Chapter 3 - Rationalisation of Defence properties
The property rationalisation
policy
3.1
Although there are many reasons for Defence to
declare a property surplus and commence disposal action, property
rationalisation within Defence has resulted from two main initiatives:
- an ongoing whole of government policy to reduce
its property holdings throughout Australia; and
- evolving Defence policy that has seen
substantial changes in the state and deployment of the Australian Defence
Force.
Government property rationalisation
3.2
The rationalisation of the Commonwealth estate
has been proceeding for some time. The broad philosophical basis for the
ongoing rationalisation was outlined by DoFA officers during their appearance
before the Committee:
But the point is that the Commonwealth is not a property company
and this is an opportunity cost of capital and the Commonwealth has determined
that there are better things for it to do than be a property holding company.
[Private sector companies] believe that their capital should be
focussed on their core business rather than owning property. The government has
a similar view—that the ownership of property is not their core business.[1]
Defence driven property
rationalisation
3.3
The Defence policy on estate management has seen
considerable change during the previous decade, driven by a number of changes
in the wider Defence environment.[2]
The Defence Efficiency Review noted in 1997:
While the current disposition [of the Defence estate] is largely
historically based, major facilities decisions in recent times have been driven
primarily by strategic considerations.[3]
3.4
In its submission, Defence also noted the
considerations of Defence’s basing policy:
Defence basing policy is predicated on the development and
maintenance of Australian Defence Force (ADF) capability to meet operational
and strategic requirements. This further influenced by factors that are
fundamental to the delivery of capability including support, personnel and
training requirements.[4]
3.5
The operational and strategic requirements that
have led to changes in the disposition of Defence units include:
- the move of the 1st Brigade to Darwin as part of
the ‘Army Presence in the North’ policy;
- the development of a fleet base at HMAS
Stirling in Western Australia under the Two Ocean Basing policy;
- the development of a chain of bare air bases in
northern Australia;
- a drive to maximise tri–service functions has
also led to the amalgamation of many of the logistics, training and
administrative facilities of the individual services; and
- the Commercial Support Program (CSP) has seen
the outsourcing of many Defence support services to private contractors.
3.6
Each of these has resulted in changing property
requirements across the Defence Estate, with new facilities being created while
older, often single service facilities, became surplus to requirements.
3.7
Defence studies also demonstrated that the costs
of facilities and accommodation could be minimised by ensuring that bases are
kept beyond a certain minimum size. As the Defence Efficiency Review explained:
Smaller bases do not provide economies of scale and available
data indicates that per capita operating costs increase significantly for bases
with less than 1000 personnel.[5]
3.8
In general, Defence also pointed out that, as
there is a direct relationship between the Defence estate asset value and
operating costs, it will always be important to minimise the overall size of
the Defence estate, within the constraints of fulfilling the Defence task. [6]
3.9
Defence’s changing strategic and operational
posture gives the opportunity to rationalise further property holdings in the
capital cities and move from high–value metropolitan sites to lower–value
regional sites that fit with Defence’s requirements. Defence said it will
continue to pursue such opportunities. During the last few years, for example,
Army elements have moved to Puckapunyal and Townsville from Sydney Harbour
foreshore sites, the Hydrographic Office has moved from North Sydney to
Wollongong, and the major Defence office at 350 St Kilda Rd Melbourne has been
sold and significant elements relocated to Laverton.[7]
3.10
In the light of these considerations, a number
of Defence studies examined the facilities requirements for the ADF, including
the:
- Naval
Infrastructure Strategy 2010;
- ADF
Airfields Study;
- Review
of Army’s Long Term Facilities and Training Area Requirements;
- Facilities
Rationalisation Study 1992;
- Force
Structure Review 1991; and
- Defence
Efficiency Review 1997.
3.11
These factors led to the sale of about 170
properties or parts of properties since 1991 with gross receipts of around $450
million. Defence is continuing its rationalisation and consolidation of the
Defence estate and proposes to reduce its property portfolio by a further 25
per cent over the next five or six years.[8]
In financial year 2000–01, Defence expects to return approximately $97 million
to its budget from property disposal, with this figure rising to $173 million
in 2001–02.[9]
Defence explained that:
This gives the opportunity to rationalise property holdings
further in the capital cities and move from high value metropolitan sites to
lower value regional sites that fit with Defence’s strategic requirements and
Defence will continue to pursue such opportunities. During the last few years,
for example, Army elements have moved to Puckapunyal and Townsville from Sydney
Harbour foreshore sites, the Hydrographic Office has moved from North Sydney to
Wollongong, and the major Defence office at 350 St Kilda Road Melbourne
has been sold and significant elements relocated to Laverton.[10]
Current
policy guidance
3.12
Defence is guided in the ownership and disposal
of properties by both government-wide and Defence–specific policies.
