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Centenary House - Leasing by Commonwealth of accommodation - Royal Commission of Inquiry - Report of the Commissioner (the Hon. T. R. Morling, QC)


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ROYAL COM M ISSION OF INQUIRY INTO

THE LEASING BY THE COMMONWEALTH OF ACCOMMODATION IN CENTENARY HOUSE

REPORT OF THE COMMISSIONER

The H o n o u ra b le T. R. M orling, Q.C.

Royal Commission of Inquiry into the Leasing by the Commonwealth of Accommodation in Centenary House

Australian Government Publishing Service Canberra

Inquiry into the Leasing of Centenary House

25 October 1994

His Excellency the Honourable Bill Hayden AC Governor-General and Commander-in-Chief Government House CANBERRA ACT 2600

Your Excellency,

In accordance with the Letters Patent issued

to me on 16 May 1994 and 26 July 1994 by the Government

of the Commonwealth I now have the honour to present to

you the report of my inquiry.

I return herewith the Letters Patent.

Yours sincerely,

(T. R. Morling) Roval Commissioner

Locked Bag 27, Queen Victoria Terrace, Canberra, ACT, 2600 Telephone: (06) 271 5224 Facsimile: (06) 273 4193

Royal Commission of Inquiry into the leasing by theCommonwealth of accommodation in Centenary House

Report of the Commissioner The Honourable T. R. Morling, QC

Table of Contents

Page

luminary of Findings i

Chapter 1 Establishment and Proceedings of the Commission 1

Chapter 2 Chronology of events preceding execution of the lease 6

Chapter 3 The offer of $50,OCX) to The Australian Property Group 32

Chapter 4 Are the terms of the lease reasonable? 38

Chapter 5 Communications between the Australian National Audit Office and the Department of Finance 65

Chapter 6 Were appropriate steps taken by the ANAO and the Department of Finance to ensure that the ANAO could fund the lease commitments on Centenary House 82

Chapter 7 Did the Australian National Audit Office give adequate instructions to the Australian Property Group as regards its accommodation needs? 95

Chapter 8 The appropriateness of the tender and selection processes followed in identifying suitable accommodation for the ANAO 101

Chapter 9 The roles of Australian Estate Management and the Australian Government Solicitor 104

Chapter 10 Did the Australian Property Group fulfil its responsibilities to the Australian National Audit Office and were the communications between them adequate? 108

Chapter 11 Did any party to the lease for Centenary House obtain unfair and/or 'above market commercial advantage from the lease? 111

Chapter 12 Did the Commonwealth Agencies act in the best interests of the Commonwealth, including so as to achieve value for money? 114

Chapter 13 Whether the Commonwealth agencies acted in accordance with Government Policies 117

Chapter 14 The longer term funding implications for the ANAO of the Centenary House lease and the options available in relation to the funding of it. 127

Chapter 15 Are changes to existing arrangements necessary or desirable 133

Chapter 16 Other matters relevant to the public interest 137

Annexure A Letters Patent

Annexure B Extension of time for Letters Patent

List of acronyms and abbreviations

ACS

ACT

ACTU

AEM

AGS

ALP

ANAO

APG

AUSLIG AVO

Australian Construction Services

Australian Capital Territory

Australian Council of Trade Unions

Australian Estate Management

Australian Government Solicitor

Australian Labor Party

Australian National Audit Office

Australian Property Group (Department of Administrative Services)

Australian Surveying and Land Information Group

Australian Valuation Office

BKF Ballieu Knight Frank (Canberra) Pty Limited

CBD

CPI

Central Business District

Consumer Price Index

DAS DoF

Department of Administrative Services

Department of Finance

HIC Health Insurance Commission

JCPA Joint Committee of Public Accounts

Lendlease Lend Lease Property Group

OID ACT Government Office of Industry Development

PCG POE PRA

Project Control Group

Property Operating Expenses Property Resource Agreement

WTNP Works Technical New Policy

I

Summary of findings

The major findings made in my report are as follows:

1. Prior to the conclusion of negotiations for the lease of Centenary House Ms

Penelope Morris, a representative of the proposed lessor, offered to pay $50 000

to the Australian Property Group. The $50 000 was intended to be in the nature

of an agency commission. The offer was declined. If the offer to make the

payment had been made to the Australian National Audit Office it would not have

been inappropriate. However, it ought not to have been made to the Australian

Property Group. It was not intended that the $50 000 should benefit personally

any Commonwealth officer, nor did it.

2. The terms of the lease of Centenary House are reasonable and are not unduly

generous to the lessor. The terms of the lease were the result of arm's length

negotiations between the lessor and the Australian Property Group. The advice of

the Australian Valuation Office was sought before the terms of the lease were

finally settled.

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3. The most significant terms of the lease were:

(a) the length of the term — 15 years

Although longer than most leases taken by the Commonwealth, the length

of the term is not disadvantageous to the Commonwealth. There are

advantages to the Australian National Audit Office in the lease being for a

long term, particularly as, after the expiration of 10 years, the lessee has the

right to exercise an option to require the lessor to grant a further 5-year term

and to refurbish the premises.

(b) the base rent, calculated by reference to an agreed amount o f $280 per

square metre as at 1 January 1991

This was a fair market rental for accommodation in a building such as

Centenary House at Barton as at 1 January 1991. The rental was supported

by extensive market evidence and there is nothing to suggest that it was

excessive.

(c) a 105% per annum rent escalation factor from 1 January 1991 to date of

occupation of the building and a 9% per annum annual rent escalation factor

thereafter during the term of the lease

The escalation factors are well supported by historical rent movements.

The average long-term growth rate per annum of rents in John Curtin

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House in the period 1975-90 was 9.08%. In respect of John McEwan

House the equivalent growth rate in the period 1973-89 was 9.35%, and in

respect of Bligh House was 10.51% for the period 1978-90. In respect of

shorter periods, the equivalent rent growth rates at Industry House and the

IBM Building were 14.31% and 12.03% respectively. All these buildings

are at Barton. Except in one minor respect, the evidence firmly supports the

adoption of the 10.5% short-term and the 9% long-term rent escalation

factors contained in the lease. There is some evidence to suggest that an

attempt should have been made to induce the lessor to accept a rent

escalation factor of about 10% in respect of the period of about 12 months

prior to the date of occupation of the premises. However, it would be

hypercritical to criticise the Australian Property Group for not seeking to

have the factor reduced in this minor respect.

(d) the rent review clause

Although on its face the rent review clause appears generous to the lessor,

the independent evidence is to the effect that it is not unreasonable. The

clause cannot be considered in isolation from the 9% long-term escalation

factor. The lessor might not have been prepared to accept a 9% factor in the

absence of the rent review clause. The inclusion of the clause in the lease

was neither unduly generous to the lessor nor disadvantageous to the

Commonwealth.

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(e) a contribution by the lessor of $400 000 to the lessee's costs offitout

This operated in favour of the Commonwealth and effectively reduces the

rent escalation factor by about 0.5% per annum.

4. In the short term the adoption of the 9% escalation factor has proved advantageous

to the lessor but this will not necessarily prove to be the case in the long term.

5. There is a large volume of compelling evidence supporting the opinions formed by

the officers of the Australian Property Group and the Australian Valuation Office

upon whose advice the terms of the lease were negotiated. There is no evidence to

suggest that they, and other officers who took part in the negotiations, did not carry

out their duties with competence and integrity.

6. No party to the lease of Centenary House obtained unfair or above-market

commercial advantage from the lease.

7. The terms of the lease were negotiated during a period of change in the way in

which Commonwealth agencies assumed responsibility for lease commitments

entered into on their behalf. The impact of these changes was not sufficiently

appreciated by the Australian National Audit Office in 1991. There were extensive

communications between it and the Department of Finance concerning the

proposed lease. However, the Australian National Audit Office assumed that any

increase in its Canberra accommodation costs, if incurred pursuant to a lease of

iv

suitable accommodation at market rental, would be funded by an appropriate

adjustment to its annual appropriation under the new property arrangements which

had come into effect at the time the terms of the lease were settled. This

assumption was incorrect. Adequate attention was paid to the cost of relocating to

Centenary House, but more attention should have been given to the funding of

future rent payable under the lease, should it escalate at a rate higher than a national

deflator figure adopted by the Department of Finance. The Department had given

notice to Commonwealth agencies that such a deflator would be applied to their

future Property Operating Expenses. All agencies should have appreciated that it

would be not nearly as high as 9% per annum. Nevertheless, since the Australian

National Audit Office had advised the Department that there would be long-term

savings to the budget as a result of the move to Centenary House, it is surprising

that the Department did not take steps itself to ascertain what the new rental

arrangements would be.

8. The application of a national deflator figure to property operating expenses of an

agency (such as the Australian National Audit Office) whose principal

accommodation costs are incurred in Canberra is likely to cause difficulty because

of differences between rental market conditions in Canberra and other capital cities.

9. Provision was made for an agency to seek exemption from the national deflator if it

could demonstrate to the Department of Finance that the preponderance of its rent

costs were incurred in a market where costs were rising at a higher rate than

contemplated by the deflator. However, the Australian National Audit Office did

not seek exemption for the Centenary House lease nor did it involve the

v

Department of Finance in the rent decision-making process. Had the Department

been involved the problems which subsequently arose probably would have been

avoided.

10. In the events that happened, the Australian National Audit Office did not take all

appropriate steps to ensure that it could fund its commitments under the Centenary

House lease and meet its other obligations. But this is not to say that its move to

Centenary House was not justified. Its accommodation at Woden was quite

unsatisfactory and it was reasonable for it to seek to relocate to more suitable

premises, whether in Barton or elsewhere.

11. The Australian National Audit Office gave adequate instructions to the Australian

Property Group as regards its accommodation needs. Although it was open to it to

stay in its existing accommodation in Medibank House or to move to the Sir Keith

Campbell Building, it was not unreasonable for it to opt to move to Centenary

House.

12. There was nothing inappropriate in the tender and selection processes followed in

identifying suitable accommodation for the Australian National Audit Office. The

fact that Centenary House was owned by interests associated with the Australian

Labor Party did not make it unsuitable to be occupied by a Commonwealth agency.

13. There is no basis for criticism of the conduct of Australian Estate Management or

of the Australian Government Solicitor in relation to the leasing of Centenary

House.

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14. The Australian Property Group gave appropriate advice and fulfilled its

responsibilities to the Australian National Audit Office regarding the leasing of

Centenary House. However, there was a lack of formality in the advice it gave its

client as to the terms of the lease.

15. All Commonwealth agencies involved in the leasing of Centenary House acted in

the best interests of the Commonwealth. The Commonwealth has not failed to

achieve value for the money it has expended, or is likely in the future to expend, on

the lease.

16. The Australian National Audit Office could have occupied less expensive

accommodation elsewhere but such accommodation would not have been as

suitable for its needs. If it had not relocated to Centenary House, the best

alternative accommodation would have been in the Sir Keith Campbell Building at

Woden. Accommodation in this building would have been somewhat cheaper than

at Centenary House.

17. Although the Australian National Audit Office calculated that it could effect

considerable efficiencies by moving from Medibank House to Centenary House, it

does not appear to have considered whether it could have effected similar

efficiencies by moving to the Sir Keith Campbell Building. Nevertheless, the fact

that the terms of the lease of Centenary House were approved by both the

Australian Property Group and the Australian Valuation Office justified the

Auditor-General in being satisfied that the rent which would be payable at

Centenary House would be no more than the market rent for suitable

accommodation at Barton.

vu

18. The provisions of s.40(3) of the Lands Acquisition Act 1989 were not complied

with in that a statement describing details of the Centenary House lease was not laid

before each House of the Parliament within the appropriate time. However, this

failure was inconsequential.

19. Commencing in 1995-96, the Australian National Audit Office's budget for its

Property Operating Expenses will be insufficient to fund its total lease obligations,

and the shortfall will increase markedly during the term of the lease. The financial

obligations of the lease will be significant for it. Unless it can greatly reduce its

operating costs or obtain additional funding it will have to curtail its audit activities.

20. There are a number of options available for avoiding this result. They can best be

addressed by the Department of Finance and the Australian National Audit Office

working together to reach an agreed position on the existing levels of funding

commitments against funding requirements. It is important that the capacity of the

Auditor-General to perform his statutory functions should not be impaired.

21. Some changes in the procedures of the Australian Property Group were made

necessary by the new property arrangements under which Commonwealth agencies

assumed responsibility for lease commitments entered into on their behalf. All of

these changes had not been made at the time the Centenary House lease was

negotiated. They have since been made and are adequate. However, there may be a

few Commonwealth agencies (e.g. the Australian Electoral Commission) which

would regard their occupation of property owned by a political party as

inappropriate. Accordingly specific provision should be made by the Australian

viii

Property Group in its procedures to ensure that its clients are made aware of the

name of the prospective lessor at an early stage of negotiations for a lease.

22. There is a possibility that the Australian Property Group may have a conflict of

interest in attempting to serve both Australian Estate Management as landlord and a

Commonwealth agency as a tenant. This problem should be addressed by the

Department of Administrative Services.

23. With the exception of a possible technical breach of r. 44B(d)(iii) of the Finance

Regulations and of the failure to comply with s. 40(3) of the Lands Acquisition Act,

no party acted in breach of Government policies as reflected in Commonwealth

legislation and regulations made thereunder. The application of r. 44B to future

commitments under long-term contracts is not clear. Consideration should be

given to amending the regulation so that persons entering into commitments

requiring the expenditure of money under long-term contracts are given a clearer

indication of their responsibilities.

24. The market for leasing office accommodation is more favourable to lessors in

Canberra than it is in other capital cities. The Commonwealth should consider

whether it can take any action to promote more favourable market conditions so far

as the provision of office accommodation in Canberra is concerned.

25. The Australian Property Group and the Australian Valuation Office should consider

improving the mechanism for resolving disputes as to rent reviews under leases

containing rent review clauses.

1 . Establishment and proceedings of the Commission

1.1 On 16 May 1994 the Governor-General, by Letters Patent issued in pursuance of

the Constitution of the Commonwealth of Australia, the Royal Commissions Act

1902 and other enabling powers appointed me to be a Commissioner to inquire into:

(a) the role of the Australian National Audit Office (the ANAO), the Australian

Property Group (the APG), the Australian Valuation Office (the A VO), the

Australian Estate Manager, the Department of Finance and any other agency

considered relevant, in the lease of Centenary House to the Commonwealth,

and in particular, addressing the following matters:

(i) the appropriateness of tender and selection processes followed in

identifying suitable accommodation for the ANAO, with specific

reference to the selection of Centenary House;

1

(ii) whether the processes followed by the ANAO, the APG, the A VO

and the landlord, individually and collectively, resulted at that time,

or at any time might result, in any party to the lease for Centenary

House obtaining unfair and/or above-market commercial advantage

from any aspect of the arrangement;

(iii) whether the instructions of ANAO to the APG, as regards the

accommodation options, enabled the APG to test a sufficiently wide

market so as to enable the APG to pursue a truly competitive lease

arrangement;

(iv) whether all the Commonwealth agencies concerned acted in

accordance with the Government policies applying at the time;

(v) whether the APG, as the Commonwealth's property agent, fulfilled

its responsibility to the ANAO, including in relation to the

establishment of the lease terms;

(vi) whether, taking into account the nature and effect of the resource

agreement between the ANAO and the Department of Finance in

relation to the financing of the lease, the appropriate steps were

taken by the ANAO and the Department to ensure that the ANAO

could fund the lease commitments on Centenary House and meet its

other obligations;

2

(vii) whether all of the Commonwealth agencies involved acted in the

best interests of the Commonwealth, including so as to achieve

value for money;

(viii) the longer-term funding implications for the ANAO of the Centenary

House lease;

(ix) the options available for action in relation to the funding of the

Centenary House lease; and

(x) any other matters considered relevant to the public interest in the

matter, and

(b) whether any changes to existing arrangements are necessary or desirable to

avoid similar occurrences in the future.

1.2 A copy of the Letters Patent is Annex A to this report. A copy of Letters Patent

extending the time for making my report is Annex B.

1.3 Mr Graham Glenn, a former Secretary of the Department of Administrative

Services, was appointed to act as my Administrative Assistant in the Inquiry. I am

greatly indebted to him for the considerable assistance which he gave me during the

course of the Inquiry.

1.4 At the outset of the Inquiry I decided to proceed with as little formality as possible,

consistent with observing the principles of natural justice and affording all

interested parties a proper opportunity to place evidence before me and to test the

3

evidence given by witnesses. I therefore announced at the first public hearing of

the Inquiry that I intended to take evidence from witnesses in private chambers

without the attendance of representatives of other persons or parties, and to have a

transcript made of the evidence given. The transcript of each witness's evidence

was made available to all parties and they were advised that if, after reading a

witness's evidence, they wished to test it in cross-examination, I would ensure that

the witness attended at a public sitting of the Inquiry to be cross-examined. No

party objected to this procedure.

1.5 All parties who had a significant interest in the Inquiry furnished me with a great

deal of written material consisting, for the most part, of statements of witnesses and

submissions on the various terms of reference. This material greatly assisted me

and enabled me to complete the Inquiry more expeditiously than otherwise would

have been the case. No party from whom I sought additional information declined

to give it and, indeed, all parties showed commendable cooperation throughout the

Inquiry.

1.6 For relevant purposes, the essential provisions of the lease referred to in my terms

of reference are as follows:

(a) area leased, 6297 square metres;

(b) lease term of 15 years, option of 5-year extension;

(c) rental $280 per square metre per annum net as at 1 January 1991;

4

(d) escalator adjustment of 10.5% p.a. from 1 January 1991 to date of practical

completion;

(e) escalator adjustment of 9% p.a. from date of practical completion for 15

years;

(f) market review at the end of the fifth and tenth years and the agreed rate to

whichever is the greater between the escalated rent rate and market rent (it

should be noted that initially it was proposed that the market review be at the

end of the sixth and tenth years);

(g) total refurbishment of premises after 10 years if option to extend lease

exercised; and

(h) $400 000 contribution to lessee's fitout costs.

5

2 . Chronology of events preceding execution of the lease

2.1 The matters upon which I am asked to report can best be understood if regard is had

to the history of the events that preceded the execution of the lease. Accordingly, I

set out hereunder a chronology of most of those events.

2.2 Prior to 1989 the Australian National Audit Office (ANAO) was accommodated in

the Silverton Building at Civic. On 17 January 1989 the building was evacuated

due to structural faults in it and on 20 January the ANAO was relocated in

Medibank House, Woden as a temporary measure.

2.3 On 20 February 1989, the Department of Finance issued Estimates Memorandum

1989/2. This memorandum required certain Departments and agencies to meet,

inter alia, the cost of rent and fitout of their accommodation as from 1 July 1989.

2.4 On 9 March 1989 the Joint Committee of Public Accounts (JCPA) in its 296th

Report The Auditor-General: Ally of the People and Parliament recommended that

the ANAO plan for a new building either within the Parliamentary Triangle or on

State Circle adjacent to the new Parliament House and that the building be called

'Audit House'.

6

2.5 On 1 May 1989 the ANAO advised the Department of Administrative Services

(DAS) that to avoid further disruption to its activities it should stay in Medibank

House until permanent accommodation could be found elsewhere and that this

would not occur until the JCPA report was considered.

2.6 The JCPA report was considered by the Government. It decided that consideration

of the ANAO's accommodation requirements would proceed 'through the normal

processes'.

2.7 On 22 August 1989 the Auditor-General advised the Minister for Administrative

Services of the JCPA recommendation in the context of a Cabinet submission being

prepared by DAS on the options for development in the Parliamentary Zone and

Barton.

2.8 On 15 September 1989 the Minister for Administrative Services advised the ANAO

that he had asked his Department to include reference to the ANAO within the

strategy for accommodation in the Parliamentary precincts.

2.9 On 20 March 1990 the possibility of the ANAO being accommodated within the

Parliamentary Triangle was discussed at a meeting between representatives of the

APG and of the ANAO. The APG is a division of DAS. Its responsibilities

include giving advice to Commonwealth agencies seeking accommodation and the

obtaining of such accommodation on their behalf.

2.10 In (and prior to) 1990 the Lend Lease Property Group (Lend Lease) was engaged in

project development, with particular emphasis on government-related projects in the

7

Australian Capital Territory and elsewhere. Ms Penelope Morris was an Executive

Director of Lend Lease from May 1990 to January 1994.

2.11 On 6 June 1990 Mr Robert Hogg, who was then the Secretary of the Australian

Labor Party (ALP) met with Ms Morris and advised her that John Curtin House

Limited was looking to restructure the ownership of John Curtin House (a building

at Barton owned by it) and undertake a new property development in Canberra,

possibly as a joint venture.

2.12 On 19 June 1990 Mr Hogg and officers of Lend Lease commenced discussions

with the Australian Capital Territory Government Office of Industry Development

(OID) about the availability of a site for a proposed new development for the ALP.

This development became known as the new ALP National Headquarters.

2.13 By 17 August 1990 the OID had confirmed the availability of a site opposite the

Press Club in National Circuit, Barton. It was agreed by the ALP and Lend Lease

that the latter would discuss with the APG the prospect of the Commonwealth

occupying part of the proposed new development.

2.14 On 22 August 1990 Ms Morris spoke to Mr Ross Divett, who was then the General

Manager of the APG. She told him that Lend Lease was working for the ALP in

putting together a proposed new joint venture development and that this

development would only be possible if a tenancy pre-commitment could be

achieved. Ms Morris was of the opinion that the Commonwealth Government

would be the only likely tenant of the proposed new building, since the Australian

Capital Territory Government had indicated that it was not interested in taking space

in the building and no private sector tenant would be likely to be interested in taking

8

a lease of the proposed development. It was proposed that the new building would

contain 6000-7000 square metres of gross floor area. Such an area would be likely

to be too large for any private sector tenant.

2.15 According to Ms Morris she raised with Mr Divett two possible ways in which the

APG might be able to assist Lend Lease in finding a tenant. The first way would

be for Lend Lease to engage the APG, at normal commercial rates, as leasing agent

to lease the space in the building not required by the ALP for its own head-quarters.

