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Parliamentary Standing Committee on Public Works
Australian Chancery Project Paris, France - base building refurbishment, International Energy Agency tenancy fit-out

ENGLISH, Mr Peter, Director, Financial Management Section, Overseas Property Office, Department of Foreign Affairs and Trade

HAMMOND, Mr Greg, Assistant Secretary, Project Management Branch, Overseas Property Office, Department of Foreign Affairs and Trade

KOLOBARIC, Mr Mauro, Assistant Secretary, Operational Security Branch, Department of Foreign Affairs and Trade

NIXON, Mr Kevin, Executive Director, Overseas Property Office, Department of Foreign Affairs and Trade

PASCOE, Mr Ken, Assistant Secretary, Strategy and Property Services Branch, Overseas Property Office, Department of Foreign Affairs and Trade

Committee met at 10:49

CHAIR ( Mr Buchholz ): Welcome. I declare open the public hearing of the Parliamentary Standing Committee on Public Works into the proposed Australian chancery project for Paris, France. Although the committee does not require you to give evidence under oath, I should advise you that these hearings are formal proceedings of the 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 the parliament. Mr Nixon, would you like to make some brief introductory remarks before we proceed to questions?

Mr Nixon : Thank you. This submission seeks approval for the Department of Foreign Affairs and Trade to complete the base building refurbishment, including an integrated tenant fit-out for the International Energy Agency within the Australian chancery complex in Paris, France, at a total outturn cost of $27.73 million. The works, when completed, in conjunction with the previous midlife upgrade to the DFAT areas, will complete the base building refurbishment on the chancery building. The previous stage 1 midlife upgrade was completed within budget and is in the final stages of the defects notification period.

The driver for this project is a new lease negotiated with the International Energy Agency. The IEA has been a tenant in our building since 1996 and occupied approximately 45 per cent of the accommodation. New lease terms were renegotiated on commercial market terms for a further 12-year lease term for their future office accommodation needs. Revenue from the IEA lease agreement is expected to be approximately $51.7 million over the next 12-year lease period. Subject to parliamentary approval, construction is scheduled to commence mid-2017 and be completed by mid-2019.

Mr ZAPPIA: Can you tell me how many staff are based in the Australian embassy there?

Mr Nixon : Within the IEA component of the building, there are approximately 284 IEA staff.

Mr ZAPPIA: How many Australian embassy staff?

Mr Nixon : I will get that figure for you shortly.

Mr ZAPPIA: What is the square meterage staff rate for the people who work in the building for the Australian government? My second question is in respect of the project management fees and architectural fees and the other incidentals. This is a project where the physical construction costs are around $18 million. We then have almost $8 million in oversight costs, including the architecture and project management costs. Is that a standard amount and was there a selection process that was used with respect to determining who the architects and project managers and quantity surveyors would be? It seems to me that $8 million out of an $18 million spend is excessive.

Mr Nixon : The quantity surveyor has been appointed and that was through a competitive process. But then other design and project management appointments are still to be confirmed.

Mr Hammond : It is a design and construct project, so under that structure the contractor will bring their design team. At this stage, there will be only very high-level block and stacking done. There is not a contracted architect for the full fit-out works. And it is still subject to parliamentary approval.

Mr ZAPPIA: I just leave that concern with you for your consideration.

Senator GALLACHER: So, essentially, the embassy or the chancellery is divided in half. You do the embassy functions in one area, and this tenant is taking 50 per cent of the chancellery. Is that right?

Mr Nixon : For clarification, there are essentially two buildings on the site, both of nine storeys—one being the chancellery and what I will describe as the office component. So both the embassy and IEA operations are within that building. The other building on the site—also of about 9,000 square metres—is the residential complex.

Senator GALLACHER: And these are UNESCO heritage sites?

Mr Nixon : Yes, it is within that UNESCO heritage precinct.

Senator GALLACHER: It appears to be an income-producing proposal. There are two figures in the paper work: one is $51 million, which you have mentioned, and the other is $59 million with outgoing. What does that mean? Is that the electricity or something?

Mr Nixon : That is additional items of expense recovery that we will achieve from the tenant. Those additional items are effectively money that is being spent in elements of management, administration and maintenance of the building.

Senator GALLACHER: Like a strata title fee?

Mr Nixon : Yes.

Senator GALLACHER: Basically they are contributing to the outgoings?

Mr Nixon : Correct.

Senator GALLACHER: So the real income is $51.7 million or thereabouts and the outgoings in this project are $27 million inclusive of French VAT.

Mr Nixon : Yes.

Senator GALLACHER: So that is recoverable in a proportionate way? Are we likely to get back any of the VAT?

Mr Nixon : We anticipate getting some element of the VAT back. There will be some expenses that are specifically associated with the IEA fitout, which the IEA will assist us in claiming or ensuring that there is no VAT component on those. Then there are other elements of the expenditure for which we will not receive a VAT recovery.

Senator GALLACHER: So is the public expenditure attributable only to the lettable area to the IEA?

