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Parliamentary Standing Committee on Public Works - 24/08/2015 - Fit-out of leased premises for the Australian Taxation Office at 121-125 Henry Street, Penrith, New South Wales

DI LUZIO, Mr Domenico (Dom), General Manager, Federal Government Clients, DTZ

FAIRFAX, Miss Karen Louise, Senior Associate, PTID

McLAUGHLIN, Mr Kieran, Director, Project Management and Consultancy, DTZ

STEWART, Mr David, Senior Quantity Surveyor, Donald Cant Watts Corke

UNTERSTEINER, Mr Justin Tony, Assistant Commissioner, Australian Taxation Office

Committee met at 10:00

CHAIR ( Senator Smith ): I declare open this public hearing of the Parliamentary Standing Committee on Public Works into the fit-out of existing leased premises for the Australian Taxation Office at 121-125 Henry Street in Penrith in New South Wales. Although the committee does not require you to give evidence under oath, I should advise you that these hearings are formal proceedings of parliament and, consequently, they warrant the same respect as proceedings of the parliament itself. Giving false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. Mr Untersteiner, would you care to make some brief introductory remarks before we proceed to questions?

Mr Untersteiner : Yes, thank you, Senator. I would like to start by thanking the committee for the hearing into the ATO submission in relation to the proposed fit-out of 121-125 Henry Street, Penrith, today. I do acknowledge the important role this committee plays in the review and transparency of public works. If I speak specifically about the Penrith refurbishment project, which I will, I think it is important to provide some further context which allows this committee to understand how this project fits into the broader ATO program and why it is important for us to retain a presence in the Penrith region. To do this I will provide some information about what is happening in the ATO right now.

The ATO is currently reinventing itself. Our reinvention program is aimed at improving the client experience, making it easier for people to comply with their obligations so that we can increase willing participation in the tax and super systems. This year the ATO released our blueprint for change. To quote the Commissioner of Taxation, Chris Jordan:

Our blueprint for reinvention reflects what the community wants from the ATO - the kind of experience they want to have when they participate in the tax and super systems.

I recently participated in a workshop—two weeks ago—which included a number of individual taxpayers. Steve, a community member who attended, said, 'It is inspirational to see the ATO going to such lengths to deliver a great service, and I commend you for it.' We will underpin this transformation through significant cultural change and improvements for our staff, meaning that we will provide the right environment for our staff to thrive and to succeed.

The ATO's property strategy plays a key role in supporting the delivery of the ATO's reinvention program. Examples of key deliverables within our property strategy include: first, sensible property portfolio cost management. In other words, reducing the cost of property for the ATO. We are on track to reduce the size of our portfolio by over 100,000 square metres by 2017, which equates to roughly one quarter of our total national footprint. This is a significant reduction driven by building closures, sublease opportunities with other Commonwealth agencies and the surrendering of space back to landlords.

Second, increasing the number of contracts with Indigenous owned businesses. The ATO is leading work to better engage with the Indigenous business sector through procurement. Indigenous owned businesses are 100 times more likely to employ an Indigenous person than other businesses. One recent example includes the signing of a contract for the provision of cleaning services for all of our sites in Queensland. The contract is with Pacific Services Group, a business owned by two Indigenous Australians, Troy Rugless and Shane Jacobs. The contract will see an increase in Indigenous employment across our sites in Queensland. This is just one of several examples where we are looking to work directly with businesses which are owned by Indigenous Australians.

The third is designing and building accommodation for the future not the past. Our accommodation needs to reflect the changing environment in which we operate, meaning our office fit-outs need to be contemporary, agile and cost-effective. We want to create an environment where staff can do their best work.

The Penrith refurbishment project fully aligns with our property strategy and will support the ATO to transform our culture. The ATO has a large presence in Penrith CBD and has since 1994. The site performs a number of key functions, including services for small business, individual taxpayers, tax practitioners and the large business market. We perform very important functions from the site—for instance, we have teams that monitor and target businesses who demonstrate phoenix behaviour. The site also holds our business continuity management team that looks after maintaining operations for all of the ATO. The site holds one of our larger call centres and processing areas as well.

The existing fit-out and furniture in the Penrith building has reached the end of its usable life. Most of the existing fit-out has been in place since 1994, over 20 years ago, and is in need of replacement. The building in general has now hit an age that a refurbishment is required to ensure continuity and stability of operations. We did share a video with this committee this morning which gave evidence of the poor condition of the fit-out.

