It began as the centrepiece of a newly-elected government agenda, but Royalties for Regions (RfR) ultimately helped create the fiscal conditions for its downfall.

This is how the process unfolded, according to the final report of the Special Inquiry into Government Programs and Projects, completed by former Under Treasurer John Langoulant.

1. The Grand Bargain

RfR was conceived in the 2008 election campaign and midwifed into policy by former Premier Colin Barnett and Nationals leader Brendon Grylls when they struck a deal to form government.

Colin Barnett's Liberals formed a coalition with the Nationals after the 2008 election. ( AAP: Tony McDonough )

The policy meant 25 per cent of mining royalties were diverted from general revenue straight into the regions.

Crucially, there was no spending cap on the program, despite RfR funds skyrocketing in lockstep with commodity prices — from $500 million to over $1 billion.

RfR formed the crux of the deal between Mr Barnett's Liberals and Mr Grylls' Nationals. ( ABC News )

2. Shortcut to a 'shadow Treasury'

Ideas for RfR projects came from all over — government agencies, local councils and other entities — with "hundreds if not thousands" of proposals approved over nine years.

But instead of going to Treasury, RfR applicants went straight to the Department of Regional Development to develop a business case for their projects.

Billions of dollars in mining royalties have been spent under RfR. ( AAP: Joel Carrett )

In this way, the department acted as a "shadow" Treasury, almost wholly separate from the real one, with its own project pipeline.

Treasury's only chance to evaluate RfR projects came when the proposals reached Cabinet approval stage.

In some cases, no business case was submitted to Cabinet at all, because the proposed project sat within another program that had already been approved.

3. Cabinet underprepared, 'burdened with detail'

The Special Inquiry found Cabinet was "less prepared than it might have been" for RfR, because there was no "coordinated strategic plan" for the program.

A map released by the State Government showing projects funded by RfR. ( Supplied: Government of WA )

In fact, no such plan would exist until 2016 — eight years after the policy was designed.

"To spend a billion dollars a year on recurrent expenditure without a plan [from day one] … is impossible," Mr Langoulant said.

"If you have a plan, if you have a structured approach, then it's a far better base to work from."

4. Only one in 10 projects had solid business case

Under pressure to spend "buckets of money" allocated to RfR each year, due process went out the window, starting with the quality of project business cases.

Nine out of 50 RfR projects examined by the inquiry had no business case, while others were poorly defined, selected and targeted.

"These business cases flowed into an overwhelmed Cabinet agenda which had to consider a vast array of ideas," the report said.

Among the projects highlighted was the expansion of the Ord River Irrigation Scheme. ( Tyne McConnon )

5. Funds kept off-limits despite budget problems

RfR spending is now capped at $1 billion a year, but when the policy was designed, it was capped at 25 per cent of royalty revenue.

The fact that funds were hypothecated — unable to be used for other purposes, even in the case of a deterioration in the budget — meant the Government had "significantly reduced" fiscal flexibility.

That created opportunity costs, because the money could not be spent elsewhere on more deserving projects.

6. No 'reset' when iron ore slumped

The price of iron ore slid backwards in 2013-14 but the government did not react. ( Supplied: BHP Billiton )

In Mr Langoulant's words, the Government's 25 per cent threshold "effectively forced it" to develop projects to spend all the money each year.

When iron ore prices headed south in 2013-14, the Government had an opportunity to reset the 25 per cent threshold for RfR revenue. It chose not to.

7. Loss of AAA credit rating

A lack of budgetary flexibility, due to RfR funds being quarantined from general revenue, meant that when royalties slumped and the state's finances rapidly deteriorated, the Government had little room to move.

"Credit ratings agencies have often cited the lack of fiscal flexibility as a reason for downgrading the state's credit rating," the report said.

'A lot of room to improve'

Despite a litany of failures, the inquiry found RfR should not be abolished.

Instead, it has recommended major surgery for the administration, approval and evaluation of projects.

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