Commonwealth property principles and the
Commonwealth property disposals policy
The Commonwealth property principles
3.13
In summary, the Commonwealth property principles
set out the circumstances in which the Commonwealth Government should own
property. Embedded in the principles is the presumption that, in general,
property should not be Commonwealth-owned unless the rates of return exceed a
predetermined level. The aim of the property principles is to provide guidance
on when the Commonwealth should own property:
The Commonwealth property principles generally apply to land
that Commonwealth is still using and [they guide] whether or not it should
remain in [Commonwealth] ownership.[11]
3.14
Mr Stephen Bartos, General Manager, Budget
Group, DoFA, told the Committee that a rate of return of 14 to 15 per cent is
currently applied throughout the Commonwealth property principles.[12] Ms Kathryn Campbell, First
Assistant Secretary, Property Group, DoFA, added:
The internal rate of return calculations generally look at the
property over a ten to fifteen year period and take into consideration the
costs that are likely to be invested in the property over that period, as well
as the likely income from the property and determine the rate on that aspect.[13]
3.15
In addition, a property may remain in
Commonwealth ownership if there are public interest considerations that
outweigh economic considerations. Examples listed include symbolic
significance, environmental, heritage or security requirements.[14] Importantly, the onus is on
each government agency to justify retaining a property in public ownership.[15] The practical operation of
these principles is examined in greater detail below.
3.16
The Commonwealth property principles detail a
number of measures required to encourage efficient, effective and transparent
decision-making and accountability. However, Mr Stephen Bartos, when questioned
about the calculations that determined the sale and lease back of a number of
Defence properties, stated:
In terms of whether or not these properties met the hurdle rate
as applied in the property principles, yes that was done. The calculations were
done prior to decision by cabinet. ... If these form part of a cabinet
submission, they are not going to be made available.[16]
3.17
Although the Committee respects Cabinet
confidentiality, the withholding of figures in this way is contrary to the
policy of transparency and accountability laid down in the Commonwealth
property principles. The inclusion of facts and figures in a Cabinet submission
does not, of itself, render those facts and figures confidential. Cabinet
submissions often contain information, which neither the Government nor anyone
else would consider to be confidential. Unless those facts and figures have
some inherent reason to be confidential (eg their release would be contrary to
our national security interests), they should not be withheld from public
release solely on the grounds of having been used in a Cabinet submission. The
withholding of such information is not only contrary to principles of public
accountability but also fosters the perception that such information would not
stand up to scrutiny if released and that the withholding of that information
is intended to prevent such scrutiny.
The Commonwealth property disposal
policy
3.18
Once a Commonwealth property has been listed as
surplus to requirements, the Commonwealth property disposal policy provides the
requirements for property disposal. Foremost in this policy is the general
principle that ‘Commonwealth property to be sold is to be sold on the open
market at full market value.’ However, exceptions to the rule are provided for
in the case of ‘priority sales’ and ‘concessional sales’.
3.19
Priority sales are those made to the purchaser
without offering the property on the open market, and may be made in limited
circumstances to former owners of the property, Commonwealth–funded
organisations, or where the sale to a State or Territory Government would
advance Commonwealth policy interest. The sale should still be at full market
value. DoFA officers stated that ‘priority sales, indeed, are not encouraged’.[17]
3.20
Concessional sales are a type of priority sale
where the price is below market value. They also require the permission of the
Minister for Finance and Administration to proceed. While specific comment was
not made, it can be assumed that these sales are discouraged more than priority
sales.
Defence policy
3.21
The plan for disposing of Defence properties
across the short, medium and long term is articulated within the Defence Estate
strategic plan. This plan is designed as a portfolio–level document to provide
the longer–term planning framework for the rationalisation and consolidation of
the Defence estate over the next 20 to 30 years. According to DEO:
The [strategic plan] is to be supported by detailed business
case studies and facilitate the executive decision making process. The
progressive implementation of the [strategic plan] will be instrumental in
meeting DRP targets for property disposals and efficiency savings.[18]
3.22
The Committee sought a copy of the strategic
plan from Defence to assist in its inquiry. However, the Minister for Defence
declined to release it, owing to the latest revision not having been considered
by government.
3.23
The unavailability of the strategic plan makes
it difficult for the Committee to address in any meaningful way the first part
of term of reference 5 regarding how the ADO decides whether property is
surplus to requirements.
3.24
However, during another inquiry into recruitment
and retention of ADF personnel, the Committee received evidence that the
rationalisation and consolidation of bases in operational areas has had
ramifications for recruitment and retention, especially the latter. As the
majority of ADF members are recruited in the southern States, which is where
most of their families and friends live, the closure of many bases in the
southern State capital cities has had the effect of giving fewer serving members,
particularly in Army, the opportunity to serve near family and friends and to
live in cities, which have good facilities and amenities and better employment
opportunities for spouses than in most other areas where there are large bases.