The second way would be for Lend Lease to give the APG a substantial fee in the

order of $500 000 to take the leasing risk for the building. Ms Morris said that she

expressed a preference for the second way.

2.16 On 6 September 1990 Ms Morris attended a meeting at which Mr Hogg was present

and advised him of her preliminary discussions with the APG.

2.17 On 7 September 1990 Ms Morris chaired a meeting of representatives of Lend

Lease, the APG and Australian Construction Services (ACS) at which possible

project opportunities in which Lend Lease, the APG and the ACS could work

together were discussed. One item on the agenda of the meeting was the new ALP

Headquarters development. According to Ms Morris Mr Divett was present at the

meeting and indicated that the APG might be prepared to take the leasing risk for the

proposed building on certain conditions and enquired whether it would be possible

for the proposed new development to be designed to provide up to 8000 square

metres gross floor area instead of the 6000-7000 square metres that had been

mentioned in earlier discussions.

9

2.18 On 21 September 1990 Ms Morris instructed Lend Lease's solicitors to prepare

Heads of Agreement relating to the proposal that the APG should take up the

leasing risk of the proposed development. It was her view that it might be

reasonable for a fee of approximately $500 000 to be paid to the APG should the

proposal in the Heads of Agreement proceed. She decided that an offer of $400

000 should be made to the APG, with a view to negotiating up to a possible ceiling

of $500 000.

2.19 On 3 October 1990 Ms Morris gave a copy of the initial draft of the Heads of

Agreement to Mr Rex Hoy, who was then the Assistant General Manager of the

APG in charge of, inter alia, its ACT Regional Office. The fee to be paid to the

APG was left blank as it had not, at that stage, been discussed with John Curtin

House Limited's representatives. Shortly thereafter, Ms Morris advised Mr Hogg

that she had given the draft Heads of Agreement to the APG and that, after its terms

had been refined, she would suggest that a fee of $400 000 be paid to the APG.

She said she would expect to negotiate a higher figure up to $500 000. Mr Hogg

assented to this proposed course of action, but suggested that the reasonableness of

the fee should be checked with Mr Noel McCann, who was John Curtin House

Limited's adviser on valuation matters.

2.20 On 5 October 1990 the ANAO wrote to the Secretary of DAS advising of a

requirement for 7500square metres of office accommodation in a separate building

in the Parkes-Barton area or in a large complex with controlled access.

2.21 On 12 October 1990 DAS advised the ANAO that its requirement had been noted

and that a number of smaller buildings were being planned by private developers

for the Parkes-Barton area.

10

2.22 In late October and early November 1990 the APG placed advertisements in several

newspapers inviting expressions of interest in providing office accommodation of

3000-8000 square metres of net usable space in the Barton-Parkes-Griffith-Forrest

precinct of Canberra. The closing date for expressions of interest was 16

November 1990.

2.23 On 1 November 1990 Ms Morris had a conversation with Mr Hoy with reference to

the advertisements. She told him that the proposed ALP Headquarters met the

locational and area criteria referred to in the advertisements. Mr Hoy told her that

he was aware of the ALP Headquarters proposal and that there was no need to

respond to the newspaper advertisements. However, on 15 November 1990 Mr

Dominic Collins, an APG officer involved in the negotiations concerning the

ANAO's accommodation requirements, spoke to Ms Morris and asked her to

submit a proposal in answer to the advertisements. This she did. In all, 14

responses to the advertisements were received by the APG.

2.24 On 21 November 1990 Mr Collins wrote to the Auditor-General advising him of

options that might satisfy the ANAO's medium- to long-term needs. Attached to

the letter of advice were attachments showing the following:

(a) current accommodation holdings in the Australian Capital Territory showing

net rents;

(b) Medibank House net rents showing refurbished and unrefurbished rates;

11

(c) background and projected rents on the Sir Keith Campbell Building at

Woden;

(d) summary of potential accommodation in Barton-Parkes-Forrest-Griffith

area;

(e) location map for (d) above;

(f) other known proposals in the Barton-Parkes-Forrest-Griffith area;

(g) options to satisfy the requirement for 6500 square metres approximately in

the Barton-Parkes-Forrest-Griffith area.

2.25 Mr Collins included in his advice a schedule of 13 respondents to the

advertisements referred to in para. 2.22. No reference was made to the Lend Lease

proposal because, at that time, it was thought that the Industries Commission

should be given the opportunity of considering it. The APG wished to avoid a

situation where the ANAO and the Industries Commission would be competing for

the same property.

12

2.26 The substance of Mr Collins' advice was contained in the summary attached to his

letter, which was in the following terms:

T here are three options available that w ould satisfy the m edium to long term

accom m odation needs of the Australian National A udit O ffice, that could be achieved

within a tim efram e of 18 to 24 months. They are:

1. Remain in their existing accommodation

2. Relocate to the Parkes/Barton/Forrest/ Griffith area

3. Relocate to the Sir Keith Campbell Building in W oden.

Option 1

This option will cause considerable problems for ANAO. T he nature o f their operations

is such that they require above the norm al level o f security. They share this building

with the Departm ent o f Employm ent, Education and Training. This makes the provision

o f a secure perim eter for A N AO very costly and alm ost im possible to achieve.

Furtherm ore the space requirem ents o f ANAO slightly exceed that available in this

building. The building is substandard and requires a degree o f refurbishm ent and

m aintenance to be undertaken if ANAO are to remain there for any length o f time.

The owner's agents have written to APG advising in the following terms.

13

T h ere is no requirem ent for the Health Insurance C om m ission to refurbish

Medibank House during the term o f the current lease.'

■Financially there exists no incentive for the Health Insurance Com mission to

refurbish now.'

"We are under instructions from the Health Insurance Com m ission to advise you

that in order for the Health Insurance Commission to consider the refurbishments

further they m ust have in w riting agreem ent that the C om m onw ealth will

negotiate the lease term to ten years duration from the com pletion date o f the

refurbishm ents. W e note that as a m atter of policy no option provision within

that period would be considered acceptable.'

The above statem ents clearly indicate the lessor has no interest in the w elfare o f its

tenants and I strongly recommend against this as being an acceptable option.

Option 2

W hile there are proposals to construct buildings in this area only one would provide

ANAO with a sole occupancy building. It is located at M cM illan C ircuit and Sturt

Avenue, Griffith and has an infrastructure far inferior to other locations in the ACT. The

area provided is 8274 square metres and would have excess space to ANAO requirements.

Two other proposals provide 13,00 [sic] square metres and provide 30,000 square metres

respectively. Both these would require the Commonwealth to enter a pre-com mitment

lease arrangem ent for the whole o f the accommodation. All these proposals would be

more costly than options 1 and 3.

14

Option 3

T his option w ould provide A N A O with 6588 square m etres o f accom m odation.

Preliminary discussions with the building owners indicate a clear preparedness to upgrade

the prem ises to m odem standards to m eet ANAO long term needs. This option is

favoured as, subject to negotiation, the building w ill provide specifically for ANAO

needs, it can be secured, and ANAO will be the sole tenant. ANAO will be able to have

a m ajor input to services and finishes to satisfy their corporate image.”

As noted above, no reference was made in Option 2 to the Lend Lease proposal

because of the then current interest of the Industries Commission in that site.

However, shortly after the letter was written the Industries Commission appears to

have dropped out of consideration as a possible tenant of the Lend Lease

development and the ANAO was then told of it.

2.27 On 27 November 1990 Ms Morris had a conversation with Mr Hoy in which he

told her that he had two possible tenants in mind, the Industries Assistance

Commission which required 4500-5000 square metres and the ANAO which

required 6500-7500 square metres. He told Ms Morris that his preference was for

a development of 7500 square metres. He asked her to confirm by letter that 7500

square metres of space could be provided and requested that the draft Heads of

Agreement be redrafted so as to include a reference to this quantum of space. In

due course (on 7 December 1990), Ms Morris wrote to the APG confirming that

7500 square metres of space could be provided and forwarding a redrafted Heads

of Agreement.

15

2.28 On 29 November 1990 the APG advised the ANAO of the Lend Lease proposal.

By this time the Industry Commission's possible requirement for space in the

development had lapsed.

2.29 On 7 December 1990 the ANAO wrote to the APG confirming its preference for the

Lend Lease proposal. It also advised that its second preference was for Macquarie

House and the Australian Chamber of Manufactures Building (two buildings

opposite each other in Barton) and that its 'last resort' preference was for the Sir

Keith Campbell Building at Woden.

2.30 On 19 December 1990 the APG advised the ANAO that before approaching the

Department of Finance for funds, the APG needed to examine actual costs, rental

levels, timing of occupancy, etc.

2.31 On 11 January 1991 the APG wrote to the 14 respondents to the advertisements

requesting each to complete a building performance assessment form.

2.32 On 16 January 1991 Ms Morris met with Messrs Hoy and Collins. Mr Hoy

advised that he was happy with the Heads of Agreement except for a few minor

matters which he wanted changed. He said that the only remaining issue requiring

to be finalised was the quantum of the fee for the assumption of the tenancy

occupancy risk. At this time it was proposed that the new development would be

undertaken jointly by the ALP and the Australian Council of Trade Unions.

2.33 On 8 February 1991 Mr Hoy sent a facsimile message to Ms Morris concerning the

Heads of Agreement, raising one matter requiring clarification and asking that the

revised Heads of Agreement be sent to him.

16

2.34 On 26 February 1991 a meeting was held of the Project Control Group (PCG).

The Group was made up of representatives of the ALP and its various advisers,

including Lend Lease and Civil & Civic Pty Ltd. It was reported to the meeting that

the APG was keen to receive further details of the ALP project and had indicated its

willingness to assume the tenancy occupancy risk of the project. The draft Heads

of Agreement was discussed.

2.35 On 4 March 1991 the APG received a request from the ANAO for formal allocation

of the proposed development. (I shall hereafter refer to the proposed development

as Centenary House.) The ANAO'S request included a copy of an interim

approach to the Department of Finance in respect of funding.

2.36 On 5 March 1991 Ms Morris met with Mr Hoy who confirmed the APG's interest

in the proposed Centenary House development. It was agreed that a meeting

would be held on 19 March for the purpose of further discussing the development.

2.37 The meeting was held on 19 March. It was stated that, at that stage, the ANAO had

been identified as the prospective tenant and that it was engaged in discussions with

the APG regarding its proposed occupancy. The APG requested a package

providing details of indicative design, rent structure, lease agreement and fitout for

presentation to the ANAO.

2.38 On 22 March 1991 at a meeting of the ANAO Management Committee, reference

was made to the new ALP Headquarters. This appears to be the first written

reference on the ANAO's files that the owner of Centenary House would be the

ALP.

17

2.39 In early April 1991 the APG held meetings with the various respondents to the

advertisements referred to in para. 2.22.

2.40 On 16 April 1991 the APG was asked formally to acquire the Centenary House

development for the ANAO.

2.41 On 23 April 1991 a meeting was held between representatives of Lend Lease and

the ANAO to review preliminary tenancy requirements.

2.42 On 2 May 1991 the Department of Finance responded to the ANAO's letter of 4

March 1991 seeking additional information regarding the proposed development

and costs of relocation, suggesting that the option of staying in Medibank House be

not overlooked and indicating that a New Policy Proposal would be required.

2.43 It appears from a PCG report of 8 May 1991 that, as at that date, PCG was

considering paying a $50 000 fee to the APG. Although there is no precise

evidence on the point, it seems reasonable to infer that by 8 May 1991 the proposal

to enter into the Heads of Agreement had been abandoned.

2.44 On 27 May 1991 the ANAO replied to the Department of Finance seeking

agreement in principle to the relocation to Centenary House.

2.45 On 5 June 1991 the APG arranged a presentation to the ANAO by the Centenary

House Project Team of the proposed development.

18

2.46 On 11 June 1991 the ANAO submitted to the Department of Finance a Works

Technical New Policy proposal (WTNP) with reference to the relocation to

Centenary House, indicating cost savings over 10 years.

2.47 On 21 June the APG wrote to the ANAO seeking agreement to proceed with

negotiations on its behalf and stating that it had already had discussions with Lend

Lease to establish the parameters for any future agreement, including the terms of

any formal lease and a major contribution by the lessor to the cost of fitout.

2.48 On 21 June 1991 Mr Collins wrote to Ms Morris referring to the presentation on 5

June and confirming the ANAO's interest in occupying the proposed development,

subject to satisfactory lease negotiations. It was said that the ANAO would like the

APG to enter into negotiations as early as possible to ensure its accommodation

needs would be satisfied with minimum delay.

2.49 On 25 June 1991 a meeting was held between officers of the ANAO and the

Department of Finance. The matters discussed at this meeting are referred to in

some detail hereunder at paras 5.6 and 5.7.

2.50 On 26 June 1991 the ANAO formally confirmed APG's authority to proceed with

negotiations on its behalf.

2.51 On 28 June 1991 the ANAO wrote to the Department of Finance with more details

on the WTNP submission for the years 1991-92 to 1994-95.

2.52 On 3 July 1991 Ms Morris and Mr Collins met and commenced lease negotiations.

19

2.53 On 4 July 1991 the ANAO was provided by the APG with information mainly

relating to security of tenure and costings to assist in discussions with the

Department of Finance.

2.54 On 5 July 1991 Ms Morris wrote to the APG referring to the meeting held on 3 July

1991 and outlining her understanding of the outcome of negotiations conducted on

that day, including rent of $320 per square metre gross as at 1 January 1991,

escalation to completion of building, 15-year term of lease and annual rent

escalations or two-yearly reviews.

2.55 On 8 July 1991 the ANAO was provided by the APG with details of rental levels

and movements in the Woden and Barton areas showing a premium of 7-8% in

Barton.

2.56 On 15 July 1991 Mr R.J. Morison of the ANAO and Mr Pearson from the

Department of Finance discussed the ANAO's desire to relocate at Barton. Mr

Morison's record of that meeting is noted on the ANAO's files as follows:

1. On the afternoon o f 15 July 1991 Messrs Morison and Pearson, from ANAO and

DoF respectively, spoke regarding the status o f the ANAO's bid for accomm odation at

Section 22, Barton. DoF was concerned about potential rental variations between

Section 22 and Medibank House. DoF advised that they w ould support the Section 22

proposal only if the ANAO entered into a resource agreem ent for POE funding. They

were also worried that the ANAO would be left with sizable dead rents, particularly in

Tasman House. U nder the resource agreement we would be funded at a fixed amount

20

per year adjusted for price movements less efficiency dividends. The ANAO would be free

to m ake its ow n decisions regarding accom m odation and be responsible for the

consequences. Lum py costs o f fitout, dead rent, e tc, could be m et from savings on

borrow ings up to five years into the future at an interest penalty around the 10% mark.

2. The A N AO's disadvantaged status, and the fact that such agreem ents will be

common-place under future POE funding arrangements, were also discussed.

3. A fter discussions with the Acting D eputy the A N A O ’s latest position was

conveyed to the [sic] M r W ojick o f DoF. The A N A O w as happy to be funded to the

balance o f unspent appropriation for fitout rolled over from 1990-91 and any excess fitout

costs w ould be m et from a resource agreement. D oF advised that fitout was not their

concern but rather dead rent and it was dead rent that w ould need to be funded from a

resource agreem ent. T he m atter was left w ith D oF to b e reconsidered jointly on

Thursday, 18 July at a tim e m utually agreeable on that m orning.

2.57 On 8 August 1991 the Department of Finance forwarded to the ANAO a copy of an

extract of a brief on the proposed accommodation with varying assumptions on

escalation factors, concluding that the proposal was not cost-effective as presented

at that stage.

2.58 On 9 August 1991 the ANAO informed the Department of Finance that it was

willing to enter into a Resource Agreement.

21

2.59 On 13 August 1991 the Department of Finance proposed to the ANAO the

development of a Resource Agreement based on borrowing $2.75 million, and

repayment by a permanent reduction of $0,507 million in its Property Operating

Expenses (POE), not by passing on the cost to auditees.

2.60 On 22 August 1991 the ANAO informed the Department of Finance that it would

like to proceed with the Resource Agreement, but that it needed to resolve some

concerns.

2.61 According to a letter that is on the APG file and is dated 23 August 1991 Mr Collins

advised the ANAO of various possible methods of determining the rental in relation

to Centenary House. ANAO records do not disclose receipt of this letter. In the

letter Mr Collins, said, inter alia:

I am currently looking at the follow ing options and would seek your agreement before

entering any commitment:

(a) (i) Set a rent level at the time o f entering a commitment; or

(ii) Set a rent level now that would apply at the completion o f the project.

(b) (i) Establish a gross rent similar to the arrangements in Medibank House;

or

(ii) Establish a net rent which provides for the tenant to pay all outgoings.

22

(c) (i) Negotiate a rent structure based on fixed escalations; or

(ii) Negotiate a rent structure based on m arket rents.

I w ould be pleased to discuss the above with you at any time.

2.62 On 30 August 1991 Ms Morris met with a number of persons including Mr Collins

to progress matters relating to the proposed lease. It seems likely that an amount of

$400 000 was mentioned as the amount which the developer of Centenary House

was prepared to pay as a contribution to fitout costs.

2.63 On 3 September 1991 the AN AO informed the Department of Finance that a

permanent reduction of $0,507 million in its budget would not be appropriate, that

the final figure of $2.75 million might vary when the design for Centenary House

was setded, and that additional costs ought to be recovered by the ANAO through

fees.

2.64 On 17 September 1991 the APG sent a letter to McCann & Associates (the ALP's

valuation advisers) expressing the intent of the Commonwealth to take up space in

Centenary House. The letter stated that subject to satisfactory negotiations being

concluded, the Commonwealth would enter a formal pre-commitment to lease space

in the building by the end of January 1992. The envisaged conditions included:

(a) 15 years term with 5-year option;

(b) $280 per square metre per annum (net as at 1 January 1991);

23

(c) rent to be escalated to date of commencement of lease by an amount to be

agreed between the lessee's and lessor's nominated valuers;

(d) and to escalate at a fixed rate per annum thereafter — such amount to be

agreed between the valuers as before, but not to exceed 9.75% per annum;

(e) fitout incentive of $400 000.

2.65 In a Project Feasibility Report prepared by McCann & Associates and others dated

September 1991 prepared for presentation to an ALP Executive meeting on

20 September 1991 reference was made to a letting up cost expressed to be 'agreed

at $50 000'.

2.66 According to Ms Morris she had a discussion at about this time with Mr Collins and

Mr Richard McKeon (the then project manager of Civil & Civic Pty Ltd) regarding

the payment of the alleged $50 000 fee. As this discussion is the matter of some

contention I shall refer to it in greater detail hereunder in Chapter 3.

2.67 On 16 October 1991 representatives of the ANAO and the APG met. The ANAO

was informed that development problems had been resolved, negotiations were

underway with the developers and that a lease agreement might be signed by

Christmas. It was indicated that it was time for the ANAO to commence design

work.

2.68 On 17 October 1991 representatives of the APG and Lend Lease met to continue

negotiations on the terms and conditions of the proposed lease.

24

2.69 On 17 October 1991 the Department of Finance forwarded to Commonwealth

agencies Estimates Memorandum 1991/32, which included arrangements for office

accommodation leases in the ACT. These included a requirement that before

entering leases agencies should obtain certification from the APG that certain

requirements (including approval from Australian Estate Management) had been

met.

2.70 On 18 October 1991 the Department of Finance agreed to the ANAO repaying over

a period of 7 years the amount it required to borrow to relocate at Centenary House.

It stated that any ongoing savings brought about by the relocation were to be

shared. The Department stated that it needed to be satisfied that safeguards existed

to prevent excessive requirements creeping into the specifications and that rental

costs were well controlled.

2.71 On 21 October 1991 the APG sought the ANAO's approval to commission

comprehensive valuation advice from the Australian Valuation Office (AVO) on the

proposed lease.

2.72 On 24 October 1991 the ANAO sought advice from the APG that the requirements

of Memorandum 1991/32 had been met.

2.73 On 28 October 1991 the ANAO advised its agreement to the commissioning of a

valuation by the AVO.

25

2.74 On 1 November 1991 the APG sought comprehensive advice from the AVO in

respect of the proposed lease. The advice sought included:

(a) rentals and operating outgoings for the premises as at 1 January 1991;

(b) rent and outgoings escalators from 1 January 1991 to the date of practical

completion and for the term of the lease.

It was stated that rentals under the lease were to escalate at a fixed percentage over

the term of the lease. It was also stated that the proposed lease 'represents a major

departure from the conventional gross lease agreement' and that 'it does effectively

provide the owner with a predetermined return on investment and this should be

taken into account when you provide the valuation'.

2.75 On 4 November 1991 the APG replied to the ANAO's letter of 24 October 1991

(supra) dealing with some of the issues raised by the Department of Finance in

Estimates Memorandum 1991/32.

2.76 On 6 November 1991 Lend Lease wrote to the APG setting out its understanding of

the outcome of the negotiations on 17 October 1991 and acknowledging the need

for both parties to further consider the lease conditions during finalisation of the

financial structuring of the development.

26

1

2.77 On 7 November 1991 the ANAO sought advice from the APG in the context of the

Resource Agreement it was negotiating with the Department of Finance on:

(a) funds required from the Department of Finance;

(b) the rent arrangements into which Lend Lease would be prepared to enter,

(c) whether the rent/fitout mix could be changed to negate the need for the

ANAO to approach the Department of Finance;

(d) short- and long-term economic considerations.

2.78 On 11 November 1991 Mr Collins of the APG supplied the ANAO with

information relating to the Resource Agreement. With respect to the ANAO's

query as to what would be the rent arrangements that would be acceptable to Lend

Lease, Mr Collins replied by stating: 'The attached advice to the Australian

Valuation Office sets out the basis of the proposed lease and the rent agreement'.

The attached advice was a copy of the letter referred to in para. 2.74 in which it was

stated, inter alia, that 'rentals will escalate at a fixed percentage per annum over the

term of the lease’.

2.79 On 12 November 1991 representatives of the A VO met with representatives of

McCann & Associates and Lend Lease to gain information about the development.

2.80 On 19 November 1991 a second meeting took place between representatives of the

AVO, McCann & Associates and Lend Lease.

