Background and context

1. The Australian Taxation Office (ATO) is Australia’s principal revenue collection agency, with responsibility for administering Australia’s tax and superannuation systems. It is a large government agency, with an operating budget of $3.45 billion for 2012–13, and around 24 000 staff working from offices located across all states and territories.¹ As at 31 December 2012, the ATO’s property portfolio included 19 offices in central business districts nationally, eight in suburban areas and nine in major regional centres.² The ATO’s property-related expenditure was $238 million in 2011–12 (excluding the costs associated with ATO staff assigned to property management) or seven per cent of its total operating budget.

2. The management of Commonwealth property plays a key role in supporting the delivery of an agency’s services to government and the public. Property provides a platform from which to administer and deliver services and, as such, must fulfil that role by providing accommodation of the right quality, in the right location, at a cost commensurate with the service delivery. Property management contributes to the effective operation of an agency’s workplace and infrastructure and requires co-ordination with its business activities, employees and stakeholders. To achieve this end, agencies are required to set clear property objectives as part of comprehensive strategic planning processes and establish internal procedures to facilitate effective property planning and administration.³

3. Over the years, Australian governments have taken different approaches to the management and regulation of government property, with significant implications for how agencies manage their property portfolios. Throughout the 1990s the (then) Government’s reforms made agencies responsible for managing their own properties, consistent with a set of property principles. The application of these principles generally resulted in agencies entering into commercial property leases.⁴ This position applied to the ATO, whereby all premises are leased. Further, since 1999 the ATO has outsourced property management services to one of several commercial companies in Australia providing property and leasing services.

4. The ATO’s first property management services contract, valued at $8 million⁵, covered the period 1999–2004, and included a relatively narrow range of services covering lease administration, bill paying, building inspections and routine maintenance. The services provided were expanded in the second contract, 2004–12, valued at $22.1 million (including extension options), to include almost all aspects of property management, from the delivery of cleaning services to the management of complex capital works projects. The current contract is valued at $17.2 million for the period 2012–17, with two, two-year extension options available. It requires greater contractor input to long-term strategic property management planning and clarifies the contractor’s role in providing environmental and value added services. The increased range of services reflects the recommendations from the three contract reviews undertaken by the ATO prior to exercising contract extensions in 2007 and 2009 and issuing a request for tender in 2011.

5. The Australian Government’s current approach to the management of government property was outlined in September 2009, when the Department of Finance and Deregulation (Finance) released the Commonwealth Property Management Framework.⁶ The framework sets out key policies and legislative requirements, including legislation related to property management⁷, under which agencies are accountable for managing their property portfolios.⁸

6. In 2009–10 Finance introduced, as part of the Property Framework, the requirement for agencies to have a property management plan in place by October 2010, which was to be reviewed and updated annually, or as required.⁹ Property management plans have to be linked with other corporate planning functions, to establish that the agency’s property portfolio is appropriate for the size and nature of its existing and future business needs.

7. Consequently, the ATO began establishing new processes and procedures to satisfy Finance’s new requirements and to more effectively manage its property portfolio. The measures are designed to support a more comprehensive and strategic approach to property management than previously practised. As at April 2013, arrangements supporting the ATO’s administration of its property portfolio are centred around the Property Services and Environmental Services branch, the National Accommodation Forum, and the Environmental Management Committee, whereby the:

• Property Services and Environmental Services branch provides a range of office-based property services across all ATO locations and works with the contracted property management services provider on all aspects of the ATO’s property portfolio. As at December 2012, the branch had 162 staff working from 23 ATO offices and a total operating budget of over $286 million in 2012–13, including: $263.2 million for property operating expenses such as for leasing, cleaning, energy, maintenance and security; staffing costs of $16.9 million; and supplier costs of $6.6 million, including costs associated with the outsourced property services contract;
• National Accommodation Forum, established in 2009, provides executive-level oversight and greater visibility to the management of the ATO’s property portfolio, strengthening the links between property and the ATO’s business requirements; and
• Environmental Management Committee, formed in February 2011, develops and implements the ATO’s environmental initiatives. It includes representatives from across the ATO, including the procurement branch.

Audit objective and criteria

8. The objective of the audit was to assess the effectiveness of the ATO’s management of its property portfolio. In particular the ANAO examined whether the ATO’s:

• property management arrangements supported the agency’s property objectives and business requirements;
• external contract for the provision of property management services reflected the ATO’s property management arrangements; and
• contract management framework provides assurance that the property portfolio is being effectively managed.

