The state government has been forced to factor more than $5 billion of rail payments in to future budgets after the NSW auditor-general criticised its "unsophisticated" and "poor" accounting.
Auditor-general Margaret Crawford on Wednesday released a much-anticipated report into the state's 2020-2021 finances.
In it, she revealed the process had been "significantly delayed" after disagreements about the state's accounting and that she had been "further frustrated" by information being withheld and not shared on a timely basis.
The complicated disagreement has been in the spotlight since mid-last year and revolves around a $2.4 billion payment made to the Transport Asset Holding Entity (TAHE).
TAHE was set up by the NSW government in July 2020 to manage the state's rail assets and infrastructure.
It was also designed to help the government achieve a budget surplus because any funding going to the corporation could be defined as an investment instead of expenditure and therefore not impact the budget's bottom line.
The entity was required to deliver a certain rate of return.
In her report, the auditor-general said evidence provided to her by December last year indicated the rate of return would be insufficient to claim the $2.4 billion payment as an investment, which would undermine the state's total deficit.
"Between 9 July and 1 December 2021, NSW Treasury submitted three versions of estimated returns with respect to the [state government's] investment in TAHE.
"All of these models were unsophisticated, containing errors, omissions, and/or poor logic. Most importantly, none were able to demonstrate that a realistic rate of return would be derived from the [state government's] investment in TAHE."
After the auditor-general raised concerns about "deficiencies" in the accounting, the government proposed to take several measures to alleviate those misgivings.
These include increasing the fees paid by Sydney Trains and NSW Trains to TAHE by $5.2 billion between 2022 and 2031.
The auditor-general raised concerns that the financial impact on the state budget would extend beyond the term of the current government.
"Uncertainty exists because future governments may also need to commit the necessary funding in successive forward estimates to enable the operators to pay the access and licence fees," the report said.
The NSW Treasurer Matt Kean welcomed the release of the report.
"It comes on the back of many months of hard work and collaboration between NSW Treasury and the NSW Audit Office, working their way through the many complex accounting issues," he said.
"I always welcome recommendations on how we can do things better and look forward to reviewing the report."
He said the Auditor-General's report showed that the government's accounts were "a true and accurate reflection" of the financial position of the state.
Opposition Leader Chris Minns said train fares would have to rise to cover the increased fees payable to TAHE.
"At the end of the day, that $5 billion will be passed on to the consumers and passengers on public transport right throughout NSW … $5 billion can't be invented out of the clear blue sky."
He described the report's criticism of the government's accounting as "scathing".
"You've got a situation where the New South Wales Premier tried to pull the wool over the eyes of the people of NSW, setting up an entity that they knew was trying to dud the books and obscure the true state of the NSW finances.
"Now we're in this ridiculous position where the NSW government has to tip in $5 billion into the entity so the Auditor-General would tick off on the finances."
The saga has led to numerous recommendations by the auditor-general, including that the NSW Treasury significantly improve its processes to ensure all key information is identified and shared.
It also recommended that a policy be established to determine minimum expected rate of returns on its equity payments.
The end-of-financial-year result for the state government was a deficit of $7.1 billion, lower than the forecast deficit of $16 billion.
Annual expenditure growth of 6.9 per cent was above the long-term growth target of 5.6 per cent — mainly due to grants and subsidies paid from COVID-19 stimulus funds received from the Commonwealth.