27

2.81 On 27 November 1991 the AVO made a report to the APG. The report

recommended that rental growth escalators, on a base rental of $280 per square

metre net as at 1 January 1991 be negotiated at rates not exceeding:

, 10.5% from 1 January 1991 to date of practical completion of the building;

, 9% for 15 years from the date of practical completion of the building;

and that a review to market be held at the end of the sixth and tenth years with the

lessee paying the reviewed rate or the agreed escalated rate, whichever was the

greater.

2.82 On 2 December 1991 the Department of Finance provided a draft Resource

Agreement to the ANAO providing for the borrowing of $2.75 million repayable

with interest over 7 years, after full repayment of a 50:50 share of on-going

savings, with the ANAO to meet any lease costs which escalated at a rate greater

than the market.

2.83 On 3 December 1991 the APG advised McCann & Associates that the

Commonwealth would be prepared to enter into a lease agreement, subject to the

granting of statutory approval and finalisation of the terms and conditions. The

letter envisaged the following:

(a) area of 6000 square metres;

(b) lease term of 15 years with an option for a further 5 years;

28

(C) rental $280 per square metres per annum net as at 1 January 1991;

(d) escalator adjustment of 10.5% p.a. from 1 January 1991 to date of practical

completion;

(e) escalator adjustment of 9% p.a. from date of practical completion for 15

years;

(f) market review at the end of the sixth and tenth years and the agreed rate to be

whichever is the greater between the escalated rent rate and market rent;

(g) total refurbishment of premises after 10 years if option to extend lease

exercised.

2.84 On 15 January 1992 Senator Warwick Parer, the then Shadow Minister for the

Australian Capital Territory, Local Government and Administrative Services issued

a media release in which he expressed Opposition concerns about the proposed

lease, referring to what he described as 'issues of conflict of interest' and

'incredibly generous conditions to the Labor Party landlords'.

2.85 On 16 January 1992 the APG sought confirmation from the National Capital

Planning Authority that the proposed relocation of the ANAO to Barton would

comply with the requirements of the National Capital Plan.

2.86 On 20 January 1992 the APG sought approval from Australian Estate Management

(AEM) of the proposed relocation of the ANAO to Centenary House.

29

2.87 On 21 January 1992 AEM foreshadowed that its approval to the relocation would

not be forthcoming.

2.88 On 24 January 1992 the APG advised the ANAO that the AEM's approval would

not be forthcoming.

2.89 On 30 January 1992 AEM reviewed its position and advised the ANAO it would

not withhold support for the proposed relocation.

2.90 On 7 February 1992 the National Capital Planning Authority endorsed relocation of

the ANAO from Woden to Barton as appropriate and consistent with the National

Capital Plan.

2.91 On 11 February 1992 the Department of Finance wrote to the ANAO setting out the

terms of a proposed Resource Agreement. It was said the Agreement ’does not

extend to arrangements in the accommodation contract which exceed the accepted-

norms for accommodation standards and fitout, or for any possible arrangements

which allow rent revisions to exceed market rates'.

2.92 On 12 February 1992 the ANAO agreed in principle to the Department of Finance

terms.

2.93 On 14 February 1992 the Department of Finance wrote to the ANAO stating its

concern as to whether the ANAO could realistically repay the loan from real

savings.

2.94 On 27 March 1992 the Resource Agreement was signed.

30

2.95 On 3 April 1992 the APG formally sought confirmation of the ANAO's requirement

for space in the proposed Centenary House and approval for it to enter into a pre­

commitment lease on the ANAO's behalf. The ANAO replied on the same day

confirming its requirements and authorising the APG to enter into a pre­

commitment lease.

2.96 On 6 April 1992 the APG gave formal approval to the proposed lease under the

Lands Acquisition Act.

2.97 Between 9 March and 8 April 1992 many meetings and discussions were held,

involving the APG, Lend Lease, Civil & Civic Pty Ltd (the manager of the project),

McCann & Associates, the Australian Government Solicitor, the solicitors for the

ALP and Macquarie Bank and its solicitors, to discuss and agree upon the terms of

the lease and Agreement to Lease documentation.

2.98 On 8 April 1992 a formal agreement to the lease was signed on behalf of the

Commonwealth by the Australian Government Solicitor, but was held in escrow

until 23 April pending confirmation of finance by the lessor.

2.99 On 23 April 1992 the formal Agreement to Lease was dated to take effect from that

day, and the Commonwealth became legally bound to the lease.

2.100 In April 1992 construction of Centenary House commenced. The building was

occupied by the ANAO on 11 June 1993.

2.101 In September 1993 the lease was signed.

31

3 . The offer of $50 000 to the Australian Property Group

3.1 At an early stage of the Inquiry a question arose as to the propriety of an offer by

Ms Morris on behalf of the proposed lessor to pay the sum of $50 000 to the APG.

I heard evidence on this question at the commencement of the Inquiry as it was

important to ascertain whether any Commonwealth officer had been influenced by

the making of the offer. The offer was made with' the knowledge of the PCG

which had been established to progress the Centenary House development. Its

members included Ms Morris and Messrs Hogg, McCann and McKeon.

3.2 There are two versions of the circumstances in which the offer came to be made. In

substance, Ms Morris claims that the payment was to be in the nature of a

recompense to the APG for the work done by it in pursuing the proposed Heads of

Agreement. According to her, she had a discussion with Messrs Collins and

McKeon some time prior to 20 September 1991 in which she told Collins that the

PCG would be receptive to compensating the APG in some way for the work it had

done pursuant to the Heads of Agreement and asked him to give some thought as to

what would be an appropriate fee to compensate the APG for the work it had done.

She said that Mr Collins said he would do that and would get back to her and that

he subsequently telephoned her and said that 'something in the vicinity of $45 000

32

to $50 000' would be reasonable compensation for the APG. She said she told Mr

Collins that the PCG would agree to a sum of $50 000 being included within the

project budget for this item. She denied that the fee was intended to be in the

nature of an agent's commission payable to the APG for finding a tenant for the

development. Mr McKeon did not give oral evidence, but in his written statement

he said that an amount of $50 000 was agreed as an appropriate fee to the APG in

relation to the work they had undertaken to let the project. Clearly there was no

longer any tenancy risk as a tenant had been found. He agreed with Ms Morris that

Mr Collins did not say it would be inappropriate for the APG to accept the money.

3.3 Mr Collins' version of the nature of the offer is different. According to him, the

proposed fee of $50 000 was offered to the APG if it 'formally committed a tenant

to the building prior to construction commencing'. He said he rejected the fee

because to have accepted it would have placed the APG in a position of conflict of

interest. That is to say, the APG could not act in the interests of the

Commonwealth as the prospective lessee of Centenary House and also accept a fee

from the lessor for finding the lessee. Mr Collins denied that the fee was offered in

recompense for the work done under the proposed Heads of Agreement.

3.4 Mr Collins' account of the offer finds substantial support in a statement furnished

by Mr Hogg. He said he believed the payment of the fee was raised by a

representative of Civil & Civic Pty Ltd as a possible inducement to the lessee. He

said:

My understanding from that discussion was we w ere in a new 'user pays' environm ent

which had recently been introduced to government departments including APG. Therefore

there w as a commercial fee similar to an agent's comm ission that could be charged by the

33

APG to client departments for organising leases for them. It was suggested to me that

the Landlord (John Curtin House Limited) could offer to pay an am ount o f say $50 000 to

APG towards satisfying that fee as part o f the inducement package being offered to the

tenant."

3.5 Ms Morris' version of the nature of the offer does not gain support from Mr

Hogg's evidence.

3.6 Ms Morris said in evidence that the offer of the $50 000 was first made in

September 1991. If this is correct, and I accept that it is, it seems highly

improbable that her recollection of her conversation with Mr Collins is accurate.

She herself had fixed on the sum of $50 000 as early as May 1991, some four

months before, according to her, Mr Collins calculated that $50 000 would be an

appropriate fee and mentioned that sum to her. On 8 May 1991 she tabled a report

to a PCG meeting in which she stated that the ANAO had confirmed to the APG its

desire to progress negotiations relating to the new ALP Headquarters building. In

that report, under the heading 'Possible Inducements", there is an entry 'possible

$50 000 "agency commission" to the APG'.

3.7 Moreover, the possibility of the payment of $50 000 was referred to in a Civil &

Civic Pty Ltd commercial assessment of the proposed development made on

12 August 1991. In that assessment under the heading 'Possible Inducements'

appears the entry 'possible $50 000 "agency commission" to APG'.

This entry was made a month before Ms Morris claims Mr Collins first mentioned

the sum of $50 000.

34

3.8 I think it is reasonable to conclude on the whole of the evidence that Ms Morris, on

behalf of the developer, offered to pay an agency commission of $50 000 to the

APG should the Commonwealth enter into a lease of Centenary House.

3.9 It was unfortunate that the offer was made. Mr Collins correctly appreciated that it

would have been wrong for him to have accepted it on behalf of the APG and he

was right to reject the offer. There would have been nothing wrong in Ms Morris

offering inducements to any prospective tenant to persuade it to enter into a lease.

Payments by a lessor to a lessee in the nature of contributions to fitout costs and

costs of relocation are not unusual and frequently form part of proper commercial

arrangements made between lessors and lessees.

3.10 It was no doubt always contemplated by Ms Morris that if a lease was to be

formally concluded, it would be with the Commonwealth and not with the APG or

the ANAO. I accept that she did not perceive the impropriety of making the offer

in the form which she did. In fairness to her it should be stated that there is no

basis for any suggestion that the offer was intended to benefit Mr Collins personally

or to improperly influence him to deal favourably with the developer of Centenary

House. The money offered to the APG was in fact applied towards the cost of

fitting out that part of Centenary House occupied by the ALP.

3.11 I do not think the offer had any bearing on the way in which the APG or its officers

dealt with Ms Morris or the developer, nor did it influence the terms of the lease

which was subsequently entered into by the Commonwealth.

3.12 Nor do I think any criticism can be levelled at the other members of the PCG

because the offer was made. They were entitled to proceed upon the basis that it

35

was proper for inducements to be offered to the proposed lessee as an incentive to

enter into a lease. It was reasonable for them to leave it to Ms Morris to make any

offer and if she erred (as I think she did) in offering the inducement to the APG

instead of to the ANAO they cannot reasonably be held responsible for her error.

3.13 However, there remain two features of the offer which require comment. In the

first place, whether or not the offer was intended to be in the nature of an agent's

commission or a compensation to the APG for abortive work done by it on the

Heads of Agreement, there was no legal obligation upon the developer to make it.

It was fairly put in a submission made by Mr David Connolly MP that 'the

possibility must be considered, that those representing the lessor were so pleased to

have the ANAO lease executed that they [offered to make] a gratuitous payment of

$50 000'. I agree that Ms Morris' offer requires that close attention be given to the

question whether the terms of the lease are unduly generous to the lessor.

3.14 The other aspect of the offer which requires comment is the failure by Mr Collins or

someone else in the APG to have the offer reformulated so that it could have been

accepted by the ANAO. Mr Collins said in evidence that he suggested that the

$50 000 be applied towards an additional contribution to fitout costs, specifically

for electronic equipment required by the ANAO. Yet no attempt seems to have been

made to follow up this suggestion. In the result the opportunity for the

Commonwealth to receive the $50 000 on behalf of the ANAO was lost. It was

submitted by senior counsel for the APG that the reason why sufficient attention

was not given to ensuring that advantage was taken of the offer was that Mr Collins

retired while the terms of the lease were being finalised. However, he did not

retire until February 1992 and there was adequate opportunity before then for action

to be taken to take advantage of a reformulated offer.

36

3.15 Ms Katherine Argali, who is the General Manager of APG, was of the view that it

would not have been appropriate for the APG to attempt to have the offer reframed

as an offer to the ANAO. She said that, given the political sensitivity of the

transaction, it could have given rise to public perception of some sort of

impropriety. This is a matter upon which reasonable minds may differ. However,

given that the developer was in any event giving the ANAO an inducement in the

form of a major monetary contribution to fitout costs, I do not think there would

have been any objection to the ANAO receiving the $50 000 as an additional

inducement

3.16 The making of the offer should be kept in perspective. It was made to a

government agency, not to an individual, and was not made with any improper

motive. Had the offer been cast in slightly different terms it would have been

unexceptionable.

37

4 . Are the terms of the lease reasonable?

4.1 The terms of the lease were negotiated by officers of the APG with the benefit of

valuation advice from the AVO. This was in accordance with proper practice, as

they were the Commonwealth agencies best equipped to advise upon and negotiate

the terms on which the Commonwealth might take a lease of accommodation

required by Commonwealth agencies.

4.2 There is no evidence that any Commonwealth officer involved with the Centenary

House lease has, or has had, any connection with the ALP or Lend Lease. Nor is

there any evidence suggesting that any officer stood to gain any benefit from the

Commonwealth entering into the lease.

4.3 For some time prior to 17 September 1991 discussions had been held by Mr

Collins and representatives of the PCG as to the terms upon which the

Commonwealth might take a lease of a substantial part of Centenary House. Some

of these discussions are referred to in Chapter 2. By 17 September 1991 the

discussions had reached an advanced stage because Mr Collins then wrote to

McCann & Associates expressing the Commonwealth's intention to take up space

in the proposed new development subject to the broad parameters and conditions

38

outlined in his letter. The parameters included a lease area of approximately 6000

square metres net lettable space, the lease to commence from final completion and

fitout of the building, a term of 15 years with an option to extend for a further five

years, and an opening rent expressed to be as follows:

$280 per square m etre net as at 1 January 1991 escalated at a level per annum compound

to the comm encement o f the Commonwealth lease, as agreed between the lessor’s and the

lessee's nominated valuers.

It was stated that rental for basement and on-site car parking spaces would be

$1000 and $500 per annum respectively.

Under the heading 'Rent Escalation' it was stated:

Rent to escalate at a fixed -% per annum over the 15-year term certain o f the lease;

R ent escalations to be determ ined by the lessor's and lessee's valuers and not to exceed

9.75% and to be based on rates of escalation already applying to sim ilar Commonwealth

leases in the ACT.

4.4 The letter of 17 September 1991 also stated that the lease terms and conditions were

to 'essentially align with the form and content as covered in the Lease by the

Commonwealth over premises in Fernhill Park Bruce, for AUSLIG' and that the

ALP was to contribute up to $0.4 million towards the cost of fitout of the premises.

39

4.5 The advice of the AVO was not sought until 1 November 1991. On that date Mr

Ireland of the APG wrote to the AVO giving some details of the proposed lease, but

those details did not include the statement that the opening rent was intended to be

$280 per square metre net as at 1 January 1991, nor that the annual rental for

basement and on-site car parking spaces was intended to be $1000 and $500

respectively. Mr Ireland asked the AVO to provide advice in respect of, inter alia,

rental for accommodation and car parking spaces as at 1 January 1991, rent

escalators from 1 January 1991 to the practical completion date, and rent escalators

from practical completion date for the term of the lease.

4.6 The valuer who provided the advice was Mr Graham Jeffress. His advice was

given on 27 November 1991. Reference to his advice discloses that he was aware

that the rental rates of $280 per square metres per annum for the office

accommodation and $1000 per annum and $500 per annum for basement and on­

site car parking spaces respectively had already been tentatively agreed in

negotiations which had taken place before his advice was sought.

4.7 From the text of Mr Jeffress' advice, it might be thought that he merely accepted

the rental figures which had already been discussed by Mr Collins with Mr

McCann. However, I am satisfied that he formed his own independent opinion

that the rental figures of $280 per square metre for office space and $1000 and

$500 for car spaces were fair and reasonable as at 1 January 1991. At first blush,

it might appear odd that the APG should form its own tentative views on rentals

without first seeking advice from the AVO. However, I do not think that it can be

criticised for doing so. Its experience in negotiating leases of office

accommodation and car parking spaces in the Australian Capital Territory gave it

an unrivalled knowledge of market rentals for such accommodation. Indeed, the

40

A VO itself necessarily had to depend substantially upon rental information given to

it by the APG when giving valuation advice in respect of accommodation in the

Australian Capital Territory.

4.8 Mr Jeffress recommended that the rental growth escalator for the period 1 January

1991 to the date of practical completion of the building should be 10.5% per

annum, and for the 15-year term of the lease should be 9%. He further

recommended that a review to market should also be held at the end of the sixth

year and the tenth year of the lease with the lessee paying the rental escalated at the

agreed rate at those dates or the market rent whichever should be the greater.

4.9 Mr Jeffress' reasons for adopting these rental growth escalators were expressed in

his report as follows.

LONG TERM RENTAL GROWTH

In determ ining a rental escalator for the proposed lease, historical records o f rental

m ovem ents within the main commercial areas o f Canberra have been examined.

An exam ination o f rental m ovem ents over the last 15 years in the Barton area, the City

and the W oden Town Centre has shown long term annual rental growth rates o f between

9.08% to 10.51% in the Barton area and 10.16% to 10.66% in the City area. The long

term ren tal grow th in the W oden Town Centre from 1976 to 1987 w as indicated at

9.06% .

41

Other considerations in establishing a long term rental escalator for the subject lease is

the supply and demand for office accomm odation in Canberra and in particular the Barton

area. The proposed developm ent o f the York Park complex will provide an additional 46

000 square metres of office space when completed.

However, the uncertainty o f the comm encement date o f this project together with the need

to use m ost o f the accommodation in the new building as staging space for the occupants

of the Treasury Building and the Adm inistration Building (which are to be refurbished),

suggests that the im pact o f the provision o f this additional accom m odation would

probably not be felt for eight to ten years.

The planned redevelopm ent o f the Com merce House site in Brisbane Avenue is the only

other known private office developm ent project in the Barton area.

As supply and demand are the m ost critical factors affecting rental growth rates and

assum ing that any possible change in governm ent policy does greatly alter the current

growth o f the public service located in Canberra, it is difficult to envisage that the

existing long term rental trends will not continue.

SHORT TERM RENTAL GROWTH

At 1 January 1991 rentals negotiated over a two year period in the City and in Barton

were showing annual rental growth rates o f around 12.5% to 13.75%.

Since January this year these rates have dropped to a present rate o f around 10.5% to

11%.

42

4.10 The most significant terms of the lease requiring consideration are as follows: -

(a) the length of the term —15 years;

(b) the notional rent of $280 per square metre net as at 1 January 1991 — this

formed the basis of the calculation made to determine the actual base rent

payable when the lease took effect;

(c) the 10.5% rent escalation factor from 1 January 1991 to date of occupation;

(d) the 9% annual rent escalation factor,

(e) the form of the rent review clause;

(0 the lessor's contribution of $400 000 to the lessee's costs of relocation and

fitout.

4.11 At the commencement of the Inquiry I formed the view that I should obtain

independent valuation advice on the question whether the terms of the lease were

unduly generous to the lessor and on related matters. Accordingly I arranged for

Mr Graham Fenwick to make a report on the matters referred to in para. 4.10. Mr

Fenwick is a most experienced and highly competent valuer who has no

professional or other connection with Lend Lease, the APG, the AVO, the ANAO

or the ALP. He was for many years managing director of Richard Ellis Pty Ltd,

formerly Richard Ellis, Sallmann & Seward, and has been a director of the Real

43

Estate Institute of South Australia, President of the Australian Institute of Valuers

(South Australian Division) and President of the Real Estate Institute of South

Australia. He is a Fellow of the Australian Institute of Valuers and Land

Economists and is a Life Member of the Real Estate Institute of South Australia. I

shall make references to Mr Fenwick's views later in this report.

4.12 While the 15-year term of the lease was longer than most leases entered into by the

Commonwealth, I do not think the length of the term calls for adverse comment.

No doubt the length of the term was suitable to the lessor, but it was also suitable to

the ANAO. The building was constructed to meet the ANAO's requirements and it

was therefore not unreasonable that both parties to the lease should contemplate that

it would be for a lengthy term.

4.13 It is of significance that the lease contains a provision that if, at the expiration of 10

years, the lessee exercises the option of a 5-year renewal, the premises are to be

refurbished at the cost of the lessor. This provision is likely to be of considerable

benefit to the ANAO. In effect, it gives the lessee the right to occupy a refurbished

building for a further 10 years after the option is exercised, if it desires to do so.

There is no reason to believe that the ANAO will require accommodation in

Canberra for less than 20 years. The 15-year term and the option, taken as a

package, although longer than most lease packages, is likely to prove a distinct

advantage to the ANAO.

4.14 Mr Collins said that in the great majority of cases where the Commonwealth takes

leases of large areas of office space it seldom, if ever, vacates in less than 20 years

or thereabouts. He also said that lessors were almost always reluctant to

undertake even minimum repairs and maintenance, much less reasonable r

44

refurbishment, unless or until faced with the prospect of tenants actually vacating

buildings. Medibank House and the Sir Keith Campbell Building are examples of

this. He also said that given the cost of relocation, and the lack of relocation

alternatives in the tight Canberra market, it was frequently the case that

Commonwealth agencies were effectively locked into premises of mediocre or poor

standard. It was for these reasons that he indicated to Lend Lease that the

Commonwealth might be agreeable to a 15-year term provided the lessor agreed to

undertake a refurbishment and upgrading program after 10 years. Additional

factors to which he had regard in deciding that a 15-year term was appropriate

were:

(a) the AN AO was a 'stable' organisation unlikely to be disbanded or

abolished by Government;

(b) the ANAO had been unsatisfactorily accommodated for a

considerable period;

(c) the JCPA had recommended that the ANAO plan for

permanent accommodation in or near the Parliament;

(d) the ANAO was proposing to spend some $3.5 million to fit

the premises out for its use;

(e) without a 15-year term refurbishment by the lessor at year 10

could not be achieved, and this would result in the ANAO being

accommodated in poor quality premises once again.

45

4.15 I think Mr Collins' reasons have considerable force. I therefore conclude that the

term of the lease of Centenary House,that is, for 15 years, was not unreasonably

long.

4.16 As to the base rental of $280 per square metre net, Mr Bryan Hurrell, a senior

valuer in the A VO who had not taken any part in the original valuation furnished

by Mr Jeffress, gave evidence supporting that figure, citing market evidence to

support his opinion.

