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Management of Commonwealth property [20 August 1996]

Domestic property

The management of the Commonwealth property estate will be reformed following the adoption of new principles covering Government ownership and development of property, the Minister for Administrative Services, David Jull, announced today.

The current total value of Commonwealth property is around $40 billion. There are 330 properties valued at $2 billion in the Commonwealth's commercial estate, which is managed by the Department of Administrative Services (DAS).

"All commercial properties will be reviewed according to the new ownership principles, and we expect a significant number of property sales over the next two or three years," said Mr Jull.

"But this doesn't mean that the Government is selling off its entire estate.

"Rather, it means that in the future the Commonwealth will own property where there is a real economic benefit from public ownership or where there is a strong public interest argument for so doing," he said.

Public interest reasons for Government owning property include national buildings of symbolic significance (eg. Parliament House), national security, special diplomatic requirements and high specialised use (eg. the High Court of Australia).

Mr Jull said a Commonwealth Property Committee, comprising Government and private sector expertise, will be established to conduct the reviews and to provide independent advice on the management and coordination of divestment.

All new property funding proposals of more than $6 million in value will be referred to the committee for consideration while the review is under way.

The committee will undertake a property- by- property review to ensure the best possible outcome is achieved by considering:

* grouping properties to maximise their attraction for investors;

* timing divestment to avoid over supply in the market;

* proper preparation, including refurbishment or improvements to add to potential returns.

"It is clear that there are public interest reasons for owning property but it is not necessary for the Commonwealth to own property to meet all its accommodation requirements," Mr Jull said.

Following earlier reviews, eleven commercial properties will be offered for sale immediately. These properties, with an estimated total value of over $100 million, are:

* Australian Tax Office Belconnen ACT;

* Commonwealth Offices Phillip Street Sydney;

* Commonwealth Centre Townsville;

* Ultimo Sydney;

* Commonwealth Centre Cairns;

* Link Road Mascot Sydney;

* Melbourne Building ACT;

* Acton House ACT;

* Hayden Centre Ipswich;

* Customs House Darwin; and

* Kent Town South Australia.

In addition to reviewing Commonwealth ownership of property, the Government will establish a centralised Commonwealth Property Register for all domestic land, property and accommodation.

This register, to be maintained by DAS, will include all vacant Commonwealth space so that vacancies are taken into consideration before any new lease is entered into with private sector landlords.

"This will help reduce the space waste problem which the Labor Government allowed to escalate at great cost to the taxpayer, and will give the Government better information on its total property holdings and associated costs," Mr Jull said.

The reforms follow the recent announcement by the Minister of the outsourcing of property management functions performed by the Domestic Property Group within DAS. Tenders have been called for this work which includes tenancy management and leasing, building maintenance, income and cost administration, energy management and performance reporting.

Overseas Property

The new principles apply to the overseas property estate, currently valued at $1.5 billion. In particular, the Government will introduce 'user- pays' principles to the overseas estate on a pilot basis starting during 1996-97, with full implementation expected in 1997-98.

"Under this principle, the true cost of property will be charged to departments and agencies with overseas representation, leading to greater discipline in property usage, more cost- effective property management and a sharper focus on the full cost of program delivery by departments and agencies," Mr Jull said.

Mr Jull also announced that a number of overseas properties would be sold. Together with the introduction of user- pays, this would ensure that the Government achieved its targeted savings as set out in its pre- election statement Meeting Our Commitments.

"Overall, the reforms to property management will deliver taxpayers far better value for money and will lead to more effective management of the Commonwealth's property needs," Mr Jull said.

Contact:

Penny Farnsworth, Minister's Office, 06 277 7600; 0419 495 191

ATTACHMENT

COMMONWEALTH PROPERTY PRINCIPLES

1. The Commonwealth should own property where the long- term yield rate exceeds the social opportunity cost of capital or where it is otherwise in the public interest to do so.

