How financial engineering turned into a train wreck for NSW government
By Adele Ferguson https://www.smh.com.au/by/adele-ferguson-hve4m and Matt O'Sullivan https://www.smh.com.au/by/matt-o'sullivan-hvehy
November 20, 2021
With thousands converging on a shiny new station in Sydney’s north-west, Rodd Staples beamed as he greeted Premier Gladys Berejiklian for the opening of the city’s first fully automated rail line.
It was May 2019 and Staples, the Transport for NSW secretary, had delivered on the Premier’s promise to build the north-west rail line, on time and on budget. It was the first stage of a multi-billion dollar metro network that would straddle Sydney – a guaranteed vote winner.
Better days: Transport for NSW secretary, Rodd Staples, centre, with Transport Minister Andrew Constance, left, and Premier Gladys Berejiklian at the opening of Sydney’s first metro rail line in May 2019.
Better days: Transport for NSW secretary, Rodd Staples, centre, with Transport Minister Andrew Constance, left, and Premier Gladys Berejiklian at the opening of Sydney’s first metro rail line in May 2019.Credit:Edwina Pickles
Behind the scenes, all was not what it seemed. A $40 billion rail entity, set up in 2015 to cement the government’s reputation as a good economic manager, was about to miss a key deadline and set in motion a chain of events that would tarnish its public image.
Over the next 18 months, relationships would be torched and reputations damaged as two department heads slugged it out over the future of the Transport Asset Holding Entity (TAHE).
With billions of dollars at stake, the body count mounted and by November last year, Staples, considered one of the state’s most respected and popular bureaucrats, was sacked without reason.
TAHE is becoming a massive headache for the government. The state’s new Treasurer, Matt Kean, has been left to deal with the mess, while his boss, Premier Dominic Perrottet, is trying desperately to distance himself from his role in the attempt by Treasury to keep TAHE alive despite multiple warnings about its safety and budgetary risks.
It is a smell that won’t easily go away and one that shadow treasurer Daniel Mookhey won’t let them forget. “It shows how desperate the government is to prop up its TAHE budget trick,” he says.
NSW Auditor-General Margaret Crawford has two investigations under way into TAHE and has delayed signing off the state’s audited accounts due to accounting irregularities in TAHE including its valuation. The inquiry has heard that TAHE had made a “monster” $20 billion writedown on its transport assets.
Former Transport secretary Rodd Staples at the inquiry into the controversial rail corporation this week.
Former Transport secretary Rodd Staples at the inquiry into the controversial rail corporation this week.Credit:Edwina Pickles
Crawford is expected to hand down her verdict on the audited accounts for NSW in the next week or so, and her decision could prove extremely uncomfortable for the government.
If she refuses to give the state’s accounts a clean bill of health, the controversy will escalate and the drums will beat loudly for the head of Treasury Secretary Mike Pratt, whose role was laid bare in bombshell allegations, internal emails and letters produced in a parliamentary inquiry into TAHE.
A year after he was terminated, Staples was summoned to appear on Monday before the inquiry, and help shed light on how its reclassification from a government body to a commercial entity enabled the government to create an alleged accounting gimmick or, as former auditor-general Tony Harris described it, a vehicle of deception.
The parliamentary inquiry was sparked by a /Herald/ investigation https://www.smh.com.au/national/nsw/the-cover-up-of-a-financial-mirage-that-has-inflated-the-nsw-budget-and-may-put-rail-safety-at-risk-20210528-p57vy0.html that revealed how the government attempted to use consultants to cover up how it artificially inflated the state’s budgets by tens of billions of dollars after it shifted the rail network’s costs onto a corporation that still hasn’t been able to properly operate six years after it was launched.
Seven people were killed and dozens injured when a Tangara train derailed near Waterfall station, south of Sydney, in January 2003.
The cover-up of a ‘financial mirage’ that has inflated the NSW
budget and may put rail safety at risk
For an inquiry delving into the entrails of the accounting treatment of TAHE, it has packed a punch. Allegations of bullying, humiliation, “playing the man”, and pressure to change reports by top Treasury officials have been on full display in a series of jaw-dropping hearings.
The most shocking was Staples’s acknowledgement that his pushback against TAHE stemmed from his longer-term concerns about the risks to passenger safety. It was an issue he felt so strongly about that he told Berejiklian he was considering resigning over it, before he was beaten to the punch and sacked on November 6 last year.