4.17 Mr Fenwick examined the same market evidence and came to the same conclusion.

He made his own enquiries and property inspections before expressing his opinion

that the valuation of $280 per square metre as at 1 January 1991 was justified. He

inspected the APG records of all Government lettings and rent reviews that

occurred in 1990-91. He also interviewed three of the most prominent leasing

agents and valuers in Canberra, viz. Knight Frank Hooker, Colliers Jardine and

Ray L. Davis, to ascertain whether there were any other lease transactions which

might have provided relevant data for valuation purposes. All three agents

disclosed their records to him and supplied him with graphs and predictions which

they had prepared independently in the relevant years. Mr Fenwick formed the

opinion that the rental market was very strong in the years leading up to the

valuation date and that all the evidence strongly supported the base rental of $280

per square metre net as at 1 January 1991.

4.18 At my request, Mr Malcolm Coleman, who is the General Manager of the A VO,

also made an examination of the data that was available to Mr Jeffress in 1991 when

he made his valuation. Mr Coleman saw no reason to differ from Mr

46

Jeffress' opinion that $280 per square metre net was a fair estimate of the rental

value of space in a building such as Centenary House had it been leased on 1

January 1991.

4.19 On 9 October 1992 the ANAO commissioned Baillieu Knight Frank (Canberra) Pty

Limited (BKF) to furnish an independent report on the Centenary House lease. The

report was furnished on 9 December 1992 by Mr P.W. Marshall and Mr G.H.

Sirel, who are BKF's managing director and senior valuer, respectively. In their

report they warned of the danger of using hindsight. They concluded, inter alia:

Irrespective o f the ow nership implications of the subject property, our overview o f the

availability or potential availability o f a private sector building in Barton satisfying the

criteria concludes that the subject property was the only property that could potentially

satisfy the accommodation requirements.

W hilst the econom ic clim ate throughout A ustralia w as extrem ely grim , the property

m arket in Canberra for 1991 was one which experienced:

, an increase in building vacancies with the overall rate remaining low;

, continuing rental growth;

, strong levels o f absorption;

, moderate levels o f supply projected for the medium term; and,

, high levels o f pre-com mitment for new developments.

W hilst the initial term o f fifteen years, with a five year option, is towards the maximum

term th at w ould be sought, it w ould not be unusual that any enterprise seeking

substantial accomm odation, to satisfy long term requirem ents, would not (sic) seek long

47

term lease comm itm ents of a minimum o f ten years, with options to extend the term,

generally at five yearly intervals.

W e are o f the opinion that at the time o f entering into the lease the base rent of $280/m2

and maintenance allowance o f $40/m2 were commercially realistic.

W hether or not the negotiated growth rates will reflect the m arket forces over the fifteen

years remains to be seen, but as with any fixed percentage increases applied over time,

one would expert (sic) that m arket levels during any particular point would not necessarily

correlate with the percentage incremented rent, with the m arket either exceeding or being

less than the incremented rent.

Having regard to the various factors which impact on rental growth the escalation rates,

whilst not unreasonable, are considered to be towards the maximum.

4.20 In June 1992 Mr Warren, a partner in the Canberra practice of Price Waterhouse,

made a report to the Liberal Party of Australia concerning some aspects of the

Centenary House lease. The report was tendered in evidence. Although he did

not state in this report that the base rental figure of $280 per square metre was too

high, it can be inferred that that was Mr Warren's opinion. However, he appears

to have based his opinion on leases entered into, for the most part, after the date

when Mr Jeffress made his valuation. Although Mr Warren has considerable

commercial experience, he is not a valuer and I think that his opinions were formed

to an extent with the benefit of hindsight. Moreover, the leases of other premises

relied upon by him in making his report differed in important respects from the

48

lease of Centenary House. They were not leases of buildings constructed to meet

the Commonwealth's accommodation standards, as was Centenary House.

Further, Centenary House was designed to meet the particular needs of the ANAO

as to space, security and separation from other tenants. Mr Warren's report does

not persuade me that Messrs Jeffress, Hurrell, Coleman, Marshall, Sirel and

Fenwick, who are all experienced land valuers, are wrong in their opinions.

4.21 In the light of all the evidence, I do not think there is any reason to question the

base rental figure of $280 per square metre as at 1 January 1991.

4.22 The 10.5% and 9% escalation factors are of much greater importance. Mr Fenwick

was of the opinion that unless there is a clear indication that there will be a marked

change in market circumstances, it is appropriate to project known trend-lines to try

to predict future rental levels. As appears from his valuation Mr Jeffress is of the

same opinion.

4.23 It is most instructive to consider the evidence that existed in 1991 as to the long­

term trend in rentals of commercial premises in Canberra. Table 4.1 shows

changes in levels of rentals in the Canberra City (i.e. CBD) area and in Barton

during the period 1982-92. The table also shows CPI movements over the same

period. The table also shows rental movements in 1992, but this information

would not have been available to the A VO in 1991. As can be seen from the table

there was strong and continuous growth in rents in both Barton and the CBD in the

years 1983-91.

49

Table 4.1. Property Rent Growth and CPI 1982-92.

C ity Barton C PI

G row th

R ents G row th R ents G row th All

G roups

Year (% p.a.) (% p.a.) (% p.a.)

1982 135 110

1983 150 11 125 13.6 11.13

1984 172.5 15 145 16 3.8

1985 197.5 14.5 160 10.3 6.7

1986 205 3.4 180 12.5 8.5

1987 236.5 15.4 190 5.5 9.3

1988 245 3.4 205 7.8 7.1

1989 282.5 15.3 245 19.5 7.5

1990 320 13.3 280 14.2 7.7

1991 340 6.3 315 12.5 3.4

1992 350 2.3 330 4.7 ~ T ~

4.24 Table 4.2 shows trends of rental levels in Barton over a longer period. As can be

seen from the table, the average long-term annual growth rate of rentals in John

Curtin House in the period 1975-90 was 9.08%. In respect of John McEwan

House, the average annual growth rate in the period 1973-89 was 9.35%. In

respect of Bligh House, the equivalent growth rate for the period 1978-90 was

10.51%. Industry House and the IBM building (in respect of which the rental

periods were shorter) show figures of 14.31% and 12.0% respectively.

50

4.25 Mr Fenwick's opinion as to the 10.5% p.a. and 9% p.a. factors which were agreed

upon in 1991 was expressed in the following words:

In the light o f all o f the m arket evidence at the time, o f which both parties were aware,

the end result is considered to be reasonable. There was evidence o f long term trends

which would have supported a 10.5% p.a. rate for the whole term but the valuers correctly

allowed for the fact that at the tim e o f the negotiations there was evidence o f a slight

reduction in the growth rate and settled on a differential between the short term escalator,

that is, up to practical completion and the longer term escalator.

4.26 Mr Fenwick also relied upon the lease of the Scrivener Building at Femhill

Technology Park as supportive of the 9% annual escalation factor. In that case, a

base rental was agreed during early negotiations at $250 per square metre per

annum with a 1% per month escalator from 31 January 1991 until completion of the

building, with rent reviews thereafter for the term of the 10-year lease at 9% p.a.

compounded on two-yearly anniversaries of the lease commencement. Approval

for this arrangement was given on 23 May 1991. The transaction, although

apparently unknown to Mr Jeffress at the time he made his valuation in November

1991, lends support to the 9% factor which he then adopted.

4.27 It is impossible to say whether the average annual growth rate in commercial rentals

in Barton will be greater or less than 9% over the next 14 years of the Centenary

House lease. For all that is known at the present time, the average annual growth

rate may exceed 9%. The chart which follows shows the level of increases in

office rentals in the Australian Capital Territory from 1 January 1991 to 31

December 1993 (see figure 4.1). The chart shows that increases in the period

from 1 January 1991 to 30 June 1991 ranged between 8.13% and 13.76%. For

52

the following six months to 31 December 1991 the increases ranged, with one

exception, between 8.8% and 10.15%. The one lease which is out of line in that

period was in respect of the Institute of Criminology Building. The modest rate of

increase in respect of that building (which is said to be poorly located in comparison

with the others) may have been occasioned by the fact that the rental increase started

from a higher base of $305 per square metre in 1989. There is only one example

in the period 1 January 1992 to 30 June 1992 and this showed an increase of

8.84%. The trend thereafter is downwards. Between 1 July 1992 and 31

December 1992 rental movements ranged from increases of 4.15% to 6.64% and

from 1 January 1993 to 30 June 1993 they ranged from 3.48% to 4.84%.

Thereafter rental increases still were in the vicinity of an average of 4%.

53

15 Ma'

br > s C C C

3 3 3 §> o o

< O O | 1

o O

CD r - in lO _ -r-

^ CM

rsj x x N

\ X

\ X

X x X

X X

T

i I

m

I i

c _3

] July-Dee '93

Q Jan-June '93

|H July-Dee '92

111 Jan-June '92

| | July-Dee '91

ΐ ( | Jan-June '91

CD ^ LO LD T- oo

Lease review data

Figure 4.1. ACT Office rental increases, leases reviewed January 1991 to December 1993.

4.28 It is particularly important to note that the historical trend is for rents in the

Australian Capital Territory to increase, and never to decrease. This may well be a

situation which is unique in Australian capital cities.

4.29 When, at the end of November 1991, Mr Jeffress formed the opinion that a 10.5%

escalation factor would be appropriate from 1 January 1991 to date of completion

of the building, there was abundant historical rental evidence to support that

opinion. Indeed, as the material to which I have already referred discloses, the

annual growth rent of John Curtin House between 1988 and 1990 was 16.87%.

With respect to Bligh House the increase was 10.46% between 1988 and 1990. In

the case of the IBM building it was 11.56% between 1987 and 1989, and with

respect to John McEwan House it was 5.27% between 1987 and 1989. An

approximate average of these increases is about 11%, which would have fully

justified the figure of 10.5% adopted by Mr Jeffress.

4.30 The 9% annual escalation factor is also well supported by the historical evidence.

As the table referred to in para. 4.24 demonstrates, the average long-term annual

growth in the rent of accommodation in John Curtin House was slightly in excess

of 9% over the 15-year period prior to 1990. The long-term average annual

growth in rent at John McEwan House over the 16 years from 1973 to 1989 was

9.35%. At Bligh House, the long-term average annual growth rate was 10.51%

over the 12 years from 1978 to 1990. Higher average long-term growth rates

were achieved in the IBM building and at Industry House, but over shorter

periods.

55

4.31 In evidence given to the Inquiry Mr Jeffress gave the following account as to how

the rental growth rates were adopted.

I had two m eetings with M cCann and Lend Lease L td representatives. A t the first

meeting I was provided with detailed plans of the building and a description of the standard

o f finishes proposed. Their initial position was that a short term rental growth rate o f

12.5% and a long term rate o f 11.0% were appropriate for the project. Although I was

aware that such figures were consistent with historical rent increases in the Barton Area, I

felt that 8-9% was a more reasonable projection o f prospective long term rental growth at

the time and advised M cCann/Lend Lease accordingly. M cCann/Lend Lease stated that at

8.0% the project would probably not be viable and may not proceed.

My suggestion of 8-9% represented a discount on historical rent increases in Barton up to

that tim e and as such w ould have been considered on the pessim istic side o f m arket

expectations in N ovem ber 1991. At the time I was aw are that there was evidence

emerging of a slowdown in the rate o f rental increases experienced in the Canberra office

rental m arket in the preceding years, down to about 10.5-11.0% per annum during the

first half o f 1991...

On the question o f the escalation rates, I agreed to the figures o f 10.5% from 1 January

1991 to completion and 9.0% thereafter, following lengthy negotiations and in the light

o f my ow n professional appraisal o f the m arket. A t m y m eetings w ith them ,

M cCann/Lend Lease did not rely on any alleged com m itm ents by APG in arguing for a

56

higher level of escalations than were eventually agreed. In November 1991 no one in the

commercial property sector was predicting the magnitude o f the eventual slowdown in the

rental growth o f commercial buildings and there was a general feeling Canberra would be

insulated from such slowdown as did occur.

4.32 Mr Paul Ferrari, a senior APG officer, pointed out that there are some advantages to

a tenant who is committed to a fixed and specified rent increase. He said:

It provides a degree of certainty which facilitates budgeting, it avoids costs associated with

regular rent reviews and, of particular relevance to the ANAO/JCH situation, it avoids the

need for regular negotiations between the parties. Additionally, it is clear that agreement

to that approach was the only way that a developer w ould proceed to construct office space

to m eet ANAO's needs.

4.33 It is true, as was submitted by Senator Campbell on behalf of the Liberal Party, that

care has to be taken in using long-term average growth rates because growth may

occur at an uneven rate throughout the term. This point has substance as a general

proposition, but it does not detract from the conclusions which can be reached from

the growth rates to which I have referred, since the increases in rents occurred

throughout the terms examined, and not at the end of those terms.

4.34 A prospective lessor or lessee who, at the end of 1991, was estimating the extent to

which rents in Centenary House would be likely to escalate in future years would

have concluded that the rents would be likely to escalate at no less than 9% per

annum. Such a person would have contemplated that the annual increase might

57

drop below 9% at some stage during the course of a 15-year lease. But he would

also have anticipated that there would be times during the period of 15 years when

the annual rate of escalation would exceed 9%.

4.35 Mr David Connolly MP submitted that rental growth rates over the 15 years before

1991 should not have been regarded as a reliable guide to rental growth rates in

future years because of high underlying inflation rates in past years. But this

argument does not appear to be borne out by the table referred to in para. 4.23. Mr

Fenwick also expressed the opinion that there is no correlation between CPI and

rent movements.

4.36 I conclude that there is no justifiable basis for criticism of Mr Jeffress' advice to the

APG that a 9% per annum escalation factor should be adopted in the lease. It is

true that, with the benefit of hindsight, it can be seen that annual rental growth

slowed after 1991. It follows that, in the short term, the adoption of the 9% factor

has proved advantageous to the lessor. However, over the passage of time it may

turn out that the 9% factor will prove advantageous to the lessee. Should there be

a resurgence to past growth levels of rents in Barton, the 9% factor will operate to

the advantage of the Commonwealth.

4.37 I turn now to consider the reasonableness of the rent review clause. On this matter

Mr Fenwick's opinion was as follows:

I have been asked to comm ent also on the appropriateness of the basis for rent reviews at

the end o f the 6th and 10th years o f the lease whereby the rent is review ed to the higher of

the then passing (escalated) rent o r m arket rent. T his m ay seem to be all in the

58

lessor's favour but it is not at all uncommon in commercial leases. Lease terms and

conditions are all a m atter o f negotiation and a lessor will usually seek to elim inate his

downside risk by requiring such a clause.

Canberra with its traditionally low vacancy factors, can be generally said to be a lessor's

m arket and within reason a lessor can negotiate hard to get agreement terms favourable to

himself.

The lessor is the one who invests his money in the project to provide the accommodation

required by the lessee, he is (the) one whose capital is at risk and it is to be expected that

he will seek a secure incom e flow in order to be able to finance the project.

The experience o f speculative developers in 1980s with som e huge losses being incurred

has made lessors more careful.

I am aware o f som e leases where there m ight be a choice o f three bases for rent reviews,

viz., to m arket, to CPI increases or to a fixed percentage, whichever is the higher and

there is alm ost invariably a no fall back, or 'ratchet' clause.

In the present case if there had not been the 'whichever is the greater’ clause I would have

expected at least a ratchet clause and if in fact the m arket rent was higher than the fixed

escalator rent it does not disadvantage the lessee to be required to pay the m arket rate.

I do not think there is anything exceptional in this provision.

59

4.38 Mr Jeffress said that if he had not agreed to the inclusion of the ratchet clause, Mr

McCann would not have agreed to a 9% long-term escalation factor.

4.39 Mr Collins thought that it would be desirable when negotiating the terms of the

lease to opt for a rent review mechanism that would minimise the need for contact

between the ANAO and the ALP. He also thought that fixed rental escalators were

preferable because a two-yearly rent review to market mechanism had put the

Commonwealth in the past at a financial disadvantage by tending to produce what

he, and others in the APG, thought were excessive rent increases. These excessive

rent increases were, in his opinion, partly due to the nature of the market valuation

process used in the Australian Capital Territory for rental office accommodation.

Under that process:

(a) the APG and the owner would attempt to reach agreement on the reviewed

rent. If, as usually happened, agreement coiild not be reached, then

(b) the AVO and the owner's valuer would attempt to reach agreement on the

reviewed rent. Again, if the attempt was unsuccessful, then

(c) an 'Independent' valuer would be appointed by the President of the Institute

of Valuers (ACT Branch) to make a determination which was binding on

both parties.

Mr Collins said that the 'Independent' valuers were employed by owners who had

major property dealings with the Commonwealth. Whilst he did not question

their integrity, he thought the valuers tended to arrive at the highest possible rent.

60

He thought that predetermined rental adjustments would minimise these concerns.

I think Mr Collins' views in this respect have substance.

4.40 Mr Ferrari said that when negotiations with Lend Lease became serious in late 1991

Lend Lease were seeking 10.5% per annum as an escalation factor. He pointed out

that there is not always good correlation between rents paid per annum and average

annual growth rates of rents over the long term. For that reason, and also because

annual increases were proposed rather than the more normal adjustment every two

years, the APG argued for an annual figure below the long-term figure. The long­

term figure was around 10.5%. He said Lend Lease was only prepared to accept

the 9% figure if the lessor could be given a guarantee that it would not end the 15-

year term of the lease behind the market. It was for that reason that the APG

agreed to review the rent to market after years 5 and 10, if the escalated rent was

below market at those times.

4.41 In the light of Mr Fenwick's and the other evidence, which recognises the reality of

market forces in Canberra, I do not think it can be said that the inclusion of the rent

review clause in the lease was either specially generous to the lessor or

disadvantageous to the Commonwealth.

4.42 The final term of the lease upon which I should comment is the requirement that the

lessor contribute $400 000 to the lessee's costs of relocation and fitout. This is not

a major matter and, of course, operates in favour of the lessee. The making of the

payment effectively reduces the rent escalation by about 0.5% per annum.

61

4.43 It is true that the terms of the Centenary House lease differ from the terms of most

other Common-wealth leases. But that circumstance of itself does not demonstrate

that it was improvident for the Commonwealth to enter into the lease or that its

terms were unduly generous to the lessor. Reference has been made above in para.

4.26 to the lease of the Scrivener Building at Femhill Technology Park. There are

some differences between this lease and the Centenary House lease but the

differences are not of major significance. At the very least the lease of the

Scrivener Building shows that a relatively long lease (10 years) with a 9% annual

escalator clause was thought to be a proper commercial transaction. It was put by

Mr Connolly MP that this lease was negotiated in a buoyant market, in contrast to

market conditions at the end of 1991. But as is demonstrated by the market

evidence to which I have referred above, a 9% escalation factor was justified as at

the end of 1991.

4.44 Mr Connolly also submitted that the Centenary House lease was the only one of

2066 leases negotiated by the APG over three years which contains a 9% fixed

escalator over a period of 15 years. This is correct, but it does not prove anything

of itself. Most leases are, for good reasons, for terms shorter than 15 years.

Further, as the tables above demonstrate, historical rental growth rates have

exceeded 9% per annum, even though most leases are for terms shorter than

15 years.

4.45 Mr Connolly submitted that if Mr Jeffress had rewritten his valuation as at the

time the pre-commitment lease was signed he may well have reduced the long-term

annual growth escalator from 9% to 8%. It is true that Mr Jeffress was not asked

formally to rewrite his valuation. However, at a meeting which took place on 28

62

February 1992 between Mr Ferrari and Mr Jeffress, the latter was asked whether

his views on valuation matters were still current as at the date of the meeting. Mr

Jeffress confirmed that his advice had been based on long-term rental and rental

growth trends applicable in the ACT and that short-term fluctuations in the property

market, such as were being experienced at that time, did not detract from the

validity of the opinions which he had expressed. Indeed, he expressed the view

that rentals in Barton were still increasing at about 10% per annum at that time.

4.46 Hence there is no reason to suppose that if Mr Jeffress had formally revised his

valuation just before the pre-commitment lease was signed, he would have reduced

the 9% escalator rate. In truth, the 9% rate can only be attacked with the benefit of

hindsight, and that is not permissible.

4.47 Mr Jeffress gave evidence to the Inquiry that if he had been formally asked in 1992

to advise on an appropriate short-term escalator to apply as from 1 January 1991,

he would not have changed his previous advice, i.e. that the escalator should not

exceed 10.5%. He would have reduced the escalator to 10% if it was to have been

effective from 1 March 1992. However, I think it would be hypercritical of Mr

Ferrari to find that, at that late stage, he should have sought to persuade Mr

McCann to agree to a reduction of the 10.5% factor to 10% over the relatively short

period between March 1992 and the expected date of completion of the building.

4.48 Reference was made in the Liberal Party's submissions to the fact that Macquarie

Bank had granted a facility of $50 million in respect of the funding of the

Centenary House project. However, it is plain that this facility was designed to

cover all possible contingencies arising out of the Centenary House development

63

and not to provide the ALP with funds for other purposes. In any event, the extent

of the facility is irrelevant to the question whether the terms of the lease were

reasonable.

4.49 Much was made in Mr Connolly's submissions that it was only possible for the

ALP to erect Centenary House because the Commonwealth agreed to the terms that

were eventually enshrined in the lease. That may well have been the case. But any

other developer might have put a similar proposition to the Commonwealth, had it

been minded to do so. There is nothing in the evidence to indicate that any other

developer putting a similar proposition would have been differentiy treated.

4.50 In valuation matters, there is almost always room for differences of opinion. There

is a large volume of compelling evidence supporting the opinions formed in the

latter part of 1991 by Messrs Collins and Jeffress. Moreover, there is no evidence

to suggest that they were not capable and professional officers who were exerting

their best efforts on behalf of the Commonwealth. In any bargaining over a

substantial real estate transaction there is always the possibility that, as future events

turn out, one party may have struck a better bargain than the other. That is

common commercial experience and ordinarily would not be regarded as a cause for

concern. I think it likely that there would not have been public controversy over

the terms of the Centenary House lease had it not been for the identity of the lessor.