The proposal represents good value for money, driven by an open approach to the market. We have great experience in running large tender processes. Our expertise has allowed us to deliver great outcomes for the Commonwealth. We see that by remaining in the existing building we are achieving a low rental cost, materially lower than that of a new build option. The proposal will see us remain in our existing building, located in Henry Street, with a lease extension through to 2026. Due to changes in business functions and operations, the ATO has successfully negotiated the hand back of over 30 per cent of the building to the landlord. This represents a reduction of almost 4½ thousand square metres. The Department of Finance has reviewed our cost-benefit analysis in detail and the secretary of the agency has endorsed our leasing proposal, hence we brought the fit-out works to this committee today.

As part of the negotiation, the landlord will undertake at their own cost a refurbishment of base building services, including but not limited to upgrades to amenities areas, lifts, lobbies, environmental performance including solar panels, rainwater harvesting, air conditioning, lighting, a full upgrade of ceilings and building facade. At the same time the ATO will look to complete a refurbishment of the office fit-out, helping the ATO to create a contemporary workplace for our employees and to ensure the long-term viability of the office.

The current building density rate is at 19 square metres per occupied work point. This is well outside the Department of Finance target of 14 square metres per occupied work point. The proposed fit-out will allow the ATO to meet the Department of Finance target through a more efficient office design and through the surrender of space. We have worked with the landlord to ensure that works are staged and do not impact ATO operations. We have been in preliminary discussions with several contractors and we believe there will be an opportunity to engage in an Indigenous owned business within the project.

We see that this proposal represents a good outcome for the Commonwealth, secures our presence in Western Sydney, which we have had since 1994, represents a strong value-for-money outcome and allows us to meet government targets for density and environmental performance. I would also like to note on the record that I have provided the chair with a request for approval for concurrent works, which would include some detailed design work and tendering processes as well. Again, I would like to thank the committee for its time today and I would welcome questions about the project.

CHAIR: Thank you. Mr Perrett, would you like to begin?

Mr PERRETT: Mr Untersteiner, would the ground, first and second floors go over to the landlord?

Mr Untersteiner : That is correct. Currently the ATO holds levels 1 to 8 as office space, and the ground floor is a lobby area. Levels 1 and 2 will be surrendered to the landlord.

Mr PERRETT: To become commercial?

Mr Untersteiner : To become commercial and available to the market.

Mr PERRETT: So the area has changed since 1995. Did it always have a commercial presence on the ground floor—ATO services?

Mr Untersteiner : Yes. I believe we had some office space on the ground floor and levels 1 and 2, and I think there is a little bit of retail on the ground floor.

Mr PERRETT: I notice the lease expires in December next year, but you are starting a new lease on 1 September. Why the transition? Why are we gifting three months and one week to the landlord?

Mr Untersteiner : I do not think that we are gifting; we are starting the lease early, which allows—

Mr PERRETT: But we have a lease to 6 December, from memory.

Mr Di Luzio : That is correct. We do have a lease, but in effect we are relinquishing the ground, first and second floors to the owner early so that we can stop paying rent on that space, and then the new lease comes into effect from that time.

Mr PERRETT: Why not go from 7 December?

Mr Untersteiner : That would mean us retaining space that we do not require, and that means we will be paying—

Mr PERRETT: What about floors 3 to 10?

Mr Untersteiner : Floors 3 to 8.

Mr PERRETT: Would that lease be starting from 7 December or from 1 September?

Mr Di Luzio : 1 September, subject to completion of the owner's works. But in effect it means that we can hand back the three floors—ground, 1 and 2—early because they are effectively not required by the ATO. So we can stop paying rent on those three floors.

Mr PERRETT: But if they are desirable for the landlord and they are now going to go commercial/retail, surely that is of benefit to the landlord. I know the landlord is in the room, but can't we screw the landlord and get a better deal?

Mr Untersteiner : What I would like to flag there is that we do have DTZ, who are our experts in property management, and we do believe that that tender process has got us a good deal. We will not talk about the commercials in the public component of the hearing. We can talk about that in the private part of the hearing. What it does for us is reduce our operating budget, which is really important as well. At the moment, we are paying money for space. We have the opportunity to let go of that early, which means it essentially saves the Commonwealth money earlier than the anticipated lease end.

Mr PERRETT: I still have not had an explanation of why we would not continue with the lease at 1995 prices or at 2005 prices—why would we suddenly go to a 2015 rate when we have these floors leased until 6 December. I still do not understand that. It is one package for the entire building now and then we are renegotiating the package. Is that inherent in the lease for the—

Mr Di Luzio : Look, it is inherent in the lease deal. But, in effect, the ATO will have the benefit of upgraded, refurbished and refitted space from 1 September and be able to hand back space that it is not occupying. It will not be paying rent on that space that is handed back. So there is an overall advantage or benefit to the ATO in that arrangement.

