe the powers of the Office in relation to cash management and set limits on any intervention in domestic markets, thus overcoming the concerns of the Reserve Bank regarding the possibility of becoming a market leader.

It would be important that the Office be able to recruit staff from both the private and public sector, so as to have an appropriate mix of commercial and public sector background and skills. Appropriate salary packages for the Head of the Office and other senior staff should be determined by the Remuneration Tribunal to ensure that suitable persons will be attracted from within and outside the Public Service.

Recommendation 22

The government give consideration to the establishment of an Office of Cash Management in the light of the issues raised in this Report.

Appendix 1 ABBREVIATIONS

ABC Australian Broadcasting Commission
ANAO Australian National Audit Office
ANSTO Australian Nuclear Sciente and Technology Organisation
ASTIC Aboriginal and Torres Strait Islander Commission
ATC Australian Tourist Office
ATO Australian Tax Office
CBA Central Borrowing Authority
COAG Council of Australian Governments
CPA Commonwealth Public Account
CRF Consolidated Revenue Fund
CSIRO Commonwealth Scientific and Instrial Research Organisation
DEET Department of Employment, Education and Training
DHSH Department of Human Services and Health
DMO Debt Management Office
DoF Department of Finance
ESRA Employment Services Regulatory Authority
FCBA Federal Central Borrowing Authority
GBE Government Business Enterprise
GPP General Purpose Payment
HIC Health Insurance Commission
JCPA Joint Committee on Public Accounts (of the Federal Parliament)
NZDMO New Zealand Debt Management Office
PAYE Pay As You Earn (taxation)
PDI Public Debt Interest
RBA Reserve Bank of Australia
SBS Special Broadcasting Service
SMA Statutory Marketing Authority
SPP Special Purpose Payment
TCorp Treasury Corporation

Appendix 2 LIST of CONSULTATIONS and VISITS

[Not Shown]

Appendix 3 SUMMARY of STATUTORY AUTHORITIES’ CASH BALANCES

[Not Shown]

Appendix 4 SUMMARY and COMMENTS on STATUTORY AUTHORITIES EXAMINED

[Not Shown]

Appendix 5 SUGGESTED PRO-FORMA for DRAW DOWNS by AUTHORITIES

[Not Shown]

Appendix 6 THE LEGAL POSITION CONCERNING APPROPRIATIONS

[Not Shown]

Appendix 7 SPECIFIC PURPOSE PAYMENTS by the COMMONWEALTH, 1991-92 to 1995-96

[Not Shown]

Appendix 8 THE SPECIFIC PURPOSE PAYMENT SITUATION in EACH STATE

[Not Shown]

Appendix 9 SUMMARY and COMMENTS on MAJOR SPECIFIC PURPOSE PAYMENTS

[Not Shown]

Appendix 10 COMMONWEALTH/STATE PROGRAM: BUILDING BETTER CITIES

[Not Shown]

Appendix 11 SUGGESTED PRO-FORMA for SPECIFIC PURPOSE PAYMENT DRAW DOWNS

[Not Shown]

Appendix 12 AGGREGATION of ACCOUNT BALANCES

[Not Shown]

Appendix 13 IS THERE a CASE for a FEDERAL BORROWING AUTHORITY?

[Not Shown]

Postscript (2015)

Kim Beazley, Minister for Finance in the Keating government rang me in late 1994 to ask that I Chair a committee of bureaucrats and lead the investigations and the writing of this report. Picking me for a wide-ranging assignment on cash management was not an obvious choice. We got on, “Kimbo” and I, but “why me?” I remember asking him.

Kim thought me curious and diligent enough to be capable of doing the necessary probing. Besides, because I did not come from an “obvious” background, such as from Treasury, this might induce some of the bureaucrats to under-estimate the team I was about to lead, to co-operate more than they might otherwise, etc. Plus, as an outsider, I was a cleanskin with no known agenda other than truth-finding.

I was on the Plimsoll line in terms of my spluttering competence to do the job. But I was aided by a top-notch group of senior public servants. A few of them were clearly nearing retirement. But that seemed to liberate them to think aloud, pursue enquires come what may, and write for me drafts of whatever they thought appropriate. My appetite was whetted on all things finance and how best to forensically read balance sheets and finance documents, thereby to prise secrets from what was meant to be tactfully hidden from immediate gaze. (In 1997, to deepen my understanding, I enrolled in and completed the Finance Management Program at Stanford Business School. But that was after this report was completed on cash management.)

Phil Bowen, an Assistant Secretary of Finance, whom I met at the start of my role and a few times thereafter, including soon before I submitted my final report, assured me that I would have the full support of the Department and I only had to ask if I needed more resources, either in personnel or in other respects.

In those days both Treasury and Finance operated from the one building. You entered Finance on one side and Treasury from the opposite side of a large complex, not far from the National Library of Australia.