4.51 I conclude that the terms of the lease are reasonable, are not unduly favourable to

the lessor and are not inimical to the interests of the Commonwealth.

64

5 . Communications between the Australian National Audit Office and the Department of Finance

5.1 The first formal communication between the Australian National Audit Office

(ANAO) and the Department of Finance regarding Centenary House was a letter

from the ANAO dated 4 March 1991. It referred to efforts the ANAO had made in

the preceding two years to secure permanent accommodation following the

evacuation of Silverton Centre, indicated a preference for a building on the ’Lend

Lease site' in Barton and proposed that it, with Department of Finance agreement,

seek funding of $4 million in 1991-92 to cover the cost of relocation.

5.2 In responding on 2 May 1991 the Department sought further details of costs and

advised, inter alia, that the Works Technical New Policy (WTNP) processes would

not be available to secure funding because they were to be replaced by proposed

new arrangements, i.e. incorporation of Property Operating Expenses into Running

Costs. The Department stated that if the relocation could not be accommodated

under the new arrangements, a New Policy Proposal would be needed.

65

Subsequently the ANAO did submit a WTNP proposal, which it was entitled to do.

The Department rejected it as it did not, in its view, meet the essential and

unavoidable criteria of a WTNP.

5.3 On 11 June 1991 Mr J. Meert, Director of the Executive Support Branch of the

ANAO, wrote to the Department setting out in some detail the reasons for the

desired move to Centenary House and the cost implications of the move. He said,

inter alia:

Canberra

The purpose in seeking new accommodation for the ANAO is a direct result o f the forced

evacuation o f the Silverton Centre, com bined with the now unsatisfactory aspects of

current accommodation arrangements whereby ANAO Canberra resources are spread over

three localities. Occupancy by the ANAO o f M edibank House rem ains on a refugee

basis. The move put the ANAO in a building specifically designed for the operations of

Medibank and certainly not designed or appointed for the efficient and effective operation

o f a national auditing institution.

In addition to other accomm odation occupied in Canberra, the total space used by the

ANAO is in the order o f 7400sqm , com prising M edibank House approx. 5200sqm ,

Tasman House approx. 2000sqm and Treasury Building approx. 200sqm. The proposed

occupancy o f Section 22 in Barton will enable the A N A O to co nsolidate its

accom m odation requirem ents within the one building o f approxim ately 6000sqm , a

reduction in overall accommodation requirements o f some 1400sqm.

66

This reduction is m ade possible due to changes in audit resourcing profiles and economics

o f scale which can be brought about by the co-location of all Canberra based staff. The

economies of scale are particularly relevant: for example, comm on use areas are currently

replicated across more than one location and the consolidation in one building will avoid

that situation in the future.

At the same time, the design o f the new building, will address the access and security

concerns held by the AN AO in respect o f current shared accommodation arrangem ents at

all Canberra localities.

The ow ners of the M edibank Building, H ealth Insurance C om m ission (HIC), have

indicated that a refurbishm ent of the Medibank Building is overdue and they would like to

com m ence it as soon as possible. APG advise that it is expected that follow ing the

refurbishment the rent for M edibank Building will increase to approximately the same rate

per square metre as Section 22 in Barton.

HIC have indicated that the proposed refurbishm ent would have regard to AN AO

requirements if a long term commitment, i.e. 5-10 years from expiry o f the current lease

(31.7.94) were made in respect of tenancy by the ANAO.

This would significandy increase rental commitments by the ANAO with no advantage o f

co-location. Additionally, the disruption to the work o f the ANAO caused by any

refurbishm ent of M edibank House would be o f significant proportions. It would require

the evacuation of two or three floors of Medibank House at a time, i.e. location of these

staff in less than suitable accommodation and then their return move to M edibank House.

A t least three such exercises would be required.

67

The move to Section 22 proves to be cost effective for the AN AO. A comparison o f the

costs which will be incurred in rem aining in M edibank Building or m oving to Barton is

attached. The ANAO has also canvassed alternatives to Section 22 which have proved to

be less satisfactory, as indicated in our memorandum o f 4 M arch 1991....

It is important to recognise that for 2 '/2 years ANAO staff in M edibank House have had

to endure substandard accomm odation and it is essential that this unsatisfactory situation

be resolved as quickly as possible.

68

5.4 The attachment to Mr Meert's letter (Table 5.1) follows.

Table 5.1. Canberra cost comparison over 10 years stay in Medibank and

other Canberra locations vs move to Section 22.

Stay In Medibank

Situation:

Refurbish Medibank House 1991-92, 1992-93. To refurbish, it would be necessary for staff, two floors of Medibank at a time, to move to Colbee Court and Botany Street and then back to Medibank.

Move to Section 22

Situation:

Section 22 would be ready for occupancy at the end of December 1992. Fitout would occur in the six months prior to this. Dead rent from the vacation of existing buildings will only occur for Medibank and Tasman

and should be for no more than six months.

($•000) (S '0 0 0 )

Rent and outgoings Existing rent and outgoings prior to move (V/2 years)

• Medbank (including rent • Medibank 2 730

increase after refurbishment) 21000

• Tasman 6 800 • Tasman 1 020

• Treasury 830 • Treasury 124

• Colbee (2 years only) 257 • Colbee 78

• Botany (2 years only) 310 • Botany 78

Refurbishment 2 600 Dead rent (6 months)

Moves to Colbee and Botany • Medibank 96

and back 100 • Tasman 44

Courier and other corporate support services 20

Rent and outgoings new building (9 years) 22410

Fitout 2 860

Moving expenses 150

'Make good' (approximately 1 month rent)

• Medibank 105

• Botany 15

• Colbee 12

• Tasman 53

• Treasury 6

$31 917 $30,951

(Note: Rent and outgoings are assumed to remain constant over the 10 years in both options, unless otherwise

indicated. Prospective rent at Section 22 is in accordance with range advised by APG.)

69

5.5 It is to be noted that Mr Meert said in his letter that the APG had advised that rent at

a refurbished Medibank House would be the same per square metre as at Centenary

House.

5.6 A meeting between officers of the Department and the ANAO was held on 25 June

1991. According to a record made by a Departmental officer of the matters

discussed at the meeting it was stated by Mr Wojcik that lease contracts needed

close scrutiny as some involved escalating rent in later years, that fixed rates of

rental increases may be dangerous, and that 'under POE into Running Costs the

Lease amounts would be subject to a deflator and the ANAO would be expected to

live within the estimates. If ANAO wanted property that was more costly it would

be expected to meet the costs from its existing Running Costs, borrowing from

future years when necessary, and would not be encouraged to come to the Budget

for supplementation.'

5.7 The meeting held on 25 June 1991 dealt with the ANAO's property requirements in

Canberra and elsewhere. With respect to the Canberra situation, the following

note was made.

Canberra

The ANAO officers were advised that the issue o f the proposed move from Medibank

House to another building would be one that would need to proceed through the New

Policy process; this was based on the presumption that the building would be built with

the intention of the owner recovering the building costs, by way o f rentals, in the first

few years eg 7-10 years. The ANAO would enter into a precom mitment lease. Also it

was thought that any proposed m ove by Commonwealth agencies into new buildings

70

and/or buildings in the area of the Parliam ent would be preferred to be considered by the

G overnm ent; the A N A O situation w as discussed in the Sheridan review - the

G overnm ent's response was that there was no compelling reasons why the ANAO should

be located in the Parliamentary area.

A N A O clarified the position with the Section 22 proposal; the ALP and ACTU were

arranging the building o f the ALP HQ and want a tenant that will be likely to reside in

the accom m odation for a long period. The land apparently belongs to the A CT and we

w ere shown a brochure with a sketch o f the proposed building. The ALP and ACTU

w ould locate in a small portion o f the accomm odation and the ANAO would have about

6000 sqm.

The assumed rentals which ANAO used ($320 sqm) were provided by APG but seemed on

the low side for this location and ANAO were asked to exam ine the m atter to see if a

revised estim ate should be used and also to determ ine the basis o f increases on rent

reviews. If the rent reviews were to be based on the existing market rates then the rental

could skyrocket as property rental rates around the area are high com pared to Medibank

H ouse and would be expected to remain higher than the W oden area.

It was contended by counsel for the ANAO that the Departmental record of what

was stated at the meeting was not necessarily correct, but I see no reason to doubt

its accuracy.

5.8 On 8 July 1991 the APG advised the ANAO that rents were about 7-8% higher in

Barton than in Woden. On that date the APG wrote to the Auditor-General in the

following terms;

71

I refer to your discussions this afternoon with Dominic Collins o f this Office concerning

comparisons between rental levels in the W oden and Barton areas.

As previously advised we expect the rental level in the Barton precinct to rise above that

for new leases in the W oden area. How ever, as a com parison, a building o f sim ilar

standard to what we expect for your new accommodation is the M .L.C. Tower in W oden.

The rental for this building increased on 7 July 1991 to $292.50 per square metre and will

increase by approx. 8% in 12 m onths time. It should be noted that this is not a new

building, but has been fully refurbished.

A building that is of lower quality to the M.L.C. Tower is Penrhyn House. The rental

for this building was last reviewed in October 1990 at $265 per square m etre for the upper

floors. A refurbished Medibank House would equate to the M .L.C. Tower.

A brand new building in Barton is the A.M .A. Building. R ental was set at $315 per

square metre effective from 1 M ay 1991. In addition to this building there is also the

N ational Farm ers Federation House, 14-16 Brisbane A venue, Barton. A rent review

effective from 1 March 1991 established the rental for this building at $295 per square

metre. This is an older building o f a lower standard to the A.M .A. Building.

W hen comparing the two regions there is a 7-8% increase in the Barton rentals. This

increase is considered acceptable. It should also be mentioned that there is no building

com ing on line in the W oden area that would suit the requirem ents o f the Australian

National A udit Office. T he Sir K eith Campbell Centre, at this stage, is no longer

available as other clients are now seeking commitments to that space.

72

5.9 It should be noted that at the time this letter was received by the Auditor-General he

would have been unaware that the lease of Centenary House would contain a 9%

rental growth escalator. Hence, there was nothing in the letter to cause him to think

that it would be imprudent for the ANAO to relocate to Barton. It is true he was

told rents at Barton were 7-8% higher than at Woden, but he was also told there

was no building then available at Woden suitable for the ANAO's requirements.

On the other hand, the ANAO officer who attended the meeting referred to in paras

5.6 and 5.7 should have been aware of the Department's view that a move from

Woden to Barton might well involve the ANAO in higher rental payments in future

years.

5.10 Subsequently the ANAO's proposal was carefully examined by officers of the

Department of Finance. On 7 August 1991 Mr McPhee, the First Assistant

Secretary in the Financial Management Division, sent a Minute to the Secretary of

the Department commenting on the ANAO's proposal. He took issue with several

of the assumptions made by the ANAO in its costings of the proposed move to

Centenary House. His reservations were expressed in the following words:

ANAO have included several assumptions in their costing o f this proposal. These are:

• rental costs for the refurbished Medibank House (in W oden) would be the same

as rental at Section 22 (our advice on this m atter is that there w ould be a

substantial differential between the two locations with W oden costs likely to be

in the order of 10 to 25% below Barton);

73

no suitable alternative consolidated accommodation will become available, either

in W oden or elsewhere (we have some doubts that this would be the case as DSS

are moving to Tuggeranong); and

• rent in Barton will increase at the same rate as W oden over the next 10 years (we

consider this is unlikely, with Barton likely to increase at a higher rate).

The attached spreadsheets on the ANAO proposal indicate that it is not cost effective

compared to refurbishing existing accommodation and rem aining in three locations. We

have re-presented the ANAO costings as their figuring does not dem onstrate the full costs

of their proposal nor provide comparisons on appropriate cost bases or assumptions.

O ur costing assumptions assume:

• the existing differential between W oden and Barton will remain, even if W oden is

refurbished (however we have made no allowance for our expectation that the rate

of increase in Barton will be higher - this favours the ANAO); and

• that $2.6m currently available to ANAO for refurbishm ent o f Medibank House

can be used to fund new accom m odation fitout - w e have agreed to this

previously.

In summary, the proposal has an estim ated additional cost o f $2.1m (discounted cash

flow, based on our assum ptions - Attachm ent A ) over the existing arrangem ents which

are taken to include refurbishm ent o f M edibank, how ever, o r as low as S l .lm ,

(Attachment B) based on APG advice on latest rent differentials betw een com parable

74

W oden and Barton accommodation (i.e. an estimated $292.50/m2 for a refurbished Woden

location against $315/m 2 for Barton). If we used the (unlikely) ANAO assum ptions of

sam e rents at Barton and W oden, the Barton proposal would cost an additional $0.25m

over existing arrangements (Attachment C).

The net cost in either case is mainly due to the additional costs incurred in 1992-93 in

changeovers between locations (dead rent, m akegood costs, other) and rent differences,

after taking into account the rationalisation of space (from approx. 7400 m 2 to 6000 m2).

The proposal will cost an additional $2.89m on the existing 1992-93 forward estim ates,

based on our assum ptions, or $2.76m based on ANAO assumptions.

5.11 The attachments to Mr McPhee's Minute consisted of detailed calculations of the

cost-effectiveness of the ANAO's proposal. Attachment C, which was based on

the ANAO's calculations, assumed rental of $1 920 000 per annum for Centenary

House with no escalation in the rent in succeeding years. The figure of $1 920 000

was based upon an assumed rental of $320 per square metre gross. The

Department of Finance's calculations in Attachment A assume an annual rent of $2

370 000 in 1993-94 and years following. This amount was calculated at $395 per

square metre gross as at 1993-94. This figure was in turn based on an assumed

rental of $340 per square metre gross as at 1992-93, and was escalated to $395 per

square metre gross for succeeding years by applying the same escalation factor for

the Centenary House site as was thought would be applicable to the escalation of

rent at Medibank House, the lease of which was due to expire in 1994. It was

assumed apparently that Medibank House would be refurbished on the expiry of the

lease and that the new rental would escalate from $275 per square metre gross to

$320 per square metre gross.

75

5.12 It will be observed that neither the calculations based upon the ANAO's

assumptions nor those based upon the Department's assumptions allow for

escalations in rent due to the operation of ordinary market forces. It appears to

have been assumed by the ANAO that an appropriate adjustment would be made in

its future annual appropriations to enable it to meet any increase in the rent of

Centenary House. As will be seen from the actual communications which were

sent by the Department to the ANAO, this assumption was not shared by the

Department.

5.13 As at August 1991 neither the ANAO nor the Department of Finance knew what

would be the fixed escalation factor for the rent at Centenary House. Agreement

on that matter was not reached finally until the beginning of December 1991.

Hence when the calculations which appear in the attachments to Mr McPhee's

Minute of 7 August 1991 were made no allowance was made for the possibility that

the rents at Centenary House might escalate at a higher rate than rents in Woden.

However, Mr McPhee specifically stated in his Minute that he thought it was likely

rents would increase at a higher rate in Barton than in Woden. As events turned

out, this view has been shown to be correct. It now appears that rents in Woden

are likely to increase at the rate of about 6% per annum over the next few years,

whereas the best evidence presently available suggests that long-term rental growth

in Barton is likely to be of the order of 9% per annum.

5.14 The calculations appended to Mr McPhee's Minute appear to have been discussed

with officers of the ANAO shortly before Mr McPhee sent his Minute to the

Secretary of his Department.

76

5.15 Mr McPhee concluded his Minute by stating that he had raised with the ANAO the

idea of entering into a Resource Agreement for POE funding as a way of allowing

the ANAO to proceed with its desire to relocate at Centenary House, without

drawing on budget funds in the long term.

5.16 On 9 August 1991 the ANAO formally agreed to a Resource Agreement and

acknowledged that 'the funding implications of such an agreement are understood

and accepted ... '.

5.17 On 13 August 1991 Mr McPhee wrote to the ANAO confirming that the Department

of Finance was willing to enter into a Resource Agreement. He said, inter alia:

2. I note that you understand and a cc ep t the funding im plications o f such an

agreem ent. Staff o f the A N A O h a v e been provided with details of our

calculations of the financial aspects o f the proposal and I understand that there has

been general acceptance o f the figuring, particularly with regard to the scenario

which sets out our understanding o f y o u r assumptions and calculations. The

latest version is at Attachm ent A, but note however, paragraph 4 below.

3. In essence, it is proposed that the resource agreement revolve around the ANAO

'borrowing' in 1992-93 (by way o f additional appropriation) an am ount of

$2.75m. (based on ANAO figures) and 'repaying' the loan by way o f a permanent

reduction of $0.507m in the base PO E current funding.....

4. To the extent that there is a short fall in existing appropriations and forward

estimates ANAO will be required to fund the difference...

77

Attachment A was identical with Attachment C to Mr McPhee's Minute, i.e. it was

based on the assumptions made by the AN AO but not shared by Mr McPhee.

5.18 On 22 August 1991 the Deputy Auditor-General wrote to Mr McPhee

acknowledging receipt of the letter of 13 August 1991 and stating that:

We w ould like to proceed with the developm ent o f the proposed resource agreem ent.

However, the figuring in your m em o does raise some concerns for the ANAO and those

will need to be resolved before a resource agreement is developed.

5.19 The letter went on to mention two matters of concern, both apparently relating to the

borrowing of the amount necessary to fund the cost of relocating to Centenary

House.

5.20 On 3 September 1991 the ANAO wrote to the Department expressing concern at the

prospect of a permanent reduction in its base POE funding as a consequence of

entering into a Resource Agreement.

5.21 In a reply sent to the ANAO on 18 October 1991 the Department, referring to a

reduction in funding against the ANAO's POE in future years, said:

3. The ... sharing o f the ongoing savings is consistent with the rationalisation of

space that will occur as ANAO will be located within the one building and will

be reducing space from 7,400 sqm to 6,000 sqm ....... If there are no

perm anent ongoing savings in relation to accommodation, then it would raise the

question o f whether, in the absence of ongoing rental savings, the project is cost-

effective.

78

5.21 It took another five months of negotiations including the intervention of the

Secretary of the Department and the Auditor-General to settle the Resource

Agreement. The agreement, which was signed on 27 March 1992, has as its

purpose 'to allow the ANAO to fit out and occupy leased premises in section 22

Barton'. It deals primarily with a 1992-93 Budget appropriation of $2.6 million

for fitout, a borrowing in 1992-93 and 1993-94 of up to $2.75 million for fitout

and other costs, the repayment of the borrowing plus interest over seven years,

dead rent and the sharing of any ongoing savings 50:50 between the ANAO and the

Budget. The only reference in the agreement to rent is a provision for the ANAO

to recover part of its rental costs provided the arrangements in the accommodation

contract 'fall within norms for accommodation standards and fitout and within rent

revisions that do not exceed market rates'.

5.22 The documents leading up to the Agreement contain references to the ANAO not

passing on 'additional' costs to auditees by way of fees, to the ANAO absorbing

lease costs increases to the extent that they are greater than 'market rates' and the

ability of the ANAO to repay borrowings being dependent on real savings.

However, there is no clear evidence in the documents of real savings nor is there a

clear definition of what was meant by 'market rates'.

5.23 The ANAO contends that 'market rates' was intended to be a reference to rents

which would be payable in the market for office accommodation in the Australian

Capital Territory. On the other hand, the view taken by the Department of Finance

is that 'market rates' was intended to be a reference to base rents as increased by a

deflator which would be determined by the Department on an annual basis and

applied to the accommodation content of the POEs of all agencies. There is little to

be gained at this point in time in endeavouring to elucidate how this

misunderstanding came about. In fact, a deflator figure was not fixed by the

79

Department of Finance until after the pre-commitment lease was signed. It was

then fixed at 1% for the year 1993. However, it is certain that if the Department

had been aware before the lease was signed that it contained a fixed 9% per annum

escalator clause it would have reconsidered its views on the proposed Resource

Agreement.

5.24 The only reference to a deflator in the negotiations preceding the Resource

Agreement appears in a Departmental record of a meeting held on 25 June 1991. It

seems that the ANAO concentrated on capital costs, the borrowing required and

repayment arrangements without considering ongoing rent costs and increases.

However, as I indicate later in this report, there is much to be said for the view that

the ANAO should have appreciated that its future Property Operating Expenses

would be subject to a very low deflator, and certainly much lower than 9%.

5.25 In January 1992 following media comments about 'incredibly generous conditions'

applying to the lease, the Department suggested to the ANAO that there was a need

for it to address the issue. The ANAO officer concerned took the view that under

the devolved property arrangements the terms of the lease were the responsibility of

the ANAO and that in any event there was no need to be concerned. While

technically correct, this approach denied the Department relevant information. At

the time the Resource Agreement was being settled the Department was not aware,

for example, of the $400 000 fitout incentive nor that the proposed rental was

subject to a fixed 9% escalation clause. The terms of the lease only became known

to the Department after the lease was signed.

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5.26 However, it should be remembered that if there had not been a fixed 9% annual rent

escalator in the lease, but rather a requirement that the rent be reviewed to market

every two years, the total rent payable over the term of the lease will not necessarily

be lower. What is said in Chapter 4 shows that to be the case.

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6 . Were appropriate steps taken by the Australian National Audit Office and the Department of Finance to ensure that the AN AO could fund the lease commitments on Centenary House?

6.1 Chapter 5 shows that the Department of Finance gave warning to the ANAO that it

should be careful to consider whether it could fund the rent payments it would be

obliged to make if it relocated to Centenary House and, as part of the warning,

indicated that should the costs of leasing accommodation in Centenary House

exceed current costs the difference would have to be met out of its existing

appropriation. Reference to Chapter 5 also shows that by concentrating its

attention upon the costs of relocation to Centenary House when agreeing to the

terms of the Resource Agreement the ANAO failed to give sufficient attention to the

more important matter of ongoing lease costs.

6.2 Because the terms of the Resource Agreement focus so closely on costs of

relocation I can understand how the ANAO fell into the error of thinking that it dealt

only with the obtaining of funds necessary to allow it to relocate at Centenary

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House, not with on-going lease costs. As I have noted in para. 5.17 above, when

Mr McPhee wrote to the Deputy Auditor-General on 13 August 1991 regarding the

then proposed Resource Agreement he stated that:

In essence, it is proposed that the R esource A greem ent revolve around the ANAO

'borrowing' in 1992-93 (by way o f additional appropriation) an amount of $2.75 m .... and

’repaying' the loan by way o f a permanent reduction o f $0,507 m in the base PO E Current

funding.