Mr PERRETT: On a slightly different tack, we have seen an ATO building in the east of Melbourne, Box Hill, and they were trumpeting the number of bike stations there. I did not see any bike stations; I saw change areas.

Mr Untersteiner : I can confirm that for you: we have 79 bike racks that have been installed into the building. Included in there, we have 84 lockers and nine showers as well. So we are creating facilities for staff.

Mr PERRETT: Does the square meterage, which has gone from 14,000 to 10,000 square metres, include car parks and bike spaces?

Mr Di Luzio : No, it does. So there will be—

Mr PERRETT: I know that we may come to the formula in the in camera—

Mr Di Luzio : High level: the new lease will have 10,000 square metres of office space, 250 square metres of storage space and 40 car-parking bays.

Mr PERRETT: Is the storage space the lockers that we saw?

Mr Untersteiner : Yes, and we have some other storage requirements for ATO assets as well. So that might be things like holding onto replacement chairs and things like that just for operations of the building. It is only a small space.

Mr PERRETT: In terms of ATO servers—and I assume IT security is a bigger thing—I notice the landlord was looking after some storage areas for IT. Is that part of the storage space?

Mr Di Luzio : No, that is separate to the storage space. There are services risers throughout the core of the building, which are not included in the net lettable area. Then there are some ATO computer facilities, which are within the occupied, or 10,000 square metre, area.

Mr PERRETT: I think that the landlord is doing the electrical and data upgrade, is that right?

Mr McLaughlin : They are doing base building upgrades to certain elements, and then the ATO will fit-out with their own internal ICT and data. So there are two parts to that: the base building upgrade and then the ATO following with their own internal services.

Dr SOUTHCOTT: I was interested that, in your opening statement, you said that as part of your property strategy you wanted to increase the number of contracts with Indigenous owned businesses. The Commonwealth have a target of having 0.5 per cent of domestic contracts this financial year building up to three per cent eventually by 2019-2020. How is the ATO performing on that target? Will that be part of this project as well?

Mr Untersteiner : The ATO is performing very well on that target. I would like to highlight that we did work with the Department of the Prime Minister and Cabinet in the development of those targets. The ATO had a strategy to support Indigenous businesses well before the target was in play. We have now signed a number of significant contracts in the property and construction space. Also, we have a broader strategy across the ATO looking at a whole range of services. We have had a lot of success last year, and we are continuing that success this year. We are confident that we will be able to meet those targets and exceed those targets.

Dr SOUTHCOTT: What percentage of domestic contracts do you think are going to Indigenous enterprises now?

Mr Untersteiner : I would have to take that on notice. I do not have that figure in front of me.

Mr GOODENOUGH: My question relates to operational needs and design. In your submission, it states that the building was purpose-built for the ATO in 1994. Could you please, for the record, briefly outline which operational needs are behind the special purpose design? And, how do these relate to the current operational needs and standards given functional and operational changes are driving the need for reduced floor space?

Mr Untersteiner : I can answer that one. I do not have all of the detail about the purposes behind 1994 but I would suggest that at the time the fit-out would have been designed for our specific office requirements including processing areas. We had a large processing area within the Penrith region. That has changed. We still have large processing areas in Penrith today and large call centres but we have other functions now that have evolved over the years on the site that are quite important to the tax office. As I mentioned before, we have some of our large business operations looking for illegal operations in the tax system like phoenix behaviour and that is a very important function of the ATO.

We also have in that building our business continuity management team, which I briefly mentioned. The role of the business continuity management team is to ensure that when we have issues in our operations, and that could be issues from natural disasters through to other unforeseen issues, that is the hub that ensures that our operations continue. Those operations could be ensuring that we can still issue refunds for instance at tax time or it could be processing tax returns. There are some minor requirements in the site to support that function as well. I think it would be fair to say that the type of work that the ATO performs has changed fairly significantly since 1994. However, we still retain a significant processing and call centre function but we do have other very important functions that are quite unique to that Penrith building.

Senator GALLACHER: How long have you been paying for floors that you do not need?

Mr Untersteiner : There have been other changes in the ATO over the last couple of years that would have contributed the space loss. The more significant change occurred only in December when we had a change to operations. It was a site where we used to perform what we call image capture, which is basically a hub where we capture tax returns for instance, paper. As you can imagine, the paper business is changing. We have a lot more digital services, which means those services have reduced quite significantly.

