The New South Wales government could be forced to spend another $4.1bn over the next decade to address “significant uncertainties” surrounding a controversial $40bn rail corporation it set up to inflate the state’s budget bottom line.
The auditor general, Margaret Crawford, has given the long-awaited signoff on the state’s finances after a three-month delay caused by concerns surrounding the establishment of the Transport Asset Holding Entity, or Tahe, which holds $40bn in NSW rail assets.
Crawford in 2021 delayed the release of the state’s audited finances as a result of “significant accounting issues” with Tahe – a move that forced the state to inject $1.1bn into the transport system to meet the auditor’s concerns.
While she has now signed off on the state’s finances, the auditor has flagged that significant uncertainties remain surrounding the financial assumptions underpinning Tahe.
In comments attached to the state’s finances, Crawford noted that predictions outlined by NSW Treasury remained “highly dependent” on revenue which “may not eventuate”, and revealed taxpayers would need to contribute another $4.1bn over the next decade to satisfy accounting standards associated with Tahe.
The NSW government established Tahe in 2015 as a way of transferring the state’s $40bn rail assets out of the hands of the transport department and into a state-owned corporation.
The decision had significant benefits for the government’s bottom line. Because Tahe could lease the state’s rail assets back to service operators such as Sydney Trains, the government could classify funding to the corporation as “equity injections” which did not have a negative impact on the budget.
But under accounting rules, Tahe was required to show both that the entity remained entirely independent of the government and that it would turn a profit. In November, the auditor said “significant accounting issues” remained with the body, and delayed signing off on the state’s finances.
“We are not in a position to sign the audit,” she said at the time. “The matters are very complex and there are a lot of discussions going on around these matters.”
The auditor’s concerns meant that in December the NSW government was forced to provide $1.1bn in additional funding to the state’s transport department to pay for a huge increase in fees paid to Tahe for access to the state’s rail assets.
The increase was confirmed in a heads of agreement deal signed on 18 December 2021 between Tahe and its “customers”, the state’s rail networks.
“The heads of agreement reflects Tahe’s intention to negotiate higher access and licence fees to deliver on shareholder’s expectation of a return of 2.5% and includes proposed indicative future access and licence fees,” the auditor noted in her report.
In the report, the auditor general revealed the $1.1bn in extra funding only extended to the 2024-25 financial year and that another $4.1bn would be required over the life of the 10-year agreement.
That additional funding had been “broadly communicated” to the government’s expenditure review committee “but is yet to be provided for in government budget figures”, she wrote.
“As described in the 2020-21 half year review, for the period to 2024-25 an additional $1.1bn has been allocated to Transport for NSW to be provided to rail operators consistent with the updated shareholder expectations for Tahe,” she said.
“While the half year review does not embed approved funding beyond 2024-25, the heads of agreement attaches an indicative financial profile which indicates access and licence fees increase by an additional $4.1 billion over the following six years.”
She also wrote that a “significant portion” of the revenue required to meet accounting standards was outside the 10-year contact “and there is a risk that Tahe will not be able to re-contract for access and licence fees at a level that is consistent with current projections”.
“There is also a risk that funding for Tahe’s key customers will not be sufficient to fund payment of access and licence fees at a level that is consistent with current projections,” Crawford wrote.
On Sunday, the NSW treasurer, Matt Kean, trumpeted the release of the “unqualified audit opinion” as evidence the government had provided “a true and accurate reflection of the financial position of the state”.
“What this shows is that, despite claims to the contrary, the NSW finances are now validated and verified as accurate by the NSW auditor general based on her unqualified opinion,” Kean said.
But Labor’s shadow treasurer, Daniel Mookhey, said the auditor general’s comments showed taxpayers would be forced to “plunge even further into debt to stop Tahe from unravelling the state’s finances”.
Labor claims the cost to the budget is likely to be nearer to $7bn over the life of the agreement with the state’s rail operators based on projected access fees included in the finances.
“Tahe was always a budget con. But now it’s become a full-blown budget disaster,” Mookhey said.
“Every dollar spent on Tahe is a dollar denied to the tens of thousands of small businesses fighting to survive the Omicron lockdown. Those businesses deserve the extra $4.1bn Mr Perrottet is paying Tahe – especially since Tahe is nothing more than an accounting sham.”