6.3 The amount of $2.75 million related, of course, only to costs of relocation. The

response to Mr McPhee’s letter made it plain that the ANAO was treating the

Resource Agreement as relating only to the cost of relocation.

6.4 The Department of Finance takes a different view of the Resource Agreement. It

referred to a paragraph in the Agreement which provides, inter alia, that 'the

agreement reached here with regard to funding Canberra accommodation will not be

re-opened in that context', i.e. the context of transferring Property Operating

Expenses into Running Costs. However, while these words may have conveyed

to the Department that the Resource Agreement was, as it submitted, 'a de facto

PRA for that component of ANAO's accommodation', I accept that the ANAO did

not place the same construction on the Agreement.

6.5 It is plain from the Auditor-General's evidence that he did not turn his mind to the

question whether the ANAO could fund the lease commitments on Centenary

House and meet its other obligations. His view was that provided the terms of the

lease were approved by the APG (on the advice of the AVO) and provided the terms

of the lease were approved by the Australian Government Solicitor, he could

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assume that the ANAO would receive funding to enable it to meet its future

commitments. The following extracts from the Auditor-General's submission to

the Inquiry succinctly state his position:

The L ease

W ith respect to negotiations on the lease, I indicated to my senior officers that

if the building was properly designed and built and m et all Commonwealth

requirem ents, then it would be acceptable to me, subject always to specialist

advice being obtained if and when that was required. Consonant with my own

background, and that o f all m y senior officers, I believed at that time, that the

Com monwealth Governm ent worked as a unitary body, with one part o f the

body w orking to support the others. Hence, I believed we were able to

legitim ately assume that both the APG and the Department of Finance would

provide that specialist advice whilst representing the interests o f the ANAO, as

well as those o f the Com monwealth as a whole.

This was particularly so because, unlike the auditing function, where the

ANAO is confidently able to rely on its own internal professional skills,

leasing and financing m atters demand other parties, professionally skilled in

their own fields, to be involved.

W hilst we were unquestionably geared to handle those aspects relating to the

m ove and fitout, we were not in any position to handle the longer term

leasing arrangements. Nor, in my opinion, should we have been. That was

for the experts. In my view , those experts were in the APG and the

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D epartm ent o f Finance. The APG had a sim ilar view o f its role. It is a

m atter of the greatest regret that the Department of Finance did not and it is to

that question I now turn.

The F inancial A rrangem ents

A t no tim e during our involvem ent in the building o f Centenary House did I

ever conceive there could be any problem with the lease being funded through

the budget process. M y understanding of the Resource Agreem ent with the

Departm ent o f Finance was that it related to fitout only...

To sum up, I do not accept the Finance view that we were negotiating a rental

agreem ent with them. The papers don't support that conclusion. I always

believed that any Agreem ent com e to by the appropriate experts (AVO and

APG), signed by the C om m onw ealth Solicitor under the aegis o f the

C o m m o n w ea lth L a n d s A c q u isitio n s A c t 1989, would inevitably result in the

required flow o f funds. A t all times I was concerned to ensure that the ANAO

was, and was seen to be, politically neutral and observing the rules. To strive

to do anything other than to act with total integrity w ould destroy all that I

and my staff had worked so hard to achieve over the past six years.

6.6 I think the Auditor-General's approach to the question of funding would have been

justified had it not been for the fact that by the time the proposed move to

Centenary House was under consideration, the funding of rental obligations

incurred by Commonwealth agencies had been transferred from the Department of

Administrative Services to the agencies concerned. Under the former regime, it

would have been quite appropriate for the Auditor-General to act upon the basis

85

that it was DAS's responsibility to ensure that there would be available funds to

meet the obligations under the lease. He should also have been aware by the end

of 1991 (and probably long before then) that there was a proposal being formulated

for submission to Cabinet that Property Operating Expenses should be incorporated

into Running Costs and that the Department of Finance should construct an index of

office rents which would form part of the general deflator used to increase

administrative expenses in annual appropriations to Government agencies.

6.7 The events of 1991 were preceded by a major review of the Commonwealth's

former centralised property arrangements which was carried out in the 1980s. In

1988, Cabinet agreed to change the then existing arrangements as follows:

(a) The APG was created as a commercialised, fee-for-service property

consultancy, i.e. effectively a real estate business;

(b) AEM was retained as a, inter alia, landlord of the Commonwealth's office

estate; rent was charged to users of Commonwealth-owned office space;

and

(c) the hitherto centralised DAS rent appropriation was disaggregated and

appropriated to each tenant.

6.8 The change referred to in para. 6.7(c) occurred in 1989. The new appropriation

item was entitled 'Property Operating Expenses’ and each Commonwealth agency

became responsible for the payment of rent and associated property costs in respect

of the accommodation occupied by it.

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6.9 Immediately prior to and during the course of the negotiations for the Centenary

House lease proposals were being developed to incorporate Property Operating

Expenses into Running Costs and to apply an index to them. These proposals were

not approved by the Government until August 1992 and the first application of the

index did not take effect until 1993 after the Centenary House lease had been

signed. The index (1%) was separate from the general index which applied to

administrative expenses in that year.

6.10 Under the Running Cost arrangements, automatic price indexation is used to

maintain the real value of an agency's budget without the need for the Department

of Finance to become involved in detailed judgments about cost escalation. In the

context of agreeing to incorporate Property Operating Expenses into Running

Costs, Cabinet agreed that the administrative expenses index would be expanded to

include an element for property rent. The property index component of the

administrative expenses index is intended to be an Australia-wide price adjustment

and not directly related to particular property markets. It is being applied to agencies

progressively following a property scrutiny and a resource agreement based on that

scrutiny being entered into with the Department of Finance. It will be apparent that

an automatic price indexation factor may not be appropriate to cover increased

property expenses in a particular case.

6.11 There is also provision in the August 1992 changes for exemption of rent from the

property index component of administrative expenses. For instance, where an

agency can demonstrate to the Department of Finance that its existing

accommodation results in a preponderance of rent costs in one market, that pure

rent stream can be exempt from indexation and rental funding adjusted on the basis

87

of costs incurred. As a quid pro quo for granting such an exemption, however, the

Department becomes involved in making rent decisions before exemption is

granted. Another way of granting exemption is for a Commonwealth agency to

seek Cabinet authority for a greater allocation of resources by seeking approval via

the New Policy process.

6.12 The ANAO did not seek any special treatment of the proposed Centenary House

lease under the proposed POE arrangements at the time the lease was being

negotiated, nor was the Department of Finance invited to have any involvement in

the rent decision-making process.

6.13 Some of the changes to which I have referred above had not occurred when the pre­

commitment lease was signed, although the prospect of them taking effect was

known to the ANAO. This is apparent from correspondence that passed between

the Deputy Auditor-General and the Department of Finance. It therefore should

have sought an assurance in explicit terms from the Department of Finance that its

future annual appropriations would be increased to cover any additional rent it

might incur at Centenary House, after allowing for any cost efficiencies and savings

made as a result of the move from Woden.

6.14 Although I can understand how the ANAO came to believe that the Resource

Agreement applied only to costs of relocation, that did not absolve it from otherwise

addressing the question whether it could fund the lease commitments. The fact that

the ANAO itself would be responsible for the lease costs on an ongoing basis was

recognised by one of its officers, Mr R.J. Morison, who noted on 19 July 1991

that:

88

U nder the resource agreem ent we would be funded at a fixed amount per year adjusted for

price m ovem ents less efficiency dividends. The ANAO would be free to m ake its own

decisions regarding accomm odation a n d be responsible f o r the consequences, [emphasis

added]

6.15 Moreover, the publicity given in January 1992 to Senator Parer’s comments about

the proposed lease ought to have caused the ANAO to look very closely at the terms

of the proposed lease. If it had done that, closer consideration would almost

certainly have been given to the question whether it could fund the lease

commitments within its existing appropriation, as adjusted by the national deflator.

6.16 Technically, it was not the responsibility of the Department of Finance to ensure

that the ANAO could fund any additional rent payments. Nevertheless, in the

climate of change which existed in 1991-92 and with the benefit of hindsight it

would have been prudent for the Department to have itself clearly established what

the rent would be under the proposed lease. Since it was being suggested by the

ANAO that there would be long-term savings to the budget by the move to

Centenary House, and since the Resource Agreement was based upon the

assumption that there would be such savings, it is a little surprising that the

Department did not take steps itself to ascertain what the new rental arrangements

would be.

6.17 In my view, the following passage from the Department's final submission to the

Inquiry fairly states the considerations which should have led the ANAO to be

more alert to the danger of moving to Centenary House without first ensuring that

any necessary increased funding would be available:

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In our discussions and negotiations with ANAO over accom m odation

proposals for the ACT, the D epartm ent o f Finance objective was to contain

the proposals within existing appropriation levels and to protect the Budget

should ANAO estimates not hold in the light o f market pressures ie where rent

revisions exceeded general market rates. The term m arket rates, as used in

correspondence with the ANAO, referred to market rentals that would form the

basis o f the indexation arrangem ents in respect o f which there were wide

consultations. The indexation arrangements were specifically comm ented on

by ANAO (and other agencies) in the development of proposals to incorporate

Property Operating Expenses (POE) into Running Costs - ie they were the

equivalent o f the Running Costs Property Index. W hile the index did not

com e into being until the 1993-94 Budget, agencies had been advised of its

proposed development and introduction since October 1990. The central issue

here is that from the inception o f the proposal to incorporate PO E into

Running Costs, it was alw ays known that, as with all R unning Costs funds,

POE funds would be adjusted annually by an index; the decision to expand the

existing index by incorporating a specific property com ponent to ensure

m arket rentals were properly weighted in the adjustment was a separate issue

of policy and equity.

It is w orth noting in this respect that the O ctober 1990 paper proposed the use

o f the C G FC E (C om m onw ealth G overnm ent F inal C onsum ption E xpenditure)

as the m echanism to adjust PO E, ie, the deflator used to adjust adm inistrative

budgets o f agencies. T his d e flator was linked to C P I, w hich in the 1991-92

B udget p ap ers was estim ated to be running at around 3% over the w hole

Forw ard E stim ates period (page 3-9 o f Budget Paper N o. 1 o f 1991-92, August

1991). T he fact that actual inflation, as well as inflationary expectations, had

90

fallen significantly w as also a central feature o f the B udget Paper (eg page 2-39) and

m ight have served as a signal to a changed inflationary environm ent. Thus, against this

background and the consultation with the ANAO, there should have been a reasonable

expectation by the ANAO that the deflator would be on the low side.

• A N A O was thus in a position to know the broad rate o f adjustm ent proposed for rental

and other POE costs, before it entered into the resource agreement with Finance and before

it advised APG to proceed with the pre-com mitment lease for Centenary House.

• A N A O also knew , in late 1991 that there w as an escalation clause in the Centenary

H ouse lease - it was the ANAO's responsibility under the arrangem ents entered into to

ensure that the escalation proposed was broadly com patible with, or could be afforded, in

term s o f the indexation that the property index would deliver.

6.18 I conclude that the ANAO did not take all appropriate steps to ensure that it could

fund its commitments on the Centenary House lease and meet its other obligations.

I also conclude that while the Department of Finance warned the ANAO of the

financial risks involved in making the move and of the necessity to ensure that it

had the necessary funds, it might, itself, have ascertained the precise terms of the

proposed lease. Only by doing so could it have been confident that there would be

savings to the budget, as suggested by the ANAO.

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6.19 But in fairness to the Auditor-General the following matters must be kept in mind:

(a) He was told by the APG that rents in Barton were only 7-8% higher than in

Woden.

(b) He did not know that rents would rise more steeply in Barton than in

Woden.

(c) If he had enquired in 1991 as to comparative rates of rent increased in

Barton, Civic and Woden it is probable that he would have been told that

rents would rise in both Barton and Woden, as they had in past years.

(d) He believed, on reasonable grounds, that he could make economies by

moving from three buildings in Woden, to one building in Barton, thus

reducing the area required to be leased. '

(e) It would have been reasonable for him to have assumed that if the ANAO

stayed in Woden it would receive sufficient funding to meet rent increases in

future years. He could reasonably have assumed that, based on past

experience, such increases would be likely to average about 9% per annum

in the long term.

(f) Thus, had he turned his mind to the rent escalation clause in the Centenary

House lease, he could have been forgiven for thinking that an escalation

factor of 9% per annum would not be a problem, as it would be little, or no,

higher than would probably be experienced in Woden.

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(g) It was the change in market conditions after the pre-commitment lease was

signed that was the main reason for the rent for Centenary House being so

much higher than at Medibank House.

6.20 It should also be stated that it is difficult to see how the national deflator for

Property Operating Expenses can be sensibly applied to an agency such as the

ANAO which rents most of its accommodation in the Australian Capital Territory

where rents rise much more steeply than in most other cities.

6.21 It is to be noted that the Resource Agreement concerning Centenary House was the

first of its kind. To a certain extent both the ANAO and the Department of Finance

were operating in new territory and relatively uncharted waters. I think this goes a

long way to explaining the lack of complete understanding between the ANAO and

the Department.

6.22 I refer in paras 12.4 et seq. to the question whether the ANAO should have elected

to stay in Medibank House or relocate to the Sir Keith Campbell Building at

Woden. The latter building ceased to be available to the ANAO as from about July

1991. There was no Commonwealth-owned building available in 1991 (Juliana

House having been reserved for another agency), or likely to be built in time to

meet the ANAO's needs. It can only be a matter of conjecture at this stage what

decision would have been made by the Department of Finance in 1991 if it had

been given full details of the proposed lease of Centenary House and asked to

approve any necessary additional funding for the ANAO. The Secretary of the

Department of Finance said, and I accept his evidence, that additional funding

would not have been approved in the absence of Ministerial, and possibly Cabinet,

93

approval. However, bearing in mind the APG's and the AVO's views, and in the

light of the difficulties under which the ANAO were labouring at Medibank House,

it would not have been unreasonable for approval to have been given by the

Minister or Cabinet.

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7 . Did the Australian National Audit Office give adequate instructions to the Australian Property Group as regards its accommodation needs?

7.1 I have already referred to the circumstances in which the ANAO came to be

accommodated in Medibank House.

7.2 On 1 May 1989 the Auditor-General advised the Secretary of the Department of

Administrative Services (DAS) that the ANAO was anxious to avoid the disruptive

effects of another temporary move and that it proposed staying in Medibank House

until permanent accommodation could be found elsewhere.

7.3 On 22 August 1989 the Auditor-General wrote to the then Minister of

Administrative Services bringing to his attention the recommendation of the JCPA.

At this time DAS was preparing a submission to Cabinet addressing options for

development in the Parliamentary Zone and on adjacent Commonwealth-owned

land in Barton.

7.4 On 20 October 1989 the ANAO received a letter from DAS offering it a lease of the

space it currently occupied, together with the ground floor, on a permanent

basis. The ANAO had considerable reservations about accepting the offer but

95

nevertheless indicated that it was prepared to accept it subject to some matters

relating to the security of the building. However, it expressed a preference for the

early implementation of the recommendation of the JCPA that it be located in the

area of the Parliamentary Triangle.

7.5 On 21 December 1989 the Secretary of DAS wrote to the ANAO acknowledging its

acceptance of the Medibank House accommodation, noting its concerns concerning

security and undertaking that his officers would ensure early resolution of its

accommodation needs.

7.6 The ANAO acted quickly to develop a draft design brief for the possible fitout of

Medibank House to meet its needs, at the same time keeping open the

implementation of the JCPA's recommendation.

7.7 On 2 May 1990 the ANAO formally accepted the proposition that it would take a

new lease of Medibank House and on 24 July 1990 it further advised the APG that

the lease of Medibank House would be acceptable to it subject to its principal

objective of obtaining approval to a special purpose building which would be

wholly occupied by it, as recommended in the JCPA report.

7.8 All of the further discussions between the APG and the ANAO need not be stated.

It is sufficient to say that while the proposal to take a fresh lease of Medibank

House was advanced, the possibility of a move to the Parliamentary Triangle was

kept under consideration.

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7.9 On 23 August 1990 the APG raised an alternative accommodation option with the

AN AO before it committed itself to a long-term lease of Medibank House. The

APG advised that the Department of Employment, Education and Training intended

to stay in that part of Medibank House which it then occupied and that there was no

prospect of it moving in the foreseeable future. It proposed two possible options

instead of Medibank House — Juliana House and the Sir Keith Campbell Building.

It further indicated that a possible move to the Parliamentary Triangle would be kept

under consideration.

7.10 In October 1990 the APG advised the ANAO that a number of smaller buildings in

the Parkes-Barton area were being planned by private developers. It was about

this time that it set about seeking expressions of interest from parties in providing

office accommodation for long-term lease of approximately 3000-8000 square

metres in the Barton-Parkes-Forrest precinct of Canberra.

7.11 On 30 October 1990 Jones Lang Wootten wrote to the APG on behalf of the Health

Insurance Commission (the owner of Medibank House) expressing disappointment

that the APG was not prepared to negotiate on a long-term lease of the building on

behalf of the ANAO.

7.12 On 21 November 1990 the APG advised the ANAO of three possible options to

satisfy its accommodation needs. The options were to remain in Medibank House,

to relocate to the Parkes-Barton-Forrest-Griffith area and to relocate to the Sir Keith

Campbell Building at Woden. Comments on all three options were given, and it

was stated that the preferred option was the Sir Keith Campbell Building.

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7.13 On 23 November 1990 the ANAO's Management Committee considered the APG's

advice of 21 November 1990 and expressed a preference for relocating to the

Parliamentary Triangle. However, it was then contemplated that a move to that

area would involve a move to Macquarie House and the Australian Chamber of

Manufactures Building, both of which were then proposed by developers.

7.14 The Management Committee's decision was reconsidered on 30 November 1990 in

the light of advice by the Auditor-General that he himself had examined the

locations proposed by the APG and had also considered a proposal to construct a

building on the Centenary House site, for which he expressed a preference. The

Committee then decided that its preferred option was for relocation to the Centenary

House site, but it also agreed to maintain interest in Macquarie House and the

Australian Chamber of Manufactures Building until the ANAO was sure of securing

the building to be erected on the Centenary House site.

7.15 The ANAO's views were formally advised to the APG on 7 December 1990. The

Centenary House site was expressed to be the preferred option, Macquarie House

and Australian Chamber of Manufactures Building were the second option, with the

last resort being the Sir Keith Campbell Building. I shall deal later in this report

with the ANAO's decision not to take up space in the last-mentioned building.

7.16 The chronology of what happened thereafter is traced, in general terms, in Chapter

2. It is apparent that the ANAO's discussions and dealings with the APG were

based upon the assumption that it was unnecessary for the ANAO to become

98

involved in the financial details of any lease which might be entered into with the

developers of Centenary House. As the Auditor-General said in his evidence:

I alw ays believed that any Agreem ent com e to by the appropriate experts (AVO and

A PG ), signed by the Com m onw ealth Solicitor under the aegis o f the C o m m o n w e a lth

L a n d s A cq u isitio n s A c t 1 9 8 9 , would inevitably result in the required flow o f funds.

7.17 Whatever may be said on the question whether sufficient consideration was given

by the ANAO and/or the Department of Finance to the cost of leasing space in

Centenary House, it cannot be said that there was anything untoward in the

instructions which the ANAO gave to the APG as regards its accommodation

needs. The mere fact that the Auditor-General knew that accommodation would be

dearer at Barton than at Woden does not of itself justify criticism of his preference

for moving to Barton. Cost was an important, but not the sole, consideration. It

was for him to determine whether the advantages that he perceived in moving to

Barton outweighed what he thought would be the additional cost.

7.18 It is true that (as stated in para. 5.10) Mr McPhee of the Department of Finance

held the view that rental costs in a refurbished Medibank House would be lower

than in Centenary House, and would rise more slowly than in Centenary House.

But the Auditor-General thought that the higher rent would be offset by

efficiencies. Moreover, he does not appear to have considered, or been advised,

whether rents would rise less steeply at Medibank House than they would at

Centenary House. The reference in the letter referred to in para. 5.8 to the APG's

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expectation that the rental level in the Barton precinct would rise above that for new

leases in the Woden area was a reference to an initial rise in base rents rather than to

annual rises in future years.

7.19 As I have already observed, it now appears that rents are likely to rise at the rate of

about 9% in Barton and at about 6% in Woden. In 1991, the historical market

evidence would have shown that there had not been much difference in the rate of

rental growth in Barton and Woden. However, had the ANAO made a specific

enquiry in 1991 it may well have been advised that rents were likely to rise more

steeply in Barton than in Woden. This remains a matter of conjecture. Mr Collins

would probably have advised (see para. 12.6) that rents in Woden would rise at the

same rate as in Barton. But Mr Coleman said in evidence that the vacation of

Juliana House in Woden had the effect of depressing the rate of increase in rentals

in that area.

7.20 I conclude that the ANAO gave adequate instructions to the APG as regards its

accommodation needs. However, it would have been wise for it to have made a

specific enquiry of the APG as to likely future movements in rent levels in Barton

as compared with Woden. I deal in para. 12.4 et seq. with the question whether

the ANAO should have opted for accommodation other than Centenary House.

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The appropriateness of the tender and selection processes followed in identifying suitable accommodation for the ANAO

8.1 What I have already written gives a reasonably full account of the tender and

selection processes followed in identifying accommodation for the ANAO. In

general terms, it can be said that those processes were appropriate. It was the

APG's responsibility to identify accommodation which might meet the ANAO's

needs. The APG knew of its client's unfortunate experience in the Silverton

Building at Civic, which it was required to evacuate due to structural faults in

January 1989. Since the ANAO's accommodation in the three buildings in

Woden was far from satisfactory for its needs, and because of its interest in

relocating to the Barton area (a move supported by the JPCA's report of 9 March

1989), it was not inappropriate for it to be included within the strategy for

accommodation in the Parliamentary precincts.