Senator GALLACHER: Are you saying six months is how long you have been paying for the three floors you do not need?

Mr Untersteiner : Two floors. In saying that, it is not two floors sitting there; we have space throughout the building, but, yes, that would be correct.

Senator GALLACHER: In terms of value for money, we had a brief look at this. How do you assure the committee that the lease you are paying is in the ballpark? For argument's sake, if a building was worth $100 million and if it was somewhere between five and eight per cent, you would probably say it is somewhere around the mark. How do you demonstrate that to us.?

Mr Untersteiner : I am happy to pass you on to Dom to talk through the process.

Mr Di Luzio : In effect, we have run a public process. We approached the market seeking proposals from the market at large including the building owner. We received 10 proposals for four new leases, some on the same site. But there are approximately 6 different sites across the 10. As part of that, they were required to put forward their rental streams, their rent review structures, the building upgrade requirements, any incentives that might be applicable et cetera. They gave us a detailed response against a base building brief that was put together and utilised by the ATO over a number of years now and also their responses in relation to the lease document.

Senator GALLACHER: So you have gone to the market, people have put in build a new building for you, refurbish, offer you an existing one and all the rest of it?

Mr Di Luzio : The options were to either refurbish the existing building or to construct a brand-new building. There is nothing in Penrith that has the 10,000 square metres we were looking for.

Senator GALLACHER: So the taxation commissioner made a decision to stay with the current tenant because you have a good relationship, was one of the reasons stated in the paper.

Mr Untersteiner : Not in those terms.

Senator GALLACHER: It is actually the first one on the list. I thought they had a good relationship with everybody.

Mr Di Luzio : There is a good relationship with the current landlord; there is no doubt about that. But the evaluation was done on an objective basis looking at the rental stream, the proposed upgrade, the compliance with the lease document and the base building brief. This proposal we are putting forward resulted in the lowest rental stream by a considerable margin. We also did some evaluation against market rents in Penrith and also some evaluation against rentals in our database. DTZ manages approximately 70-odd properties in the Penrith area. Many of them are not comparable but we have taken undertaken an evaluation. I am happy, during the in camera hearing—

Senator GALLACHER: I understand that. Penrith is up at the top end of the spectrum in costs. Is that right?

Mr Di Luzio : No it is certainly not up at the top end of the spectrum. It is towards the lower end of the spectrum. It is lower than Parramatta and certainly lower than a CBD. But I am happy during the in camera hearing to give you some comparables of this deal relative to the other proposals we received and also what the market rents are in Penrith at the moment.

Mr Untersteiner : I will also flag that this was independently assured through the Department of Finance as well and it was approved by the Department of Finance.

Senator GALLACHER: The Department of Finance appeared before us in Canberra and had to make a couple of apologies for omitting some of the detail in the rent proposal, so you can understand the committee does not always look at that as a 100 per cent tick. I am just saying that there is a significant property here. There is a significant amount of rent being paid. Are there any disclosable incentives by the developer?

Mr Di Luzio : Again, we can show that during that in camera hearing if you do not mind. We will give some detail on that.

Dr SOUTHCOTT: How many proposals did you look at on the NPV basis?

Mr Di Luzio : Ten proposals were received and evaluated.

Dr SOUTHCOTT: Are you able to provide the committee with what the net present value was for each of those 10 proposals?

Mr Di Luzio : I believe we could but, again, I would prefer to do that during the in camera hearing.

Mr PERRETT: Is it true to say it is a new façade on the building? The information refers to new glazing or maybe I am misunderstanding it.

Mr Untersteiner : It is the refurbishment of an existing facade.

Mr PERRETT: It seems to talk about enhanced glazing and I am not sure what that means. I saw that little gazebo thing added on. What was the term they used? But further up, is it a new facade or new glazing?

Mr Untersteiner : There will be some components of new glazing that will be added on.

Mr PERRETT: But that will not affect the ATO. That is going to be the retail space from the photos we saw.

Member of the audience interjecting—

Mr PERRETT: How do you put new glazing on glass?

Member of the audience interjecting—

Mr Untersteiner : Just to confirm, there will be some sections that will be removed because they are currently attached on there and new sections put on top.

Ms SCOTT: I am picking up from where Dr Southcott started in regard to Indigenous contractors. I know you talked globally. Can you tell me specifically about Indigenous contractors on this project? Western Sydney actually has the largest Indigenous population in the country so I am wondering what Indigenous contractors will be working on this project?