Mr Nixon : The expenditure that we are proposing comprises a couple of components. One is elements of base building services that are incorporated into and form part of the base building structure—so building services there. Then there is an element of specific fitout attributable to the IEA.

Senator GALLACHER: I think the committee—and perhaps even the taxpayer—would appreciate understanding that. If you are getting income of $51-odd million and you are spending $27 million to do that and the term is 12 years, it looks to be a pretty generous deal for the IEA if they normally would be asked to do their own fitout.

Mr Nixon : I will just go back and make the point again—

Senator GALLACHER: This is on the public record, so you are not making it again; you are making it for the first time for the taxpayers whose money we are spending.

Mr Nixon : Thank you. This is not a deal where we are giving the IEA $27.7 million. That is not the case. We are expending money on a substantial building, an Australian government owned building, and we are seeking to ensure that there is a prudent investment in upgrade to base building services at this point in time. In addition, those works would be required whether the IEA was to occupy the building or whether the IEA was not occupying the building or whether we had to go and find another tenant to occupy the building. Those works would be required. The specific works that are being done for the IEA are being done at a cost of about A$5.5 billion and are specifically related to a lease incentive as a trade-off for the 12-year commitment that they have entered into.

Senator GALLACHER: We are really starting to make progress, because that is the clearest and most concise answer you have given today. My next question is: what is the actual revenue for the whole building? We have substantial revenue from IEA and for investing in the building—as we rightly should to keep it up to standard. Do we have any idea of what the revenue is for the whole building? That might make this a very simple exercise.

Mr Nixon : Total revenue for the whole building—not including the recovery of outgoings—is in the order of $10.5 or $10.6 million as at today.

Mr ZAPPIA: Australian dollars?

Mr Nixon : Correct.

Senator GALLACHER: That is inclusive of IEA.

Mr Nixon : Correct.

Senator GALLACHER: So over the 12-year period, we are looking at a comparison. We will get 120 in—

Mr Nixon : From a whole building basis.

Senator GALLACHER: Yes, a whole building perspective, and we are spending $27 million inclusive of $5 million French 20 per cent VAT to keep it up to spec. That seems fairly straightforward to me.

Ms KEAY: On the rental income, what is a loss of income over the period where the IEA will be in other facilities while this construction is underway?

Mr Nixon : We need to make the point, the IEA's lease will come to expiry by the just the effluxion of time in April 2017, so there was not an automatic and guaranteed continuation of that income. So the IEA are vacating the building for a period of approximately three years.

Ms KEAY: So there will be no rental income from IEA over that three-year period?

Mr Nixon : Correct. But the new lease commences on their re-occupation of the building.

Ms KEAY: They vacated the building in December and their lease does not expire until April. Are they paying rent for that four-month period?

Mr Nixon : No. We negotiated a release to get them out of the building because there are asbestos removal works and hazardous works that are required to be done and, in reality, it is far more effective having those works done in an unoccupied space.

Ms KEAY: I understand. I have a question around disability access. The IEA have requested additional works to allow equitable access to their ground and upper ground levels. The report also states that the disability access has been discussed with the IEA and the agreed scope of works will be delivered as part of the project. However, the report says that this work needs to go through some consultation with authorities and:

The feasibility of achieving this requirement through alternate solutions or through utilisation of existing arrangements is also under investigation.

I understand this is probably one part of the works that is external to the building. Can you identify or can you foresee any risks in not meeting that requirement for full disability access as per what the IEA are after?

Mr Nixon : At this stage, what we have been able to agree with the IEA is an external ramp to facilitate the disability access into the building. Then within the building, we are investigating the opportunity for an additional disability hydraulic lift to be installed. The intent is that that lift would, because of where it is positioned, actually serve additional purposes other than just disability access; it could also be used for goods movement and some other things.

Ms KEAY: It is interesting you say that. I found an inconsistency, and correct me if I am wrong. On 2.16.2, 'Lift services':

Minimal additional lift works will be required in this Project. It is anticipated works will be limited to lift access controls and programming.

Then in another part of the report, under 2.2, 'Scope of work', it says:

New lift to provide access from lower ground floor to upper ground floor;

So is there going to be a new lift or not?

Mr Nixon : What we are seeking to do is remove IEA access from lifts that service our residential side of the building. What we spoke of in respect of potentially the small hydraulic lift for improved DDA access is an option under consideration. The alternative option is that we use the existing lifts between the floors and get some additional access control segregation.

Ms KEAY: Can you foresee any risks in not meeting DDA requirements, considering that you need to consult with authorities?

Mr Nixon : No. We are satisfied that we will meet the DDA requirements.

Senator GALLACHER: What is the life of the fit-out? There is the base figure. What is it written off over? Is it 15 years?

Mr Nixon : The IEA fit-out is something that is a decision for them, as to when they refresh it or renew it at a future point. At future points that would be at their cost. But I would assume that they are writing it off, essentially, over the next 12 years. We envisage the base building works we are doing will sustain the operation of the building on a 20-year horizon.