8.2 Subject to what is said in the following paragraph the action taken by the APG in

identifying suitable accommodation for the ANAO was appropriate. As early as

August 1990 it became aware of the proposals to develop the Centenary House

site. It took the view, correctly, that a building on that site would be suitable for

occupation by an appropriate Commonwealth agency. It actively canvassed the

market for expressions of interest in providing office accommodation suitable for

101

the ANAO's needs — vide the advertisements referred to in para. 2.22. There is

no reason to doubt that the APG assessed the 14 responses to the advertisements

in a professional manner.

8.3 The APG decided initially not to bring the Centenary House proposal to the

ANAO's attention because, at that stage, the Industries Commission was already

under consideration as a possible tenant of the building. The APG thought that it

would be unwise for two Commonwealth agencies to be competing against each

other for the same accommodation. It was for that reason that the ANAO was not

advised of the possible availability of accommodation at Centenary House until

after the Industries Commission ceased to be a contender for it. I doubt the

wisdom of this approach. Where two Commonwealth agencies may be interested

in occupying the same building, the preferable course for the APG to take would

be to advise both agencies of the availability of the accommodation so that each

can argue its case for the accommodation.

8.4 Some mention should be made of the fact that the Centenary House development

is owned by interests associated with the Australian Labor Party. This fact was

not drawn to the attention of the ANAO in the initial stages of its consideration of

the site, but it became aware of the ownership very early in the piece. The

Auditor-General made it clear that he maintained his interest in relocating to

Centenary House notwithstanding his knowledge of the owner's identity.

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8.5 As a general proposition, it cannot be said that accommodation owned by a

political party is unsuitable for leasing by the Commonwealth. The Liberal Party

of Australia was one of the respondents to the advertisements placed by the APG

seeking expressions of interest from developers of office accommodation. John

McEwan House and John Curtin House have both been tenanted, from time to

time, by Commonwealth agencies. However, it may be inappropriate for some

agencies to occupy accommodation owned by a political party (see para. 15.8).

8.6 The APG and the ANAO were sensitive to the need to ensure that there was no

physical connection between the areas occupied by the ANAO and the Australian

Labor Party. The building has been so designed that there is independent and

separate access to that portion of it occupied by the ANAO.

8.7 The reason why accommodation in the then proposed York Park development

was not considered a viable option for the ANAO to take up at the time the

decision was taken to relocate to Centenary House is referred to in para. 9.3.

8.8 I conclude that there was nothing inappropriate in the tender and selection

processes followed in identifying suitable accommodation for the ANAO.

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9 . The roles of Australian Estate Management and the Australian Government Solicitor

9.1 It seems to have been assumed by the APG that there would be no problem in

securing AEM's approval of the proposed relocation of the ANAO to Centenary

House. On 16 January 1992 the APG wrote to AEM stating the reasons for the

ANAO's wish to make the move. It was said that, technically, AEM's approval

may not be necessary but nevertheless approval wa's sought as a matter of priority.

9.2 This letter provoked a spirited response from AEM on 21 January 1992. AEM

complained, in effect, that the APG had not consulted with it as to whether the

ANAO might occupy some of the space in the planned York Park office

development, of which the Department of Foreign Affairs and Trade was to be a

major occupier. AEM foreshadowed that its approval would not be granted because

it expected the ANAO to occupy space in York Park.

9.3 On 24 January 1992 Mr Collins wrote to the Auditor-General informing him of

AEM's attitude. He said, inter alia, that AEM wanted to use the ANAO's office

accommodation needs as 'part justification’ for the construction of a major office

complex on York Park. He stated that in its last Budget deliberations the Cabinet

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had rejected the York Park proposal and that nothing had changed to indicate that

the proposal would be funded in the next Budget. He doubted whether York Park

would be ready for occupation before March 1996, even if approval was given.

He concluded his letter thus:

Such a scenario w ould require the Audit O ffice to tem porarily relocate to other premises

as the ow ners o f M edibank have let a contract for the refurbishm ent w hich w ould

com m ence at the latest in m id 1994. It w ould also m ean that the Audit O ffice would

rem ain in poor quality accommodation for at least another four years. This I believe is

an untenable situation.

I am providing you with this information as your property adviser so that you can take it

up through other avenues.

9.4 On 28 January 1992 Mr A.A. Hillier (the Executive General Manager in DAS

responsible for AEM) sent a Minute to Mr Noel Tanzer, the then Secretary of

DAS. He stated that he had discussed the matter with relevant officers of AEM

and that AEM's reluctance to approve the move by the ANAO from Woden to

Barton stemmed from their wish to test the level of the ANAO's interest in

occupying a Commonwealth-owned building proposed for York Park. AEM

claimed that it had requested the APG to market the York Park building to the

ANAO, but this had not occurred. Mr Hillier stated that there was a conflict of

interest for the APG in attempting to serve both the landlord (AEM) and the tenant

(ANAO). He said that the ANAO was not pivotal to the York Park proposal and

that there was therefore no reason why it should not proceed with the lease at

Barton.

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9.5 On 30 January 1992 Mr Collins wrote to AEM asking it to reconsider its attitude. It

did so, and wrote to the Auditor-General on 30 January 1992 stating:

Given your space requirements ANAO would not be an anchor tenant for York Park and

hence it w ould not be pivotal to that project's approval by G overnm ent. Accordingly,

AEM will not withhold support for your commitment to the proposed Barton lease.

9.6 Shortly thereafter the National Capital Planning Authority stated its view that the

relocation of the ANAO from Woden to Barton would be appropriate and consistent

with the National Capital Plan.

9.7 There is nothing in the evidence to indicate that anything untoward occurred in

AEM's consideration of the ANAO's proposal to relocate Centenary House. No

improper pressure was brought to bear upon it to withdraw its initial opposition to

the proposal. It changed its attitude after considering reasoned and cogent

arguments put to it. No criticism can be made of its conduct.

9.8 The same can be said of the Australian Government Solicitor (AGS). It was not

the role of the AGS to express any opinion or give any advice as to the length of the

lease, the quantum of the rent or the terms of the escalation clause. It is true that

Ms Kelly, the solicitor who attended to the conveyancing aspects of the lease,

raised a question as to the form of the escalation clause. But she made it plain in

evidence that in raising the question she was doing no more than ensuring that the

terms of the escalation clause were appreciated and fully considered. She did not

express, nor did she purport to express, an expert opinion as to whether the terms

of the escalation clause were unduly generous to the lessor.

106

9.9 Ms Kelly competently handled the legal aspects of the lease. There is no basis for

any criticism of the role played by the AGS in the leasing of Centenary House.

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1 0 . Did the Australian Property Group fulfil its

responsibilities to the Australian National Audit Office, and were the communications between them adequate?

10.1 The Australian Property Group (APG) contends that it kept the Australian National

Audit Office (ANAO) well informed of the state of the discussions which were held

with the developer of Centenary House particularly as to the rent which would be

payable under the proposed lease and of the terms of the rent escalation clause. For

his part the Auditor-General stated in evidence: 'My observation is that APG was

trying to be extremely helpful. I did not have any criticism of them and I really

don't have any now...'

10.2 There is some lack of agreement between the APG and the ANAO as to exactly

what information was provided by the former to the latter about the terms of the

lease. However, it is not in dispute that on 11 November 1991 the APG informed

the ANAO that the rent would increase at a fixed percentage each year, without

specifying what that percentage would be — see para. 2.78.

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10.3 Evidence was given by Messrs Ireland and Collins that when the valuation prepared

by Mr Jeffress was received on 27 November 1991, it was discussed at a meeting

with ANAO representatives. Their evidence was to the effect that the substance of

the matters referred to in the valuation, including the 9% escalation factor and the

ratchet clause, was discussed. Indeed, Mr Collins stated that he actually handed a

copy of the valuation to Mr Barwood of the ANAO at a meeting held on 28

November 1991.

10.4 Mr Barwood said that it was possible that Mr Collins did give him a copy of the

report on that date, but he had no specific recollection of that having occurred. The

report contained specific details of the rent escalation clause and the ratchet clause.

There is a copy of the valuation on the ANAO file and this tends to confirm Mr

Collins' recollection of what happened.

10.5 I am satisfied that the ANAO officers were told of the relevant terms of the

proposed lease. Certainly it is beyond dispute that the APG advised the ANAO no

later than November 1991 that the lease would contain a provision that the rent

would escalate annually at a fixed rate.

10.6 However, I think it was unfortunate that the APG did not at any stage prior to the

signing of the lease send to the ANAO a document setting out the precise terms of

the proposed lease. Although a perusal of Mr Jeffress' valuation would have

apprised the ANAO of all the essential terms of the proposed lease a more formal

communication should have been sent by the APG to its client.

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I

10.7 The sending of such a communication would not have altered the course of events,

because, as the Auditor-General stated in evidence, it would not have changed his

opinion that the ANAO should move to Centenary House.

10.8 It was the responsibility of the APG to give independent and expert advice to the

ANAO. That responsibility extended both to finding suitable accommodation for

the ANAO and, having found it, to negotiate a lease of it on satisfactory terms.

10.9 It is not in question that the accommodation at Centenary House is suitable to the

ANAO's needs. The only question is whether the terms of the lease which the

APG negotiated were satisfactory.

10.10 There is little that can be said on this question beyond what I have said in Chapter

4. It follows from what I have written in that chapter that the APG did fulfil its

responsibility to the ANAO in establishing the terms of the lease.

10.11 There are two other matters that require comment. First, it was the responsibility of

the APG to ensure that appropriate steps were taken to comply with the

requirements of the Lands Acquisition Act 1989 to bring details of the proposed

lease before the Parliament. Appropriate action in this regard was not taken.

However, the failure to take the action in no way affected the ANAO's or the

Commonwealth's interests. I refer to this matter in para. 13.17. Secondly, as I

indicate in paras 3.14 and 3.15, an attempt should have been made to ensure that

the offer of $50 000 made by Ms Morris was recast in a form which would have

made it possible for the ANAO to accept it.

no

1 1 . Did any party to the lease of Centenary House obtain unfair and/or above-market commercial advantage from the lease?

11.1 It follows from what I have written in Chapter 4 that no party obtained unfair or

above-market commercial advantage from the lease of Centenary House. My

opinion in this respect is fortified by the independent valuation advice I

commissioned from Mr Fenwick.

11.2 If historical movements in the rental market in Canberra are any guide (and all

valuers agree that they are), it is likely that the economic position of the

Commonwealth under the terms of the present lease will prove to be little different

from what its position would have been had the rent been reviewed to market rates

every two years over the full term of the lease. Certainly the terms of the lease

cannot be described as unfair to the Commonwealth or unduly generous to the

lessor.

11.3 It is true that the terms of the lease were more favourable than terms that were

available in 1991-92 to developers of commercial office buildings in other capital

cities. But that is not to the point. It must not be forgotten that the APG had

111

gone to the market and sought expressions of interest in building office

accommodation which might be suitable for the needs of Commonwealth agencies.

It advertised widely for such expressions of interest. There is no evidence that

other developers were prepared to construct buildings and lease them to the

Commonwealth on terms more favourable than those which the Commonwealth

obtained at Centenary House.

11.4 In the economic climate that prevailed in 1991-92, lending bodies were unwilling

to finance the construction of office buildings unless the developer could

demonstrate that it would have a guaranteed income stream to service the loan.

Had the rental terms in the lease not been structured as they were, it is likely that

the ALP would have been unable to obtain the necessary financial accommodation.

There is some evidence that one substantial lending body which had shown interest

in financing the Centenary House development lost interest in doing so. I think it

is a reasonable conclusion that the building would' not have been constructed if

agreement had not been reached on lease terms very similar to the terms of the final

document which was signed by the parties.

11.5 It is easy to say that the Commonwealth should not have been prepared to meet the

terms required by the ALP so as to enable it to erect Centenary House. Of course

that statement is correct so far as it goes. But in meeting the ALP's terms the

Commonwealth was advancing its own interests as well. No other developer who

responded to the advertisements referred to in para. 2.22 was prepared to construct

a building with accommodation sufficient for the ANAO's needs. The quantum of

space provided in the proposals of those developers who responded to

112

the advertisements fell far short of its needs. I have referred in para. 4.19 to

Baillieu Knight Frank's view that Centenary House was the only property that

could potentially satisfy the ANAO's needs.

11.6 The fact that the rental income stream from the building is guaranteed probably has

some effect on the capital value of the development. One method of valuing

commercial buildings is to capitalise the annual net rents which they generate. Mr

Jeffress thought that the effect of the fixed escalation clause might be to reduce the

capitalisation rate from about 8% to about 7.5%. Mr Coleman was not sure that

this would be the case. If Mr Jeffress' opinion is correct, the capital value of the

building as at 1993 when it was completed might have been 6% or 7% higher than

it would have been if the lease had required rent reviews to market every two years.

But the building appears to have been erected as a long-term investment and

whether its capital value will continue to be affected at the same, if any, degree over

the next 15 or 20 years is a matter of conjecture.

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I

1 2 . Did the Commonwealth Agencies act in the best interests of the Commonwealth, including so as to achieve value for money?

12.1 In my opinion the evidence establishes that all the Commonwealth agencies

involved in the leasing of Centenary House acted in the best interests of the

Commonwealth. The Commonwealth has a continuing need for office

accommodation within the Australian Capital Territory. It has always been

Commonwealth policy that this need should be met, in part, by the occupation of

buildings owned by the private sector.

12.2 Centenary House has provided suitable accommodation for an important

Commonwealth agency on lease terms which are reasonable having regard to the

market conditions which prevailed at the time the Commonwealth committed itself

to the lease.

12.3 It is true that there was absence of agreement between the Department of Finance

and the ANAO as to what means would be adopted to fund the ongoing rent

payments under the lease. But I do not think that has led to the Commonwealth

failing to achieve value for the money it has expended, and will expend, on the

114

lease. Whatever deficiencies there may have been in the level of communication

between the various government agencies involved, they did not result in any

agency failing to act in the best interests of the Commonwealth.

12.4 A major matter requiring consideration is whether the ANAO should have opted for

some accommodation other than Centenary House. I shall not attempt to deal with

all the possible options which might have been taken up. It is sufficient to say that

the only real options open to the ANAO (other than Centenary House) were to stay

in Medibank House or to relocate in the Sir Keith Campbell Building at Woden.

12.5 As to Medibank House, it was described in evidence by Mr Collins as one of the

worst buildings in the Australian Capital Territory. Whether that was the case or

not, it did not provide satisfactory accommodation from the ANAO's point of view.

It was not large enough to accommodate all of the ANAO's staff and was not secure

in that it was partly occupied by other agencies. It was occupied originally only as

a temporary measure.

12.6 The Sir Keith Campbell Building requires more comment. It was large enough to

accommodate all the ANAO's staff. Its location in Woden is not ideal but,

nevertheless, it was, in general terms, a suitable building for occupation by the

ANAO. The reason that it did not occupy it appears to have been that it thought that

Barton was a more suitable location. I am satisfied that the Commonwealth could

have obtained a 15-year lease of the building at a somewhat lower rental than that

paid at Centenary House. At the end of 1991 a deal probably could have been

struck with the owners of the building for a 15-year lease at a rental of about

$20 per square metre less than was then expected to be paid at Centenary House.

115

The owner would have refurbished the building to Commonwealth standards. Mr

Collins gave evidence that, after refurbishment, the rental probably would have

escalated at about the same rate as at Centenary House, i.e. at about 9% per annum.

He based this view upon historical movements of rents in similar buildings in

Woden.

12.7 In expressing this view Mr Collins was aware that a short-term lease of the Sir

Keith Campbell Building was granted in February 1993 at a relatively low rental.

However, at the time that lease was granted the premises had been vacant for

nearly three years and in those circumstances the lessor was prepared to take a low

rental for a fairly short lease.

12.8 Nevertheless, the evidence satisfies me that in opting not to relocate at the Sir Keith

Campbell Building the ANAO committed itself to a higher rent at Centenary House.

This is not to say that the Commonwealth did not get value for money at Centenary

House. Its location is superior to the Sir Keith Campbell Building and it therefore

can command a higher rent.

116

1 3 . W hether the Commonwealth agencies acted in accordance with Government Policies

13.1 It is not easy to identify all the Government policies that were applicable to the

leasing of Centenary House. However, the most significant of them are referred to

hereunder, together with my conclusions as to the extent to which they were

observed.

13.2 Finance Regulation 44 A made under the Audit Act requires that a person should not

approve a proposal to spend public moneys unless satisfied that it is in accordance

with the policies of the Commonwealth and the proposed expenditure will make

efficient and effective use of the money for the programs implementing those

policies. There can be no doubt that the expenditure of public moneys on

appropriate accommodation for the AN AO was in accordance with Government

policy in a general sense. Moreover, since Centenary House was leased on

reasonable commercial terms, it follows that the expenditure on the rent has been an

efficient and effective use of Commonwealth moneys. It is always possible that

there may be a difference of opinion whether a particular Commonwealth agency

117

would be better accommodated in one location rather than another. Be that as it

may, it is impossible to say that the leasing of Centenary House involved any

breach of r. 44A.

13.3 Finance Regulation 44B, which deals with conditions for entering into

commitments, is in the following terms:

44B A person m ust not enter into a comm itm ent requiring the expenditure

o f moneys:

(a) unless a person who has authority to approve a proposal to spend

the moneys has given that approval; and

(b) except in accordance with any terms specified in that approval; and

(c) unless the person who enters into the commitment is satisfied, after

making such inquiries as are reasonable, that when the comm itm ent

is entered into:

(i) the Commonwealth is unable to obtain better value for the

expenditure in all the circumstances; or

118

(ii) if com pliance with a direction by a M inister prevents the

C o m m o n w ea lth from o b ta in in g b e tte r v a lu e for

expenditure in all the circumstances — the Commonwealth

w ill obtain the best value th at is po ssib le w hile

complying with the direction; and

(d) unless:

(i) funds for the expenditure have been appropriated; or

(ii) provision for the appropriation o f funds for the expenditure

is included in a proposed law submitted to the Parliament;

or

(iii) having regard to an appropriation that is expected to be

subm itted to the Parliam ent, the M inister has given

approval in writing for the com m itm ent to be entered into;

and

(e) unless the funds so appropriated or to be appropriated will be

sufficient to m eet the expenditure together with all other expected

expenditure of those funds.

13.4 It is clear that the requirement under r.44B(a) was met and that the requirements

under rr. 44B(b), (c)(ii) and (d)(ii) do not apply to the Centenary House

expenditure.

119

13.5 Whether the ANAO might have obtained better value for the money spent on the

Centenary House lease must always remain a question of opinion. The fact that the

terms of the lease were approved by both the APG and the AVO justified the

Auditor-General in being satisfied that the rent which would have to be paid at

Centenary House was no more than the market rent. However, the impression I

have gained from all the evidence is that the ANAO did not closely examine the

question whether it would be better for it to relocate at the Sir Keith Campbell

Building. It had been told by the APG on 8 July 1991 that rents were about 7-8%

higher in Barton than in Woden. It calculated that the move to Centenary House

would effect considerable cost savings as compared with staying at Medibank

House and the other two buildings which it partly occupied. But it does not appear

to have considered whether greater savings could have been made overall by

moving all its operations and staff to the Sir Keith Campbell Building.

13.6 If the words 'better value' in r. 44B(c)(i) refer only to monetary matters I would

conclude that there was not compliance with the provisions of r. 44B(c).

However, the Auditor-General was entitled to take the view that the location of

Centenary House at Barton made the expenditure on the rent 'better value' than

expenditure on rent for a building at Woden. It is plain that he closely considered

that matter. I therefore do not think it can be said that the requirements of r.

44B(c)(i) were not met.

13.7 So far as r. 44B(d) is concerned, I do not think it can be suggested that funds have

not been appropriated for such expenditure as has already been expended by the

ANAO in relocating to Centenary House and in paying the rent to date. The cost of

relocation was covered by the Resource Agreement and the rental payments to date

have no doubt been made out of the ANAO's past or present appropriations. I

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therefore think that the requirements of r. 44B(d)(i) have been complied with so far

as concerns the expenditure to date.

13.8 The position is not as clear so far as concerns expenditure in future years. The

'commitment' referred to in the opening words of r. 44B extend to obligations to

pay rent under leases for longer than a period of one year. Thus where a lease is

taken for a period of years, the person entering into a commitment to pay the rent

under the lease must not do so unless one of the situations referred to in para, (d)

can be shown to exist. It can hardly be said that funds for payment of rent are

appropriated in advance of the year in which the obligation to pay rent arises.

Hence, para. (d)(i) seems to have no application to commitments to pay rent under

leases extending beyond one year. Since it will be a rare case where para. (d)(ii)

has any application, it follows that in almost every case where a lease is taken for a

period longer than one year, it is technically necessary to obtain written Ministerial

approval under para. (d)(iii). Yet I understand that, in practice, Ministerial approval

is not sought in such cases. The Auditor-General did not seek approval under

para. (d)(iii). Hence, if my interpretation of r. 44B(d) is correct, he was in breach

of the regulation because Ministerial approval was not given to the Centenary

House lease. However, in not seeking approval he did no more than follow what

appears to have been the general practice adopted by other agencies.

13.9 In my opinion the meaning of para. (d)(iii) of r. 44B is somewhat obscure. It is not

clear whether it is the person who enters into a commitment or the Minister who

must have the expectation referred to in (d)(iii). I think the preferable view is that it

is the person entering into a commitment who must have the expectation that an

appropriation will be submitted to the Parliament. If the person has that

expectation, he is then required to seek the written approval of the Minister for the

commitment to be entered into. If (d)(iii) is construed in this way, there is much to

121

be said for the view that the words 'to be appropriated' in (e) mean 'expected to be

appropriated', i.e. expected to be appropriated by the person entering into the

commitment. Whilst the Auditor-General's expectation that the ANAO would get

an appropriation to fund the commitment on the Centenary House lease may not

have been realised, it cannot be said that he did not have the expectation. I therefore

do not think that he acted in breach of r. 44B(e).

13.10 I think the application of r. 44B to future commitments under long-term contracts

(whether leases or otherwise) is far from clear. Consideration should be given to

amending the regulation so that persons entering into commitments requiring the

expenditure of money under long-term contracts are given a clearer indication of

their responsibilities.