Mr Untersteiner : At this stage, we cannot confirm that because we will not go up to the market just yet until this proposal has been put through this committee. At this stage though, we have been doing some work to understand what is in the environment. We understand that there are some opportunities, for instance, for electrical service providers in the market. We know that there are some providers there and we are looking to work with them as long as this proceeds beyond today.

Ms SCOTT: There are many local Indigenous construction contractors that you could definitely fish from. I was also wondering how many staff will be in this new building?

Mr Untersteiner : The numbers are still being firmed up because we have a number of changes going on.

Ms SCOTT: Do you have a ballpark figure?

Mr Untersteiner : Around 700.

Ms SCOTT: How many car parking spaces will there be?

Mr Untersteiner : Currently there are 40.

Ms SCOTT: What proportion of the workforce drives?

Mr Untersteiner : I do not have those details but I can take that on notice.

Ms SCOTT: I think it would be quite important because a large proportion of the workforce would be local therefore they would be driving. I would be interested as to where you expect the local workforce to park. Penrith is one of the largest commuter train stations. Therefore the proximity of this building to Penrith train station means that that car park is quite quickly taken up by commuters. I am just wondering where your staff will be parking and what the knock-on effect to Penrith CBD will be for your 751 staff with only 40 car parking spaces?

Mr Untersteiner : The one point I would make is that we do not provide car parking for our staff already so this is not a change; this is a continuation. Since 1994 the arrangement seems to have been working on that site. We have not had any noise to say otherwise and that would be a continuation. We do not see any significant change.

Ms SCOTT: I dare say, your staff are using Alan Place car park, which is not far from there. Are you aware that Penrith council is turning that into a recreation park? And that the closure of the Trade Secret bridge has also taken out 50 to 100 car spaces from the CBD, which will have a fairly quick knock-on effect to this building.

Mr Untersteiner : I cannot comment on where our staff park or do not park.

Ms SCOTT: If we are only providing 40 car parking spaces and there is not necessarily adequate public transport from the suburbs, it could potentially quickly become an issue for your staff if there is nowhere to park. It potentially could create issues for you with the local council, which also has massive issues with car parking. If you could come back to me as to what the long-term car-parking strategy for the building would be in light of the other development and growth that is going on in it in and around the vicinity.

Previously, we were talking about the glazing panels and I appreciate that it was picked up by Graham. Regarding the glazing panels of the upper facades to block light, how exactly is this going to work? You were talking about blinds coming up and down. Will they be automated with the sunlight as specific UV protections? I am quite concerned about the workstations that do directly face the windows. It potentially could be an issue for the staff at those workstations. What protections will be provided? I have been in open-plan workspaces before and when one person closes the blind, it upsets other people in different spaces. Is there an automated process for that or how will you actually be managing and facilitating the process for people who are directly facing the sunlight, particularly on those really hot summer days?

Mr Untersteiner : There are a number of items that will be included in the building. We mentioned before there will be things on the outer perimeter that will block parts of the sun. We have changes to glazing. In terms of the internal fit-out, we do have multiple levels of blinds. We have complete block out blinds and then we have blinds that are more transparent that do take out the edge of the sun. They will not be automated.

What I can say is, through experience with our other sites, we have implemented these strategies into those sites, including sites such as up in Brisbane and Townsville. We find that the process works very well. Staff are comfortable with that approach. They can adjust as they need to. We do find that you are going to have parts throughout the day where there are going to be issues with the sun right around the building as it moves. I did mention earlier too we have quite an advanced building management system which picks up on any peaks in temperature, so we can very quickly get onto that and address that as well. We are comfortable that the mitigation that we are putting in place will address those issues.

Ms SCOTT: Is there any part of the upgrading to the external facade that will help mitigate the direct sunlight onto the building? The way the external facades have been built and the louvres that are attached to the building provide a lot of the protection for what is inside the building. Is there anything to add the external facades as you are updating the building that will also help this issue?

Mr Untersteiner : The first is what we mentioned before, some changes to the glazing, which will create a certain level of protection. As a part of the refurbishment, they have also been installing fins onto the outside of facade of the building.

Ms SCOTT: That is basically what I was asking for all the way through. The fins are what are being used on most of the buildings locally now to up the energy ratings from a three-star construction to a five-star construction.

Mr Untersteiner : To answer that directly, there will be fins installed on the façade.

Mr McLaughlin : If I can add here, the internal treatment with the air conditioning system will also improve with the mechanical environment so that they are controlled by the environment internally. The conditions will also improve from the management perspective as well.