As further rationalisation occurs, this will become increasingly a recruitment
and retention issue.
Defence Estate Divestment Plan
3.25
In a DEO document entitled Property Disposals
Policy Framework, there is reference to the Estate Divestment Plan. It
states:
The Estate Divestment Plan (EDP) is the endorsed five-year
property disposal program. It is made up of the list of potentially surplus
Defence properties, its primary source being the SPDE [Strategic Plan Defence
Estate]. It includes estimates of the revenues expected from each disposal and
of the costs involved in achieving them. The EDP is reviewed and endorsed
annually by the DEE, and plays an important part in development of the DEO’s
component of the FYDP.
The EDP is over programmed by 10 per cent as a mechanism
for ensuring Defence Estate can meet FYDP guidance for receipts. To achieve the
higher revenue target, additional disposal projects are positioned in the FYDP
until the cumulative revenue estimate for any year of the FYDP is 10
per cent greater than the guidance figure of that year.
Endorsement of a disposal project as part of the EDP authorises
disposal officers to raise purchase orders and expend funds to determine the
extent of site constraints and opportunities and how they can best be dealt
with. The EDP is reviewed and revised twice each year to reflect the latest
revenue and expenditure projections, as information is gathered about the costs
of preparing sites for sale, and about changes to valuations.
After analysis of the property constraints and opportunities and
before funds can be expended on planning actions, remediation or marketing, a
Disposal Strategy must be prepared presenting a business case on the disposal
strategy to the appropriate delegate for approval.
The EDP is closely linked to the Green Book. Appreciation of
this linkage is particularly important where the timing of a disposal at one
location is dependent on the completion of a Green Book project at another.
Development and review of the two programs in the same timeframe is an important
factor in the coordination and planning of related projects.[19]
The
legal environment
3.26
In examining the disposal of Defence properties,
it is also important to consider the wider legal context in which these
disposals occur. The Land Acquisition Act 1989 (LAA), which is under the
responsibility of the Minister for Finance and Administration, provides the
legal framework within which Commonwealth property is administered. Any
disposal of Commonwealth property requires authorisation under the LAA.[20]
3.27
As the owner of land, Defence is bound by
Commonwealth legislation in relation to issues such as heritage conservation[21] and environmental protection.[22] However, as a Commonwealth
agency, it is not bound by State or Territory legislation. In the context of
Defence disposals, this is significant in that Defence is not obliged to comply
with local planning, environment or heritage laws. Nevertheless, once Defence
sells the property, the new owner is bound by these laws, so, in practice,
Defence has to take them into account prior to sale.
Sale and lease–back
3.28
Sale and lease–back arrangements apply when a
property continues to be required by Defence but the financial benefit of
keeping the property does not meet the ‘hurdle rate’. When this occurs, the
property is sold at market value and then leased back to Defence as part of the
sale contract. Under most circumstances, Defence would enter into long-term
lease arrangements with options for lease extension to gain security of
tenancy.
3.29
During the inquiry, the Committee examined the
sale and lease–back of Defence properties in the Melbourne and Sydney CBD and
the Defence Headquarters complex at Russell in Canberra. The use of sale and
lease–back will be discussed later in the report.
Selling or retaining: the
options
The application of the property
principles and disposal policy
3.30
The operation of the Commonwealth Property
Principles and the Commonwealth Property Disposal Policy leave little room for
ambiguity. If the property is declared surplus through lack of requirement or
does not meet the ‘hurdle rate’ for retention under the Property Principles,
the property then falls under the Disposal Policy. As previously stated, the
disposal policy has the underlying principle of sale at market value. However,
according to the policy, when certain other considerations are present, the
property may also be disposed of as a priority sale, again at market value, or
a concessional sale, at less than market value.
3.31
Evidence given by officials of both the
Departments of Defence and Finance and Administration has made it clear that
priority and concessional sales are both discouraged. Evidence given to the
Committee by Mr Paul Ferrari, Acting Branch Manager, Competitive Tendering and
Grants Branch, DoFA, supported this view:
Priority sales, indeed, are not encouraged. Quite clearly the
policy on disposal of surplus property is to sell the property on the open
market at full market value. There are some circumstances where priority sales
are possible, but they are fairly limited circumstances. Within the
Commonwealth they are fairly tightly controlled in the sense that it is the
Minister for Finance and Administration who has ultimate responsibility to
approve such priority sales, and he would normally do so on the basis of a
recommendation from another minister. The case for such consideration would
need to be developed and put to the Minister for Finance and Administration by
that other Minister.[23]
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