‘Harebrained idea’: Secret plan to commercialise state’s public transport, roads

The NSW government seriously considered commercialising the entire public transport and road networks to artificially inflate the state budget by hiding billions of dollars in costs.

A highly confidential report for the government by consultancy giant PwC reveals that corporatising the state’s transport networks was deemed the best option to plug a multi-billion dollar budget black hole from a shell corporation it had created.

About $40 billion of rail assets including trains are owned by the government’s Transport Asset Holding Entity.Credit: James Alcock

The state’s ferries, trains, light rail, buses and roads, worth tens of billions of dollars, would be placed into a commercial corporation with a board and management independent of the government.

The leaked PwC report, obtained by the Herald, reveals that commercialising the entire transport network would not adversely impact customers but could create tensions in the organisation between safety and turning a profit.

The report sheds new light on the growing concerns aired privately at the highest levels of government about the Transport Asset Holding Entity, which culminated in the sacking without reason of Transport for NSW boss Rodd Staples last November.

A Herald investigation revealed in June that TAHE was set up in 2015 to enable the government to hide the costs of the state’s rail system. It prompted former NSW Auditor-General Tony Harris to describe the entity as a financial mirage that had bolstered the government’s operating result by more than $30 billion over the past six years “through an accounting gimmick”.

Labor finance spokesman Daniel Mookhey said the PwC report showed how desperate the government was to “prop up its TAHE budget trick”.

“Turning Transport for NSW into a for-profit corporation is a harebrained idea. In truth, TAHE is a budget bomb. If the government tries to operate it, the public will fork out billions. But if they unwind it, the budget will be smashed,” he said.

“The government cooked up this idea, so it could keep hiding the true cost of operating the rail system from the budget.”

TAHE was set up in 2015 to bolster the budget by taking costs off the government’s balance sheet into a shell corporation. However, changes to Australian accounting standards in 2018 put TAHE at risk.

Under the new rules, TAHE had to show it was truly independent of the government and turning profits. If it failed to do this, it would cost the budget $2.4 billion a year, according to the PwC report.

To avoid the budget hit, PwC considered five business models for TAHE and Transport and Treasury settled on the corporatisation of the entire network as the “preferred option”.

But it warned that corporatising the entire transport network faced a series of “high risk” roadblocks, including upheaval of the transport agency’s heavily unionised workforce, potential safety risks and political opposition.

The report, completed in December 2019, said if these “showstoppers” could not be overcome, unwinding TAHE was “expected to be the likely best alternative”.

NSW shadow treasurer Daniel Mookhey says TAHE is a “budget bomb”.Credit: Kate Geraghty

It warned that dismantling TAHE would still cost the state budget more than $8 billion over four years.

The confidential PwC report shows NSW Treasury officials went as far as requesting special exemptions from the country’s accounting standards board to prop up the budget.

“Treasury has explored alternative avenues to resolve the impact of [standards] ... [including] a discussion with the [accounting standards board] to have this standard not apply to government-to-government transactions,” it states.

But a Treasury spokesperson rejected this, saying it had “never sought special exemptions from the Australian Accounting Standards Board on TAHE”.

The PwC report also warned that turning Transport for NSW into a state-owned corporation risked “driving conflicts” between the objectives of making money and safety of the public transport network.

“Past incidents in the UK demonstrated the impact of prioritising commercial outcomes over safety,” it said.

A whistleblower close to the discussions, who sought anonymity, said the PwC findings resulted in Treasury and Transport for NSW agreeing in December 2019 that TAHE was “dead, buried and cremated” because the risks were too great.

But two months later, NSW Treasury commissioned an arm of KPMG to look for alternatives.

“Treasury went doctor shopping and came back with KPMG, ending the pre-Christmas agreement that it was time to tell the truth on TAHE,” the whistleblower said.

Despite misgivings within Transport for NSW, TAHE officially became a state-owned corporation in July last year, taking control of $40 billion of the state’s rail assets. After missing critical deadlines in its transition to a fully-fledged commercial entity, it is still not financially viable and is yet to appoint a permanent CEO.

The Herald can confirm the NSW Auditor-General is yet to get certain documents it has requested, including the PwC report. It made TAHE an area of focus and recently decided it will conduct a performance audit into the entity.

Under questioning at a budget estimates hearing on Wednesday, Department of Premier and Cabinet secretary Tim Reardon said there was “certainly a contest of views” on establishing TAHE, when asked whether the heads of Transport for NSW and Treasury were in dispute about it last March.

A spokesman for Treasurer Dominic Perrottet said he had not received advice from NSW Treasury recommending that TAHE be unwound.

“The NSW government remains committed to TAHE as a fiscally sustainable state-owned corporation to deliver better service outcomes at a lower cost, while also having a net contribution to the state budget,” the spokesman said.

The spokesman said NSW Treasury did not engage PwC to prepare a report on TAHE, and had not presented such a report to the Treasurer.

Treasury said the advice from PwC was commissioned by Transport for NSW and was “not material” to the work it had undertaken. “NSW Treasury has never advised, agreed to, or recommended to government to unwind TAHE,” it said.

Transport for NSW said both it and Treasury considered a range of advice in the development and implementation of TAHE.

A spokesperson for Transport Minister Andrew Constance said the government regularly considered a range of advice before implementing new policies, and that TAHE would have “no impact on safety, operations or maintenance activities”.

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