On Monday, Staples was asked point-blank why he thought he was fired. He could not say with certainty why. He confirmed it was done verbally by the state’s top bureaucrat, Tim Reardon, a man he had considered an ally, on the day he returned from sick leave and just six weeks after receiving a glowing review from the Premier herself.
A cache of confidential emails, sensitive documents and confidential discussions at the highest levels of government, the public service and consulting giant KPMG, suggest his dismissal had everything to do with TAHE and his push to get it dismantled; something the government could ill afford both politically and financially.
As a sitting director on the board of TAHE, Staples was cognisant of what can go wrong when an entity doesn’t have clear reporting lines and its purpose is to make a commercial return. “My concerns are more about the medium to long term,” he told the inquiry. “You’ll be faced with the conflict of, ‘well, how much do I invest in the rail asset, and maybe a new signalling system, versus investing in a property development that would generate a higher return’?”
His implication was that over time the temptation for the board would be to choose investments that offer the best returns, instead of maintenance or customer service improvements.
The brutal reality is that under the accounting rules, TAHE has to show it is truly independent of the government and will turn a profit. If it fails to do so, it will end up costing the budget billions of dollars a year. It was there that the tension lay between Treasury and Transport.
“The key driver for TAHE was to make sure they could present the budget in a fiscally different way,” Staples said.
With an engineering background, Staples was a rail man at heart, joining the transport agency shortly after the Waterfall train disaster. He understood how fragmentation of decision-making had contributed to both Waterfall and the Glenbrook rail tragedy, which between them claimed the lives of 14 people. The new TAHE structure weighed heavily on him as head of Transport and the only director on the new entity’s board with rail experience.
“I was very disappointed that we didn’t have a broader cross-section of skills on that board, particularly someone other than myself with rail expertise or safety expertise … given the nature and role and functions of that entity,” he recalled. “It was actually Treasury that led the process for determining the board membership to Cabinet.”
Seven people were killed and dozens were injured when a Tangara train derailed near Waterfall station, south of Sydney, in 2003.
Seven people were killed and dozens were injured when a Tangara train derailed near Waterfall station, south of Sydney, in 2003.Credit:Andrew Meares
His pushback on TAHE reached fever pitch in the middle of last year when KPMG partner Brendan Lyon was compiling a detailed report into the entity and began warning of serious safety and financial risks.
Months earlier, Staples had received a report from PwC https://www.smh.com.au/national/nsw/harebrained-idea-secret-plan-to-commercialise-state-s-public-transport-roads-20210818-p58joa.html that flagged risks and recommended unwinding TAHE, unless the government could corporatise the entire public and roads network. He had already been receiving information from senior officials at Transport – including the agency’s lead on TAHE, Peter Perdikos – that the rail entity had serious issues that needed to be resolved after repeated missed deadlines.
Amid growing alarm, Staples commissioned Lyon, the highly regarded former CEO of Infrastructure Partnerships Australia, long-term Liberal party member and then a KPMG partner, to complete an independent report into the rail entity. Lyon’s report estimated that the state budget would be more than $10 billion worse off than Treasury had claimed because of TAHE.
Bombshell testimony: Former KPMG partner Brendan Lyon at the inquiry last week.
Bombshell testimony: Former KPMG partner Brendan Lyon at the inquiry last week.Credit:Kate Geraghty
What happened next wasn’t pretty. Lyon outlined in forensic detail – through testimony and email correspondence – to the inquiry last week how he alleges he was bullied, humiliated and targeted by a hit squad that included the state’s Treasury Secretary, Mike Pratt when he refused to change the financial results of the rail corporation.
It was high stakes. Treasury estimated that “unwinding” TAHE would cost the state budget https://www.smh.com.au/national/nsw/premier-unwilling-to-accept-2-5b-budget-blow-from-scrapping-rail-corporation-20211116-p599ah.html $2.5 billion in 2019-2020 and almost $5 billion over four years; something Berejiklian and Perrottet, then the Treasurer, baulked at.
Perrottet spent the second half of last year under fire over the icare workers compensation scandal https://www.smh.com.au/business/consumer-affairs/they-treated-me-like-a-leper-how-worker-comp-claims-were-rejected-20200727-p55fs9.html, which exposed systemic financial mismanagement and widespread underpayment of injured and dying workers. With leadership ambitions, he could ill afford another scandal.
Berejiklian was riding high in the polls as she guided the state through the pandemic. But the Independent Commission Against Corruption’s investigation into whether she breached public trust or encouraged corrupt conduct during her relationship with disgraced former MP Daryl Maguire was a ticking time bomb which exploded last month https://www.smh.com.au/politics/nsw/they-knew-exactly-what-they-were-doing-the-moment-that-brought-down-a-premier-20211001-p58whj.html, ending her 18-year parliamentary career.