13.11 Finance Regulation 13IB requires that where a person has responsibility for

entering into a commitment requiring the payment of public moneys and that person

has reason to believe that an appropriation, or proposed appropriation, is likely to

be exceeded then the person must report the matter to the Secretary of the

Department responsible for the appropriation, or to an authorised officer.

13.12 I doubt that Regulation 13IB had any application to the proposal to lease Centenary

House. I think the commitment referred to in the regulation is a present

commitment. In the context of the proposal to relocate to Centenary House the

relevant commitment was the cost of relocation and the initial rental payments under

the lease. The relevant officers in the ANAO had no reason to believe that

appropriations were not available to meet those costs.

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13.13 I have referred above to the policy changes involving property reforms that evolved

from 1989 onwards. These changes were designed to increase the efficiency and

effective delivery of property services to Government agencies. Estimates

Memorandum 1989/2 gave notice to agencies of the substantial reorganisation of

property arrangements that were then taking place and their implications for budget

processes, appropriations and service delivery. The paper outlined the

Government's decisions on the operations of the APG and explored the

implications of those decisions for departments and agencies. With respect to the

APG the memorandum stated, inter alia:

Operation of the APG

3. The APG is required to discharge an estate m anagem ent role and a

service delivery role.

4 . In estate m anagem ent the APG will advise the Governm ent on new

pro p erty in v estm en ts and how p roperty c u rren tly used by

departments and budget funded statutory authorities (excluding the

ABC) can b est be utilised. The APG w ill also adm inister a

system w hereby departm ents and bu d g et funded authorities

(excluding the ABC) will be required ... to pay rent on the

properties used by them...

5. In service delivery, the APG w ill supply or arrange office

accom m odation and provide a range o f other real estate services

including advice, buying and selling, and arranging for various

services to be supplied. Departments and budget funded statutory

authorities (excluding the ABC) are required to use APG services...

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6. U nder these arrangem ents the APG can be thought as the landlord

o f m ost Com m onw ealth owned or leased real estate. Tenants will

receive a lease from the APG as they would (if in the private sector)

from any other landlord. Tenants will pay rent and service fees to

A PG ...

13.14 So far as the Australian Capital Territory was concerned, Estimates Memorandum

1991/32 of 17 October 1991 advised agencies in the following, inter alia, terms:

7. The G overnm ent has decided therefore, that the ACT will rem ain a

controlled environment. Agencies are therefore required to

dem onstrate that any accom m odation proposal com plies with the

N ational C apital Plan as applicable to developm ents or leasing

upon either Territory or National Land; and

obtain from APG advice on the controlled office environm ent set

by AEM relating to the owned estate and new leases in the ACT.

Before any accom m odation proposal is adopted, APG will certify that all

these requirements have been met.

13.15 It is not in doubt that the Centenary House development complied with the National

Capital Plan, that appropriate advice was obtained from APG and that the AEM's

requirements were met.

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13.16 In so far as Estimates Memorandum No. 1989/2 can be described as laying down

policy, all parties connected with the leasing of Centenary House complied with it.

13.17 Although not stated specifically in any policy document, it may be assumed that it

was Government policy that the provisions of the Lands Acquisition Act 1989

should be complied with. Section 40 deals with the acquisition by agreement of

interests in land. Subsection 40(3) provides that the Minister shall cause to be laid

before each House of the Parliament, within 15 sitting days of that House after the

agreement is entered into, a statement describing details of the interest acquired, the

situation of the land, the price at which the interest has been acquired and the public

purpose for which the interest has been acquired. However, failure to comply with

subsection (3) in relation to an acquisition does not invalidate the acquisition.

13.18 Subsection 40(3) was not complied with in that a statement complying with the

requirements of the section was not laid before either House within the prescribed

time. To this extent, there was a non-compliance with the policy of the Act. This

was inconsequential. At the time the lease was actually signed details of its

contents were public knowledge and the failure to comply with subsection (3) did

not invalidate it. Nevertheless the requirements of s.40 should have been

observed.

13.19 So far as the AVO is concerned, I have not had brought to my attention any

document specifying policies which it is required to observe. No doubt, in a

general sense, it is Government policy that it should provide expert and independent

advice to the APG upon request. The advice that was tendered in respect of the

Centenary House lease proposal was both expert and independent.

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13.20 After the pre-commitment lease of Centenary House was signed in April 1992

significant policy changes were communicated to Government agencies in relation

to the devolution to them of responsibilities with regard to their occupation of leased

accommodation. These changes are not relevant for present purposes since they did

not affect the leasing of Centenary House.

126

1 4 . The longer-term funding implications for the ANAO of the Centenary House lease and the options available in relation to the funding of it

14.1 Table 14.1, which has been agreed by the Department of Finance and the ANAO,

indicates that ANAO's funding shortfall for the Centenary House lease will be

$560 150 in 1995-96 rising over the term of the lease to $3.6 million in 2008-09

and will total $23.3 million. The table is based on certain assumptions which are

stated in it. Obviously the shortfall varies depending on the assumptions used,

particularly that for the property index. If, for example, the 1994 property index

of 1.8% applied for the term of the lease, the total shortfall would be as high as

$35.2 million.

127

Notes: 1. All rental etc requirements (other than Centenary House in column 1, which is known to be 9% p.a.) are adjusted by figures as per index in last column 2. Centenary House outgoings increase at same rate as State POE, same as POE funding (see last column) 3. An efficiency dividend has been included in calculations for POE - see efficiency dividend column but the change to a 1 % dividend on ANAO Running Costs from a 1.25% dividend on Salaries/Admin will actually lead to a reduction in ANAO's overall efficiency dividend (saving around $50,000)

4. Loan for Centenary House is repaid in full by 1999-00; base adjusted in 2000-01 without sharing *5. Outgoings for Centenary House in 1994-95 are around $73/m2 (based on 6,200 m2): evidence given to Inquiry was that this was currently around $30/m2 6. In 2008-09, although Centenary House lease expires on 22/9/08, lease cost is shown for full year & incrementing @ 9% 7. While Centenary House lease is shown as incrementing @ 9% p.a., market review after 5 years may have an impact (ratchet upwards)

8. The 1993-94 figure includes funding for POE capital of $867,000 (not all required); funding for other years does not include POE capital, some of which may be used to offset POE current; 1993-94 also incl. actual POE capital expenditure of $51,796 POE capital is an item for which funding requirements can vary substantially over different years -while an amount of $431,000 p.a. is available in base funding for ANAO, it is not expected that all of this will be used for POE capital 9. The estimate is based on a private sector forecast until 2004-05, then incremented at 5% to 2008-09

funded by trans' funded by trans

Table 14.1

14.2 The financial obligations of the lease will be significant for the ANAO. Unless it

can greatly reduce its operating costs or obtain additional funding it seems certain

that it will have to curtail its audit activities. If that occurs, it must be a serious

question whether the Auditor-General will be able to comply with his obligation

under the Audit Act 1901 to report, annually, on the financial statements of

Departments and Authorities (ss. 51(1), 63H(2) and 63M(2)) and other obligations

placed upon him by the Corporations Law, s.331A(l). In the absence of

additional funding, the ANAO's ability to maintain the existing standard of its audit

services must be prejudiced.

14.3 I set out hereunder a number of options which might be available in relation to the

funding of the Centenary House lease. The terms of reference do not require me to

reach a conclusion as to which option should be taken up. Indeed, a decision on

that matter must be affected by political considerations, a detailed examination of the

financial resources of the ANAO, and the ability of the Auditor-General to meet his

statutory obligations without increased funding. An evaluation of these matters

would not come within the Inquiry's terms of reference. I therefore set out the

options with only the briefest comment on each of them.

(a) One option would be for the ANAO to meet the additional cost of the lease

by making more efficient use of its existing resources, thus making costs

savings. One purpose of the move to Centenary House was to enable the

ANAO to rationalise its accommodation both in the Australian Capital

Territory and in the States. No doubt such rationalisation will lead to some

cost efficiencies. However, it would seem unlikely that the adopting of this

option could lead to such large savings as would make up for the shortfall

referred to in table 14.1.

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(b) Another option would be to renegotiate the terms of the lease. Since there

is no valid reason, from the lessor's point of view, why the terms of the

lease should be renegotiated, this option cannot be considered realistic.

(c) Another option would be for the ANAO to move to cheaper

accommodation. It would, of course, be necessary to find another lessee

who would be able and willing to occupy Centenary House and meet the

rental obligations under the existing lease.

(d) An alternative to the option suggested in the preceding paragraph would be

for the ANAO to sublet part of the space it occupies in Centenary House.

However, this option would depend on the availability of a sub-tenant and

also upon the ANAO's ability to contract its accommodation needs or to

accommodate some staff elsewhere in cheaper accommodation.

(e) Another option would be for the ANAO to increase its fees so as to generate

sufficient additional income to meet its obligations under the lease. The

Auditor-General is of the opinion that the payment of additional fees would

be strongly resisted by the Government agencies which would be called

upon to meet them.

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(f) Another option would be for the ANAO to be exempted from the Running

Costs property rent index. Within the PRA context, where an agency can

demonstrate to the Department of Finance that its existing accommodation

results in a preponderance of rent costs in one market, that pure rent stream

can be exempt from indexation and rental funding adjusted on the basis of

costs incurred. There would appear to be some scope for the adoption of

this option since the ANAO can demonstrate that the preponderance of its

rent costs are incurred in the ACT market. The Department of Finance

claims that an exemption in this case would require a dispensation from the

general rule that exemptions from the Running Costs Property Index are

only granted where the Department of Finance has scrutinised lease terms

before a lease is signed. This is disputed by the ANAO. It claims that the

exemption provisions, which took effect after the Centenary House lease

was signed, clearly provide exemption for existing leases such as the

Centenary House lease. In any event, an exemption would not of itself

solve the ANAO's problem, as a decision would still have to be made as to

what additional funding should be given to it in place of funding under the

index.

14.4 The Department of Finance submitted that the shortfall in the ANAO's funding

would be best resolved by the Department and the ANAO working together to reach

an agreed position on the existing levels of ANAO funding commitments against

funding requirements, including some consideration of the rate of indexation. I

agree with this submission, particularly as there are apparently issues other than the

funding implications of the lease of Centenary House which need to be addressed

with regard to the funding of the ANAO.

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14.5 The Auditor-General is concerned that by taking the course proposed by the

Department the ANAO might find itself in the position of having to fund the

shortfall from internal ANAO sources, i.e. by a reduction in resources available for

auditing. He submitted that under existing funding arrangements any general

increases in costs must be recovered, at least in part, through increases in audit

fees. He claims that the absorption of increased costs and their recovery would

seriously jeopardise the capacity of the ANAO to deliver cost-effective audit

services. He also submitted that any proposed solution to the current funding

shortfall should not be perceived by the Parliament or the community as an attempt

by the Executive to reduce the level and effectiveness of the audits undertaken by

the ANAO.

14.6 I agree that the capacity of the Auditor-General to perform his statutory functions

should not be impaired. The Department should, and no doubt will, recognise this

when seeking to reach an agreed position with the Auditor-General.

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1 5 . Are changes to existing arrangements necessary or desirable?

15.1 I have referred in para. 10.6 to the failure of the Australian Property Group (APG)

to inform the Australian National Audit Office (ANAO) in writing of the precise

terms of the proposed lease of Centenary House. In 1991 there was no settled

procedure as to the method by which the APG should inform its clients of the

precise nature of transactions into which the Commonwealth was proposing to enter

on the clients' behalf. Nor was there any settled procedure for obtaining written

instructions precisely identifying the client's instructions.

15.2 In the pre-1989 environment APG's focus was on regulating the supply of property

and property services to user agencies with the objective of minimising demands on

the annual rent and fitout budget which APG controlled. Procedural manuals were

written against that background and were quite unsuited to the new fee-for-service

environment in which APG was operating in 1991. This deficiency has been

recognised by the APG and, as a consequence, it has already taken steps to

implement changes to its procedures. These are contained in a manual styled

Procedures and Processes Implemented by the Australian Property Group over the

last three years in relation to Pre-Commitment and New Leasing.

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15.3 The procedures are too detailed to be stated in this report. It is sufficient to say that

they are adequate to avoid a situation in the future where there can be any room for

doubt as to the client's knowledge and approval of a transaction being entered into

on its behalf.

15.4 The manual does not appear to lay down procedures which, if followed, will avoid

a failure to comply with the provisions of the Lands Acquisition Act such as

occurred in the case of the lease of Centenary House. It should be amended to

overcome this deficiency.

15.5 I have considered whether any changes should be made in the procedure adopted by

the APG in instructing the AVO to carry out valuations. Mr Jefffess carried out his

valuation unaware of the fact that Mr Collins had pursued discussions with Mr

McCann on the rental for the space to be leased by the Commonwealth. Mr Jeffress

was also unaware that the developer was to make a.payment of $400 000 towards

fitout and relocation costs. There is something to be said for the view that a valuer

should be made aware of all matters that might bear upon the decision of a client

whether or not to proceed with a particular transaction. However, on balance, I

think it is better that the AVO should make its valuations having regard only to

market evidence and should ignore any particular circumstances affecting the

transaction which the APG is negotiating on behalf of its clients.

15.6 There is an important division of functions between the APG and the AVO. The

AVO's function is that of an independent professional valuer, whereas the APG's

function is to negotiate the best contractual arrangements it can make on behalf of

its clients. The AVO's assessment of market conditions and the making of

134

valuations based on those conditions could be embarrassed by knowledge of

matters not relevant to a market valuation. Those matters may, of course, be very

important to the client, but it is the APG's responsibility to take them into account

when negotiating the terms of a transaction on behalf of the client.

15.7 I therefore do not think that any change is needed in the procedure adopted by the

APG in giving instructions to the A VO for the making of valuations.

15.8 I have also considered whether specific provision should be made in the APG’s

procedures for informing a client of the name of the owner of a development in

which the client is contemplating leasing accommodation. I have said above that

there is no reason why the Commonwealth should not take a lease of property

owned by a political party. However, there may be a few Commonwealth

agencies which would regard their occupation of property owned by a political

party as inappropriate. One example would be the Australian Electoral

Commission, which is charged with the responsibilities, inter alia, of drawing the

boundaries of electoral divisions and of conducting federal elections. The

Commission would no doubt be of the view that it would be inappropriate for it to

occupy a building owned by a political party, particularly if the building is also

partly occupied by the party.

15.9 I therefore think that the APG’s procedures referred to in para. 15.2 should be

amended so as to make specific provision that its clients are made aware of the

name of a prospective lessor at a very early stage of negotiations.

15.10 In para. 9.4 I refer to a comment made by Mr Hillier to the effect that there was a

conflict of interest for the APG in attempting to serve both the landlord (AEM)

135

and the tenant (ANAO). I think Mr Hillier's comment raises a matter of some

significance. It is not easy to suggest how the conflict can be resolved, given the

present administrative arrangements. This is a problem which should be addressed

by the Department of Administrative Services.

15.11 The controversy over the Centenary House lease has no doubt alerted all

Commonwealth agencies that they themselves are responsible for ensuring that

financial commitments made on their behalf can be met out of their appropriations.

Nevertheless the Department of Finance should continue to draw the attention of

agency managers to their obligations under the new property arrangements.

136

1 6 . Other matters relevant to the public interest

16.1 I have been asked to report whether there are any other matters arising out of the

lease of Centenary House that are relevant to the public interest.

16.2 There are only two matters to which I should draw attention in this regard. First, it

is quite apparent, as I have observed earlier in this report, that the market for the

provision of office accommodation in Canberra is more favourable to lessors than it

is in other capital cities. Perhaps the best indication of this is the gross disparity

between the vacancy rates of office accommodation in Canberra and those in other

capital cities.

137

16.3 Table 16.1 gives some idea of the disparity.

Table 16.1. ACT office market 1987-93 - BOMA* vacancies data.

T o t a l V a c a n c y

C i t y S t o c k J a n 1 9 8 7 J u l y 1 9 9 2 J u l y 1 9 9 3

(million square metres) % % %

Sydney 4.0 1.4 20.3 21.9

Melbourne 3.3 1.5 26.7 26.6

Brisbane 1.4 8.6 13.8 13.9

Canberra 1.3 0.9 5.2 5.0

Perth 1.3 7.3 28.0 30.0

Adelaide Core 0.9 3.5 15.5 19.1

Hobart 0.3 1.4 11.5 15.7

♦Building Owners and Managers Association

16.4 The Canberra market appears to be much more favourable to developers than other

markets in Australia. It was in the context of the unique market conditions in

Canberra that the terms of the Centenary House lease were settled.

16.5 It is no part of my duty in making this report to provide an explanation for the

special market conditions in which developers operate in Canberra. However, it

must be a serious question whether such conditions operate to the disadvantage of

the Commonwealth which relies substantially on the commercial sector to provide it

with office accommodation.

138

16.6 I think the Commonwealth should consider whether it can take any action to

promote market conditions more favourable to it than existing conditions so far as

the provision of office accommodation in the Australian Capital Territory is

concerned.

16.7 The second matter relates to the procedure pursuant to which rental reviews are

made under leases that require rents to be reassessed periodically during the term of

a lease. In para. 4.39 I refer to Mr Collins' evidence that, under existing

arrangements in Canberra, such reviews often do not operate to the

Commonwealth's advantage. I am in no position to reach a firm conclusion on this

matter. However, I recommend that the APG and the AVO should jointly consider

whether there is scope for improving the mechanism for resolving disputes as to

rent reviews.

139

COMMONWEALTH OF AUSTRALIA

ELIZABETH THE SECOND, by the Grace of God Queen of Australia and other Realms and Territories, Head of the Commonwealth:

TO:

THE HONOURABLE TREVOR REES MORLING

GREETING:

WHEREAS it is desired to have an inquiry into matters relating to the leasin Commonwealth of accommodation for the Australian National Audit C Centenary House at Barton in the Australian Capital Territory:

NOW THEREFORE We do by these Our Letters Patent issued in Our nami Governor-General of the Commonwealth of Australia on the advice of the Executive Council and in pursuance of the Constitution of the Commonv Australia, the Royal Commissions Act 1902 and other enabling powers, app to be a Commissioner to inquire into:

(a) the role of the Australian National Audit Office (the ANAO), the Austn Property Group (the APG), the Australian Valuation Office (the AVO), Australian Estate Manager, the Department of Finance and any other ag considered relevant, in the lease of Centenary House to the Commonwe

in particular, addressing the following matters:

(i) the appropriateness of tender and selection processes followec identifying suitable accommodation for the ANAO, with speci reference to the selection of Centenary House;

(ii) whether the processes followed by the ANAO, the APG, the l the landlord, individually and collectively, resulted at that time any time might result, in any party to the lease for Centenary I obtaining unfair and/or above market commercial advantage 6 aspect of the arrangement;

i'iiii wnether the instructions of ANAO to the APG, as regards the accommodation otmons. enabled the APG to test a sufficient!) mance: so as to enaoie the .APG to pursue a truly competitive arrangement.

I iv) wneuier ai; tne Commonweaim agt.icies concemec acted in accordance witr. tne Government noiicies appivmg at tne time

v ) vnetner me .\PG. as me Commonwealths orcoertv agent. ruifilled its

responsmiiitv to tne .ANAO. mciuoina m relation to me estaniishment of the lease tenns;

ivi) wnether. taking mto account me nature ana errect of me resource agreement between me .ANAO ana the Department of Finance in relation to the financing of the lease, appropriate stens were taxen ov the ANAO and the Department to ensure mat me .ANAO could tuna the lease commitments on Centenary House ana meet its otner

obligations:

(vii) whether all of the Commonwealth agencies involved acted in the best interests of the Commonwealth, including so as to achieve value for money;

(viii) the longer term funding implications for the ANAO of the Centenary House lease;

(ix) the options available for action in relation to the funding of the Centenary House lease; and

(x) any other matters considered relevant to the public interest in the matter; and

(b) whether any changes to existing arrangements are necessary or desirable to avoid similar occurrences in the future:

AND We require you as expeditiously as practicable to make your inquiry and, not later than 9 August 1994, to furnish to Our Governor-General of the Commonwealth of Australia the report of the results of your inquiries and such recommendations as you consider appropriate.

WITNESS the Honourable William George Hayden. Companion of the Order of Australia, Governor-General of the Commonwealth of Australia on

Governor-General

By His Excellency's Command,

COMMONWEALTH OF AUSTRALIA

E L IZ A B E T H T H E SE C O N D , by the G ra ce of G od. Q u een of A ustralia and H e r o uter Reau

and T erritories, H ead of the C om m onw ealth:

G R E E T IN G :

W H E R E A S by L etters P a te n t issued in O u r nam e by O u r G overnor-G eneral of

C om m onw ealth of A ustralia o n 16 M ay 1994 W e a p p o in te d you to be a C om m issioner to inqi

into and re p o rt upon m atters relating to the leasing by the C om m onw ealth of accommodation

the A ustralian National A u d it O ffice in C entenary H o u se at B arton in the A ustralian Cap

T erritory:

A N D W H E R E A S it is d esirab le th a t those L etters P a ten t be varied in certain respects:

N O W T H E R E F O R E W e do, by these O u r L etters P atent issued in O u r nam e by <

G o v ern o r-G en eral of the C om m onw ealth of A ustralia on the advice of the F ederal Emeu

C ouncil and pursuant to the C onstitution of the Com m onw ealth of A ustralia, the A

C o m m is sio n s A c t 1902 and every o th e r enabling pow er, declare that the L etters P atent issuea

16 M ay 1994 shall have effect on a n d from 27 July 1994 as if the w ords "not later th an 31 Octc

1994’ w ere substituted for th e w ords "not late r th an 9 A ugust 1994".

TO :

T H E H O N O U R A B L E T R E V O R R E E S M O R L IN G

W ITN ESS the H onourable W illiam G eorge Haf

C om panion of the O rd e r of Austr

G overnor-G eneral of the C om m onw ealth of Austi

on &

G overnor-G eneral

for the P rim e M inister

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

PARLIAMENTARY PAPER No. 344 of 1994 ORDERED TO BE PRINTED

ISSN 0727-418