The secretariat consisted of bureaucrats who led me through the process. We had to write letters to heads of departments, Commonwealth statutory authorities and government business enterprises (some were excluded from the scope of our enquiry, however, such as Qantas, Telecom, Australian airlines, etc.)

And because of Special Purpose Payments (SPPs) to the state governments, we had to write to the state governments and seek meetings once information was obtained.

I heard some stories of outrageous behaviour in the past, decisions to spend unallocated funds in the last months of an annual grant, etc. The seasoned team I was with had sniffer-dog instinct and knowledge of what to look for. And, with some agencies, an awareness of what would not be easily forthcoming.

All of the federal departments and Commonwealth authorities co-operated in providing information. We provided some pro-forma suggestions as to the material we wanted. Some agencies were slower than others, a few difficult, but through cajoling and occasional stiff letters of protest, complemented with Jon Bowen’s manoeuvring among fellow senior bureaucrats, as well as the minister sometimes asking his colleagues to instruct subordinates to release needed information, we got the job done.

To be completely effective, after an interim report in December 1995, we asked for a slight extension of time. After we submitted the report in just over a month a new government was elected (John Howard having been elected prime minister on 2 March 1996) and a new Finance Minister, John Fahey.

The exception to the smooth operation of what we were charged with was with the state governments. There was a vast contrast between them.

Mike Egan, since March 1995 the NSW state treasurer, told me that they were too busy to engage with us on what he described as a wasteful bureaucratic fact-finding exercise that was unnecessary. We protested that information on specific programmes was scant, a lot of the reporting on SPPs was grouped together making discernment of achievement and leftover expenditure hard to detect. No doubt, this was intentional.

With Victoria, it was a different story, with complete openness and transparency.

When I pointed to the contrast between NSW and Victoria, Egan belligerently said to me that this just showed how bloated the Victorian government was that they would allocate resources to the exercise, how the Grants Commission discriminated against NSW, and that the “feds” never rewarded lean efficiency. His remarks I interpreted as a performance by Egan to shield the state from the prying eyes of the Commonwealth. He thought no good could come from a thorough investigation.

So we reported on 31 January 1996.

On 10 April 1997 The Hon. John Fahey released a media release making observations on the report’s implementation:

Minister for Finance

THE HON JOHN FAHEY, MP

MEDIA RELEASE

12/97

Easson Report Implementation

The Commonwealth Government has further responded to the ‘Easson’ Task Force Report on various cash management issues. Undertaken by the former Government and headed by private consultant Mr Michael Easson, the Task Force reported in January 1996 on the cash management arrangements for Commonwealth payments to Statutory Authorities and Specific Purpose Payments (SPPs) to the States.

In April 1996, I announced the Commonwealth’s adoption of the Report’s recommendations in relation to the cash balances held by Statutory Authorities; and the Commonwealth is now moving to implement its recommendations in relation to SPPs.

Adoption of the major recommendations relating to payments to Statutory Authorities resulted in one-off outlay savings over the 1995-96 and 1996-97 financial years in excess of $400 million and an ongoing annual public debt interest saving of around $20 million.

These common sense measures realigned the timing of payments to a number of authorities to better match the actual cash needs of these authorities. The aim was to remove instances of payments well in advance of cash needs and hence avoid an unnecessary interest cost to the Commonwealth budget, which is ultimately a burden on taxpayers. In addition the measures reduced excessive surplus cash balances held by authorities. The previous Government had allowed excess cash balances to build up over a number of years.

Consistent with this action, similar cash management principles – as recommended by the Easson Task Force – will be applied to SPPs made to the States where those payments are made in advance of need. SPPs cover a wide variety of programs in areas such as health and welfare, roads, housing and education. These sensible cash management principles are in line with those already applied throughout the private sector and by the State Governments themselves.

The Commonwealth has recognised that different circumstances apply in respect of the various SPPs and intends to progressively implement these cash management principles, where they are not already applied, on a case-by-case basis. This can be achieved when new agreements are entered into or as existing arrangements are renewed.

Improved cash management practices will reduce the cost of Commonwealth borrowings resulting from payments made well in advance of actual cash flow need. It is inappropriate for statutory authorities or States to derive unintended benefits from past inefficient cash management practices on the Commonwealths part.

Canberra 10 April 1997

There was some media reporting on the report and its implementation, but not much. The subject matter was arcane and I was obliged not to brief the media without express permission of the government.

I never did any follow up work, but I learnt so much. One thing discovered was about the people I had spent over a year working with. They were likeable, hard-working, thorough and cared that every dollar allocated from government coffers was spent wisely. I felt better for Australia that such people exist and the ethos they represented was part of the culture in Finance.

I am not certain how much of the once off $400m in savings was actually made. But finding out these things often takes an investigation.

Old habits die hard.