The TAHE scandal has now turned the spotlight on another festering sore: the role of large consultancy firms which are paid a fortune to give advice to governments. As the inquiry’s chairman, Greens MP David Shoebridge, put it: “The inquiry will give us a moment when we get to look under the bonnet and see what really went on while the government worked with carefully picked consultants to cook up a scheme.”
Unbeknown to Staples, Treasury engaged another partner at KPMG, Heather Watson, for different advice based on different assumptions that would contradict Lyon’s work and support Treasury.
KPMG saw nothing wrong with having two partners write separate reports for two government departments that reached conflicting conclusions on the same entity. “It’s embarrassing for KPMG because they didn’t have the moral strength to say ‘no’ to one or the other,” Lyon told the inquiry.
Other auditing giants referred to Treasury as a “KPMG shop”, Lyon said, citing the close relationships between senior Treasury officials and partners embedded in the agency. He revealed that James Hunter, a senior partner at KPMG, was “very close” to Pratt and wasconsidered a rainmaker https://www.smh.com.au/national/nsw/inquiry-hears-of-budget-cover-up-claims-of-bullying-over-report-20211108-p5972t.html in terms of Treasury contracts.
Under months of pressure and being sidelined inside KPMG, Lyon ended up quitting “The Firm” in June.
At the inquiry his subpoenaed testimony gave some context to his departure.
“When I asked him [Mike Pratt] directly to stop bullying me … he called for me to be sacked and also asked that KPMG prohibit me from doing any further work for the NSW government to which I was advised the firm’s CEO Andrew Yates agreed,” he said under parliamentary privilege.
In other emails, Lyon told Pratt: “Mike – I’m sick of being bullied by you. Grow up or tell the truth.” Minutes later, Pratt fired off an email to senior partners at KPMG and Lyon, saying: “You obviously have a partner who refuses to take counsel and is out of control. I expect you to take action.”
Pratt has rejected the bullying claim as a “serious allegation, without any merit or basis”, while he has also told staff that Treasury officials named during the inquiry acted with the “utmost professionalism and integrity”.
KPMG partners refuted suggestions that the firm had taken a “hear no evil, see no evil, say no evil” approach and that it stood by its “independent” and “objective” advice to both departments. It said there was no conflict in providing the advice to the two clients. “At all times, we have acted in an appropriate and ethical manner in providing independent advice to our clients on these matters. ”
Perrottet defended the Treasury secretary in Parliament last week, saying that he had “never known him to be anything but courteous, professional and genuinely kind to everyone he deals with”. The Premier also refuted as “unfounded” suggestions that TAHE compromised safety.
It was a similar approach that Perrottet took last year when he stood up in Parliament days after the icare workers compensation scandal erupted and declared that icare was doing a “superb” job.
Premier Dominic Perrottet.
Premier ‘unwilling to accept’ $2.5b budget blow from scrapping
Yet, the testimony of Staples and Lyon will reverberate for years of the lengths some inside the government – and KPMG – were prepared to go. Lyon and Staples became collateral damage and KPMG was found with its pants down. “They tried to back two horses. Or put another way, they put two crabs in a cup and waited to see which one would emerge alive,” Lyon told the inquiry.
“One hundred per cent KPMG has set up the NSW government to fail because it has promised things that it cannot deliver. The stupidity in my view of what KPMG did was get into the middle of what is effectively a family fight between two departments.”
The battle between Treasury and Transport might be over, with Staples, Lyon and others gone and KPMG winning more contracts, but the battle to save the Premier’s increasingly tattered credentials as an economic manager is just beginning.
The next twist in this tale is the Auditor-General’s decision on whether TAHE is a “vehicle of deception” as her predecessor has found; or is a profitable, safe and real corporation as Treasury claims, using millions of dollars and well paid consulting reports as back up.
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Adele Ferguson https://www.smh.com.au/by/adele-ferguson-hve4m is a Gold Walkley Award winning investigative journalist. She reports and comments on companies, markets and the economy.Connect via Twitter https://twitter.com/@adele_ferguson?lang=en or email mailto:firstname.lastname@example.org.
Matt O'Sullivan https://www.smh.com.au/by/matt-o'sullivan-hvehy is City Editor at The Sydney Morning Herald.Connect via Twitter https://twitter.com/Mattonews?lang=en or email mailto:email@example.com.