Senator GALLACHER: You have got a 30 per cent reduction in your footprint. Have you done the sums on who is paying for the building? Are you paying 70 per cent of the building now versus your historic 100 per cent of the building?

Mr Untersteiner : I am sorry; I am not sure I understand.

Senator GALLACHER: You had the whole building purpose-built for you and you had every floor. You have taken out 4 ½ thousand or more square metres. You had 15,000-odd. You have taken it down to 10 so are you paying two-thirds of the cost of this building into the future?

Mr Untersteiner : That is correct. The rental reduces based on a square-metre deal in the lease structure. So, yes.

Senator GALLACHER: And you can prove that you are actually getting a 30 per cent reduction of carriage of this building into the future?

Mr Untersteiner : Absolutely. We would be happy to share, in the in camera hearing, some of the potential savings—

Senator GALLACHER: So, this building is fully leased; you are paying 70 per cent of the cost into the future.

Mr Untersteiner : That is correct.

Senator GALLACHER: And in the past you have been paying 100 per cent.

Mr Untersteiner : That is correct.

Senator GALLACHER: And you can demonstrate that.

Mr Untersteiner : That is correct.

CHAIR: In your opening comments you said that most of the existing fit-out has been in place since 1994. When was the most recent fit-out of part of the building?

Mr Untersteiner : I will have to confirm that. I believe we had some minor works done in a site around seven to eight years ago, but they were very minor works, and potentially to only one of the floors, and that was to facilitate a changing business requirement at the time with some of our call centres.

CHAIR: In your opening statement you also mentioned teams that monitor and target business who demonstrate 'phoenix behaviour'. Could you explain to me what phoenix behaviour is?

Mr Untersteiner : In really simple terms, that is where a business will re-establish itself as a different entity in a fraudulent manner to avoid paying any liabilities that it may have, whether to the tax office or to suppliers.

Mr PERRETT: It is prevalent in the building industry.

Mr Untersteiner : Well, I am not sure, Senator.

CHAIR: Perhaps we could turn to the options that have been considered. On page 8 of your submission you talk about options having been excluded, and one of the reasons given is that they were excluded because of compliance with legal documentation. Could you expand upon that and how it affected the preferred-option outcome?

Mr Di Luzio : As part of our approach to the market we issued a comprehensive set of documentation around building brief requirements and also a lease document and an agreement-for-lease document. When some proposals came back for evaluation either they had not comprehensively addressed the requirements of the lease or the agreement for the lease, or their position was not sufficiently compliant to be considered further.

Mr Untersteiner : In a nutshell, what that means is that if they are non-compliant with our documents then potentially the ATO will not be able to obtain the best value for money through that contract because of issues in agreement on terms of the lease.

Mr Di Luzio : It would represent a risk.

CHAIR: Did I hear correctly that in your response to Dr Southcott you said there were 10 that had been received, and 10 were compliant—or 10—

Mr Di Luzio : There were 10 received in total. Four of them were excluded from consideration early on in the evaluation process.

CHAIR: Because of the legal documentation issues?

Mr Di Luzio : It was because of a range of matters, including the legal compliance.

Mr Untersteiner : We will review the proponents for a range of things: compliance against that documentation, location, size and space and all those sorts of factors.

Senator GALLACHER: I have a question on that. This may have been in the papers and I might have missed it, but did you have an option of extending this lease while you build a building? Or are you at the end of this lease?

Mr Untersteiner : We are at the end of this lease.

Senator GALLACHER: So you really did not have a realistic option. You had to either stay or go.

Mr Untersteiner : That is correct. We had to go out to the market.

Senator GALLACHER: How is it that you let yourself get into that situation in a 25-year lease, or thereabouts, such that you never really had two options? You had only one option, and that was to refurbish this building.

Mr Untersteiner : No, just to—

Senator GALLACHER: Well, if you chose not to, what would you have done?

Mr Untersteiner : There were multiple options that we had to consider. The first was where the ATO is required to be located. The decision was taken by the tax office, including the commissioner, to stay in Penrith because of the importance of the functions. And then there was running a market approach, which looked at a range of options, including staying where we were, new builds, other refurbishment—

Senator GALLACHER: So, you could have extended this lease while you built another building?

Mr Untersteiner : That could potentially be an outcome, but what we can say is that through the tender process that did not represent the best value for money for the Commonwealth.

CHAIR: Perhaps you could step us through the internal process that the ATO goes through to get to the position you are at today, in front of this committee. I am keen to understand in a little bit more detail the internal steps and time frames.