- Over the medium term, the Department of Finance advises that Commonwealth property projects have been approved with rates of return of 14-15% (nominal).This medium- term rate would seem the appropriate figure for decisions about retention or divestment of existing property holdings, taking into account past achievement of those rates of return.

- The full social opportunity cost of capital for the Commonwealth should apply to any new property development. While this will vary over time, the existing rate is much higher than the medium- term property hurdle rate previously used.

- Given the competitive nature of the property market it would be unusual for the long- term yield rate for office and other commercial accommodation requirements to exceed the Government's social opportunity cost of capital (ie. generally, the Commonwealth could make better use of its scarce capital than property investment).

2. Public interest considerations which may influence the decision as to whether the Commonwealth should own property include circumstances where:

a. the property has:

national symbolic significance - eg. Parliament House, the High Court, and some overseas diplomatic properties;

national security requirements;

strategic significance to future government use - eg. land required for future airport use;

highly specialised uses that would significantly inhibit commercial provision;

significant heritage and environmental requirements;

significant public usage;

characteristics such that the nature of the use or development of the property by the Commonwealth would give a potential lessor excessive future negotiation power (eg. where the Commonwealth needs to make a large investment in specialised fit out);

special diplomatic requirements - eg. overseas locations, where either no market exists, or government- to- government reciprocity arrangements in the context of the Vienna conventions apply;

b. there exists clear evidence of market failure. This could include properties such as:

small regional offices in isolated locations where there would be no other tenants should the property become vacant or where private investors would demand excessive rates of return to recover their investment over the life of the lease; and

those in markets where there is a predominance of Commonwealth ownership. (An example is unique areas of the ACT property market, in particular the Parliamentary Triangle, where there is no competitive market. It should be noted that a market may develop in the rest of the ACT in the future.)

3. The onus should rest with the proposing agency to clearly demonstrate the characteristics of the property that warrant Commonwealth ownership:

a. where market failure is claimed, the market circumstances for the property should be adequately tested, including consideration of offering lease terms or conditions that might allow private investors or developers to convert a 'government guarantee' of rental income into the capital necessary to provide the accommodation and earn a market return; and

b. where market failure is established, the relevant Minister should take the proposal to Cabinet in the Budget context.

4. To encourage efficient, effective and transparent decision- making and accountability:

a. the costs of property use (whether owned or leased, domestic or overseas) should be fully reported by the using agency or program;

b. property costs should be measured (and wherever practical, charged) on the basis of competitive neutrality- ie. costs to the Commonwealth should be measured on the same basis as the private sector; and

c. property costs should recognise the costs of holding unused land in reserve for possible future use, except for certain land with national significance and where disposal is not an option.

5. When seeking the provision of accommodation to meet Commonwealth need, a proactive approach should be taken to inform the market well in advance of the project so that the market has time to develop solutions to meet the Commonwealth's needs.

6. Where Commonwealth ownership is decided upon, the property should be managed so as to retain the maximum long- term economic advantage to the taxpayer. Financial and/or organisational arrangements should be made to ensure the effective maintenance and refurbishment of the facility to agreed standards. Failure to do so risks Commonwealth exposure to high property vacancy rates, additional costs and failure to meet its legal obligations under OHS legislation.

7. For Commonwealth agencies occupying property owned by another part of the Commonwealth, occupancy agreements (as a substitute for private sector leases) should be formalised between the Commonwealth property owner and the occupying agency. Conditions and rentals should be market- based. All agreements between arms of the Commonwealth should be binding, and transferable on sale of properties. Where such properties are identified for sale, the occupancy agreements should be placed in a form that facilitates completion of the sale.

8. Property management services provided within Commonwealth bodies should be fully market tested, including the option of in- house bids consistent with the principles established in the Commonwealth Competitive Neutrality Principle.

9. Where property is being provided on an internal market basis, there should be a clear separation of responsibility between the area responsible for maximising the performance of Commonwealth owned property and any area responsible for tenant advocacy.