Senator GALLACHER: I would appreciate it if you could disaggregate those figures. But if you are spending the money and it is going to last 20 years, that is a favourable point in this consideration. It is income producing. They are very simple sums that you can do from there. We would appreciate that information—the life of the works that you are doing.

CHAIR: You can take that on notice.

Ms RYAN: My questions go to project delivery. Correspondence from DFAT to the committee dated September 2015 outlines how a previous refurbishment project at the chancery, which was called a midlife services upgrade, experienced over two years of schedule slippage, a lengthy tendering process, unsatisfactory contractor performance and unexpected quantities of asbestos. In summary, what were the lessons learnt from that experience? What was the extent of cost and schedule slippage when the midlife services upgrade project was completed? How have lessons learnt from that project been applied to this proposed project? I would go specifically to the asbestos.

Mr Nixon : I think several lessons were learnt. The first of those is the extent of asbestos throughout that building greatly exceeded the indications from original testing and asbestos surveys. So it was far more extensive. The other considerations that were probably learnt from that was the complacency about doing those works in a building that continued to be occupied and the challenge then around rescheduling works, particularly of a noisy or disruptive nature to periods out of hours. What we have also done is ensured that there is project management consultancy with a language skill. Again, that was one significant challenge. We have also been required to appoint a local consultancy in respect of health and safety coordination, which is a French legislative requirement. Overlying all of this are the challenges of the actual physical structure in Paris itself, the challenges of management in that environment. The other significant lesson learnt is around the contractor selection. That was a challenge for the previous works. The reality is the contractor that was selected underperformed in many areas and that is something we need to address as we go forward.

Ms RYAN: I take it from your answer that those things have been taken into consideration in this piece of work and that things will be much tighter.

Mr Nixon : Certainly we have sat back and reconsidered the approach and reconsidered just what the potential risk exposures are and we are satisfied that they are reflected from a management perspective to be better controlled under the proposed works and budget that have been put forward.

CHAIR: I have a question around the two parts of the building. So there is the $27 million being invested in the commercial part of it and then the residential. For forward works, is there an expectation that this committee will see a request for a revamp of the residential side? I can only make the assumption that it is of a similar age.

Mr Nixon : The residential element of the complex was upgraded in about 2004-05. The project was referred to the committee at that time and was approved, and that has been delivered.

CHAIR: Thank you. The other question I had is somewhat unrelated to the Paris project. When we have embassies around the globe, do we have a sense or forecast of when refurbs are going to need to be done, like a forward projection? Is the department, either at this stage or into the future, able to give an indicative idea of if and when—what those numbers look like—so we can make assessments over our forward estimates?

Mr Nixon : There is a very strong emphasis within the Overseas Property Office to, at an individual property level, develop an individual asset management plan and strategic plan for that property giving the long-term outlook for that property. Those reports are then aggregated and effectively developed into what is called the portfolio strategic plan, which is part of a requirement from the Department of Finance under the Commonwealth Property Management Framework. That portfolio strategic plan takes in essence a five-year or 10-year through to a 30-year outlook. So it is very indicative, but it is to try and give government awareness of long-term future commitments that may arise. That is from our departments. Perspective then falls typically as part of our portfolio budget statements.

Senator GALLACHER: Where does this $27 million come from? Do you actually put some income aside to refurbish, or do you go back to ask for more money in the budget, or do you take it out of the DFAT operating budget?

Mr Nixon : It does not come out of the DFAT operating budget, because for owned property the Overseas Property Office still operates the Overseas Property Office Special Account, and so effectively we charge occupying agencies, both internal within government and external parties, a commercial rent for the occupation of that space. That money is then retained within the Overseas Property Office Special Account, and it is that account that then funds these activities.

Senator GALLACHER: Except when there are special appropriations of the budget?

Mr Nixon : Correct.

Senator GALLACHER: Where do I get a look at that account? Do I have to go through estimates or budget or delve through the papers or what?

Mr English : It is included in the budget with our portfolio budget statements

Senator GALLACHER: Excellent. Thank you very much.

CHAIR: It is coming up to the time we want to close the public hearing. Are there any final questions?

Mr ZAPPIA: A very quick one, following up your question about the residential tenancies within there. Are they restricted to occupants of the building? In other words, are the residential tenancies restricted to employees of the various organisations that have floor space in the building?

Mr Nixon : In essence, yes. I think from time to time, we may have had a like-minded country occupy an apartment. For instance, I am pretty confident that somebody from the New Zealand mission occupied one of those apartments but—

Mr ZAPPIA: By and large, it is correct. Thank you.

CHAIR: Is there a cost component that someone who would occupy one of those would make a contribution to, or is it part of a salary package?

Mr Nixon : I have not been posted, so I cannot tell you.

CHAIR: It is in the Korean one. Do you recall?

Mr Kolobaric : When I was in Washington, as part of the package, there is no personal contribution from the officer when they are posted overseas.

CHAIR: Okay. Thank you very much. Do the witnesses have anything to add before we close?

Mr Kolobaric : No.

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

Evidence was then taken in camera

Committee adjourned at 11 : 27