Mr Untersteiner : Generally for an approach like this we will start reviewing close to four years out from the lease expiry. There are a few steps. The first is to work as an organisation to understand ongoing business needs and requirements or functions. As you can imagine, things change, and in the past that has seen some building closures, for instance. But where we deem that there is an absolute requirement to remain in the location we will then work through some commercial analysis to understand the potential options that may be available and what that looks like. At that point we will work with the Department of Finance to seek approval to go out to the open market. Once we have gone out to the open market we run a detailed evaluation process to identify a preferred vendor. At that stage we will go back to the Department of Finance and have a secondary review to make sure that they are comfortable with those numbers and, again, a review of other Commonwealth assets to ensure that there are not other options that might be available for the Commonwealth. Once that is approved through the secretary of the Department of Finance we will then finalise negotiations with the vendor, generally sign leases and then submit documentation to this committee.

CHAIR: So this project has been typical of that time line? Or has it had delays?

Mr Untersteiner : This has been fairly typical of that process, yes.

Mr GOODENOUGH: My question relates to the rate per square metre. In the initial submission the fit-out cost was quoted as being $1,960 per square metre, and subsequently the cost was updated, in a supplementary submission, to $1,436.

Mr Untersteiner : Yes.

Mr GOODENOUGH: We understand that you have been investigating various methods used to calculate the project's cost per square metre, resulting in the difference in the figures. Could you please outline which methodology you have used?

Mr Untersteiner : The ATO identified, by talking to some other agencies and speaking to the Department of Finance, that there may be some inconsistencies with how project costs have been submitted to this committee. I do not think there is an outlined methodology at the moment for agencies to use in calculating construction costs. For transparency purposes the ATO has always included all costs associated with a project, even if they are not a construction cost, and basically divided it up by the square metres. The issue with that is that it does not give you a true construction cost; it is actually inflating that cost. So, we undertook to engage with a quantity surveyor as well as DTZ to understand what we would see more consistently in the industry, because we think it would make sense to ensure that the methodology the Commonwealth uses is consistent with what the industry uses. Through that we have identified a methodology whereby we still show total project costs—that is the high-level figure that you have in the submissions—but for the purpose of the square-metre rate for construction we include only the pure construction costs and remove some of those others. An example of the other costs is things like removalist costs for our staff. That is not a construction cost, but we do think it is important to include it in the total figure, because it forms part of the project. So, we have given that in the total figure but we have not included it in the revised per-square-metre construction cost. We provided this committee with an outline of our methodology after our engagement with industry for review as well.

Senator GALLACHER: I suppose my question is really to our chair: how does that compare with the parameters we have been using? We use the surveyors guide, if you like—the surveyors Bible for construction costs.

Mr Untersteiner : I think that is correct.

Senator GALLACHER: So, are you saying that ours include that, or do not?

Mr Untersteiner : The costs that you have outlined, which you have outlined to me in the past, were between $1,200 and $1,800 a square metre, which I think is accurate. I think that is over the right range that you should be reviewing against. I think the thing that was inconsistent was the way agencies may be calculating the construction costs.

Senator GALLACHER: So, the figure we are using would normally exclude relocations?

Mr Untersteiner : That is correct.

Senator GALLACHER: So, departments have included various items that are not consistent with the consultant's advice on $1,200 to $1,800?

Mr Untersteiner : Yes, that is correct. For instance, I can talk through the ATO's approach. You saw that our original submission was outside of that figure, and that was because we had not originally included things that were not construction costs.

CHAIR: I am a bit of a stickler for consistency, so in my role as chair I can give you a commitment that we will be looking at this very thoroughly, consulting with Finance and landing on a very clear position about the way forward. So, thanks very much for that, Mr Untersteiner. We might explore that a little more in camera.

Turning to grade-A fit-outs, I assume if there is a grade A there must be a grade B and a grade C. What are the variations? What things change the most significantly between a grade-A fit-out, a grade-B fit-out and, I assume, a grade-C fit-out?

Mr Di Luzio : The gradings are issued by the Property Council of Australia and relate to base building features and facilities. There are premium, A, B, C and D grades. A-grade is what is typically targeted by the federal government, state governments and major corporates like the National Australia Bank and Westpac Bank in CBDs and major suburban locations. The requirements are around floor-plate size, which is important for fit-out efficiencies. In essence, the larger the floor, the more efficient and greater utilisation of the space is achievable. It targets things like air conditioning quality, which goes to the density of the fit-out that can be achieved. There are some provisions around lighting levels and acoustic levels, and some around finishes within the buildings. Then, as you go down the grades, those requirements or standards reduce.

