14 Apr 2016

Are you properly managing funding payments?

by Alexandra Wedutenko, Natasha Smith

Most Agencies have sound overarching frameworks to oversee the delivery of grant funded projects, but they must be vigilant in adequately administering those funding agreements.

With the next Federal Budget imminent, it is timely for Agencies to take a look back at the past year's funding programs to assess whether they achieved the relevant program outcomes and whether there are any lessons learned in ensuring proper grant administration.

In order to maximise the benefits from grant funding (benefits such as innovative ideas, new collaborative partnerships and value for money outcomes), Agencies need to ensure that their grant administration processes are undertaken efficiently, effectively and so as to achieve Australian Government policy outcomes.

Helpfully, a recent cross-agency performance audit of the delivery and evaluation of grant programs by the Australian National Audit Office (ANAO) highlights good practice Agencies should consider when administering their funding agreements.

ANAO Report No. 25 2015-16 focused on the benefit of balancing its performance audit coverage across the lifecycle of grants administration activities. This approach reflects the all-encompassing scope of grants administration set out in the Commonwealth Grants Rules and Guidelines: the objectives of grants administration is to "promote the proper use and management of public resources through collaboration with the non-government sector to achieve government policy outcomes."

Timeframes and delays when designing and managing funding agreements

Most Agencies are likely to have sound overarching frameworks in place in their funding agreements to oversee the delivery of grant funded projects. However, Report No. 25 highlights the need for Agencies to be vigilant in adequately administering those funding agreements once they are in place. Report No. 25 noted that common issues resulting from poor funding agreement administration include:

  • delays in obtaining progress and other reports from funded organisations;
  • delays in the delivery of the projects being funded; and
  • project funds being paid significantly in advance of need.

In response to these findings, the ANAO recommends that Agencies:

"Provide realistic advice to Ministers on program delivery timeframes when new grant programs are being designed and pay greater attention to adopting realistic project delivery timeframes and actively manage delays."

The ANAO did not make a recommendation to improve the administration of funding agreement reporting arrangements, as there is already a range of guidance material, including the Commonwealth Grants Rules and Guidelines. Rather, the ANAO emphasised that Agencies should be more realistic in their advice regarding the timeframes a funded program will require in order to be delivered successfully. Adopting realistic program timeframes from the outset will assist to minimise the instances of delay and the need to allocate Agency and funded organisation resources to dealing with those delays.

However, Agencies should note that if there are delays during a project, they should actively manage those delays (such as through a funding agreement variation process) and better monitor project progress. Implicitly the ANAO also supports setting realistic project timeframes:

"For project-based grants, Agencies should clearly link payments to the cash flow required in order for the project to progress to make proper (efficient, effective, economical and ethical) use of taxpayer's funds."

Payment of grant funds ‒ problems with milestones

The ANAO's Better Practice Guide for grants administration indicates that value for money and sound risk management are promoted by Agencies by grant funds becoming payable only upon the demonstrated completion of work.

That is, payment is linked to a milestone defined in the funding agreement. Such milestones should be at a point in the project where the funded organisation provides a benefit to the Agency.

In deciding appropriate milestones Agencies should balance a range of matters including the funded organisations cash-flow situation, Commonwealth risk and other costs to the Commonwealth.

However, despite the recommendations in the Better Practice Guide, the ANAO indicated in Report No.25 that funding was being paid in advance of project needs, including large portion of upfront fund payments. While the ANAO did not oppose such payments being made, in Report No. 25 it noted that, for up-front payments to be made, there should be a demonstrated benefit to the Agency, to support such a payment regime, balanced against the risks of such a regime.

The ANAO also found other payment anomalies, namely some Agencies were making funds payments inconsistent with best practice by:

  • providing payments of funds subsequent to the contracted first instalment where they should not have done so;
  • providing payments of funds by the nominated programme completion date notwithstanding delivery delays;
  • providing payments of "progress payments" where payment was not needed to progress the project; and
  • making significant payments immediately prior to the end of a financial year, even in circumstances where preceding milestones had not been met or were overdue, or where the Agency held inadequate evidence to support that a milestone had been met.

The last mentioned of these activities is not uncommon when Agencies seek to get money out the door before the end of the financial year, but it must be better managed.

Payment of grant funds ‒ suggested solutions

The ANAO found that the effect of such payment regimes is that funded organisations can end up holding large amounts of unexpended grant funding.

Accordingly, prior to making any payments under a funding agreement, Agencies should carefully consider the payment framework within the funding agreement and whether the funded organisation has provided the sufficient evidence of meeting the relevant payment milestone

The ANAO also noted that not all Agencies were diligent in evaluating the program to test whether funding objectives were met.

Thus, like procurements, funding agreements need to be managed and cannot be set and forgotten. Agencies need to manage payment of funds to ensure payments are linked to milestones rather than merely paying out funds to meet Agency convenience.

When advance payments could be reasonable

That said, the ANAO did accepted that recipient cash flow needs can be considered by Agencies in determining payments, and that if a true net benefit could be ascertained, advance payments were not unreasonable.

There are times, for example, when Agencies may be requested to provide a funded organisation with an advanced payment to assist it with its cash flow in the form of start-up funds to commence a project. In this case, Agencies may choose to manage the risk of providing an advancement of funds by requiring a bank guarantee as a form of security. Typically, the costs associated with obtaining and maintain these bank guarantees come out of the grant funds.

Report No. 25 noted that where an Agency requires a bank guarantee:

  • the form of security should be provided by the funded organisation prior to the payment of the funds;
  • the form of security obtained should provide at least the same protection for the Agency as the amount of funds paid ‒ including the equivalent GST component included in the funds payments; and
  • the Agency should properly record the receipt and discharge of the security.

Who keeps the interest on advance payments of grant funds?

The ANAO identified some Agencies that were not properly accounting for interest earned on advanced sums by funded organisations. Interestingly, it reported that while Agencies appear to be willing to accept the costs of establishing and maintaining bank guarantees in order to provide advance payments as a proper use of grant funds (shown as part of the funded organisation's acquittal of the funds), some did not then require funded organisations to account for the benefit of receiving the advance payments ‒ that is, the interest earned on those funds. Essentially, these Agencies pay for funded organisations to receive two benefits (the advance payment and then the interest on that payment) without having to account for those benefits.

Agencies should require funded organisations to account for any interest earned on grant funds. Where interest is earned on such funds, Agencies should require that the interest earned be acquitted by the funded organisation, just as the costs of a bank guarantee would be acquitted as part of the funded activities. Where such interest is reported to Agencies, Agencies should determine whether that interest should be returned to the Agency, or, where appropriate, added to the funded amount, in order to comply with its obligations under the Public Governance, Performance and Accountability Act 2013 with respect to dealing with taxpayers' moneys.

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