CHAIR: Page 5 of the submission talks about the building owner undertaking refurbishment works in parallel to the proposed fit-out. The submission states:

The building facilities, base building services and general amenity will be refurbished to … Grade A standard—

which is consistent with the standard across all ATO properties. Does this grade-A standard apply to the base building works being undertaken by the owner or to the fit-out?

Mr Di Luzio : In essence, to the base building works by the owner.

Senator GALLACHER: There seems to be a little contest between what the owner is doing in terms of the building and what you are doing in terms of the building. Are we just looking at fitting out for amenities for staff and what is in your remit, or are you actually doing any refurbishment of the floors that you occupy?

Mr Untersteiner : I am happy to throw to Mr McLaughlin in a moment, but, really, the scope of the work that we do is for the internal office features—work stations and the internal features of the fit-out. It will not cross over into the base building works. However, we do run what we call an integrated approach where we will take a floor offline and do our component of the fit-out at the same time as the owner does their base building, and it reduces costs and time to run the two in parallel. We performed a study a number of years ago to assess that to make sure it was the right approach, and the review came back to demonstrate that it was a more efficient way to run a fit-out.

Senator GALLACHER: We had a look at a building in Canberra not long back, and it was environmentally designed so as to reduce costs of air conditioning, lighting and the rest of it. How do you know that the remit of the builder is sufficient to give you efficiencies in energy and those sorts of costs?

Mr Untersteiner : Through the tender process, we evaluate the submissions in detail, so we can assess those claims—

Senator GALLACHER: So you anticipate savings in air conditioning and lighting bills because you have this technology?

Mr Untersteiner : That is correct. With the upgrades in the building management systems, we have an opportunity to report against that as well, so we can review. The HO has made a commitment to some environmental targets, and one of those is the energy usage in our buildings, so we do report regularly on those facts.

Senator GALLACHER: To be very clear, you are just putting fixtures and fittings in; you are not doing anything with electricity or fire or those sorts of things?

Mr McLaughlin : The base building will cover those items. The upgrade to the environmentals, the fire services and all those technical components of the building itself—that structure—will be done by the owner. At the same time, the ATO fit-out will be integrated, and that typically is the work stations, offices and the area where the work space is but not the mechanical services, which will be undertaken by the owner.

Senator GALLACHER: What about cabling, fibre for the computer systems and all that sort of thing?

Mr McLaughlin : For the ICT, the fibre to the computers, there are two elements. The base building upgrade will deliver it to a certain point; then the ATO's internal people, which is the typical process, will fit it out from then on.

CHAIR: Mr Untersteiner, the ATO has completed two like projects—not the same but like: one at Box Hill, which you briefly mentioned, and the other at Chermside. What can you share with the committee about the success or otherwise of those two projects, how they have informed this and how they might give us confidence that this project will be as it has been presented to the committee?

Mr Untersteiner : The ATO have worked closely with DTZ, our quantity surveyors and our architects to continually refine our requirements. We have a comprehensive blueprint—as you could call it—for our fit-outs, which between every project we refine and refine. That allows us to reduce costs and increase quality. We also understand what works with staff and what does not work. On the two recent projects that you mentioned, Chermside is probably the most relevant as it was a refurbishment of an older building which is similar to this fit-out. The result was very good. The fit-out is now complete and has been delivered to a really high quality, again also delivering some of those other factors that we mentioned before like environmental performance and density. So we are confident based on our experience in those projects that we will be able to do the same here in Penrith, especially considering the refurbishment of Chermside. Prior to that, going back a few years, we also refurbished the Moonee Ponds fit-out—again a very aged fit-out and, again, we have a lot of success in that fit-out.

We continue to refine our documentation to make sure that we finetune our requirements and our blueprint as we move forward, and we feel that every time we deliver a project we deliver it a little bit better than the previous time because of the way we do that.

CHAIR: When you talk about success, you include in that the project time line and also project cost?

Mr Untersteiner : That is correct, and quality.

CHAIR: There being no other questions, do witnesses have anything further to add?

Mr Untersteiner : I would like to again thank the committee for its time today and again acknowledge the important role that this committee plays in reviewing public works for the Commonwealth. Thank you very much.

CHAIR: I declare this public hearing closed and ask that those not authorised to attend the in camera hearing leave the room.

Resolved that these proceedings be published.

Committee adjourned at 11:35