Overall conclusion

9. The ATO has a large and geographically dispersed property portfolio that in December 2012 included 65 offices, with the major buildings located in central business districts and major regional centres. The ATO’s property‑related expenditure was $238 million in 2011–12, or seven per cent of the total operating budget of $3.4 billion for that year. All premises occupied by the ATO are leased—the ATO does not own any property.

10. Despite being a large agency with significant property leasing and operating costs, prior to 2009 the ATO did not have comprehensive property management and planning processes. There was limited capacity to monitor the use and costs of its large property portfolio, including the quantity of leased office space that was used or vacant. Leasing arrangements at that time were often being entered into at short notice with little longer-term planning. Property costs were often viewed as fixed annual costs, with minimal consideration being given to options for cost savings and efficiencies.

11. Commencing in 2009–10, the ATO has substantially revised its property management approaches, implementing a number of initiatives to strengthen the planning, operation and reporting of its extensive property portfolio, and to comply with the Commonwealth’s Property Framework. These initiatives have included: preparing an overarching Property Management Plan (2010) and associated Location Plans to guide accommodation decisions; establishing the National Accommodation Forum to consider accommodation policy, usage and costs at an executive level across the ATO; and implementing an accommodation planning system to better forecast the demand for and use of office space.¹⁰

12. Together with better management and oversight of the property contractor, these initiatives have improved the ATO’s overall management of its property portfolio. However, many of these initiatives have only been recently implemented, and the ATO has still to review and update the Property Management Plan (2010) and align property planning processes with the ATO’s corporate plans. Finalising these initiatives would better support the ATO to effectively manage its property portfolio. Updating the property management plan will allow the ATO to establish an overarching strategy for its property portfolio (as no such strategy is defined in the current plan or Location Plan¹¹), which contains clear property objectives. Better integration with the corporate planning cycle would further align property decisions with the agency’s business and operating requirements.

13. Contracts for the external provision of property management services have reflected the ATO’s property management arrangements and requirements. Services being provided by the contractor have been progressively increased over the course of the three property services contracts¹², with the second and third contract being entered into with the same company. The contract management framework is sound and, as is to be expected, the management of property contracts has improved over time, drawing on the three contract reviews (undertaken prior to exercising contract extensions and issuing the recent contract request for tender) and in response to the introduction of the Property Framework in 2009–10. The reporting of contractor performance is comprehensive. Arrangements to assess this information and oversight contractor performance have particularly been strengthened since 2009–10, with ATO staff more closely examining contractor performance.

14. The ATO has documented processes and controls that guide and support the approval and correct payment of fees to the contractor. ANAO analysis indicated that these controls worked effectively overall. However, around 20 per cent of invoices analysed did not have evidence of project manager approval, or were not marked or signed as required. The ATO has established these processes to reduce the risk of incorrect or fraudulent payments, and they should be consistently applied.

15. The ATO reports the value of its property management services contracts on AusTender to support accountability and transparency in government procurement activities.¹³ In 2011–12, the ATO implemented a number of new practices and procedures designed to improve AusTender gazettal requirements across the ATO. Contract procurement rules issued by Finance set out agencies’ reporting requirements but do not cover the format and detail of the reporting of complex procurement arrangements, such as the ATO’s property management services contracts. Strengthening this guidance would assist the ATO and other agencies to accurately and consistently report their contracting expenditures.

16. The ANAO has directed one recommendation to the ATO, to improve its property planning processes and their alignment with the corporate planning cycle; and directed a second recommendation to Finance, to provide more comprehensive guidance for agencies’ AusTender reporting of complex procurement arrangements.

Key findings

Property Management and Planning (Chapter 2)

17. Since 2009, the ATO has implemented a number of administrative and operational changes and initiatives to strengthen the management of its property portfolio. The new arrangements commenced with the development of a strategic property plan, the ATO’s Property Management Plan (2010), in response to the requirements of the Property Framework. The ATO did not have the necessary skills in-house to develop this plan, and could only access limited property related data and information.

18. Other major property initiatives introduced over the past four years to address shortcomings identified in property management and planning include: establishing, at a senior executive level, a National Accommodation Forum to provide strategic oversight of the agency’s property portfolio; and developing annual Location Plans that provide information on the location and cost of the ATO’s properties up to five years in advance. Administrative changes also include forming: a Change Advisory Board, whose members are responsible for ensuring the accuracy of core documentation that sets out standards and procedures governing aspects of the ATO’s property portfolio; and an Environmental Management Committee to advance the ATO’s environmental initiatives.

19. The implementation of a computer-based accommodation planning and reporting system has improved the quality and accuracy of property‑related data. Reports provided by the system will assist the ATO with the planning and operations of its property portfolio. Further, recently completed individual property plans provide easily accessible data on each property under lease to the ATO.

20. As at April 2013, many of these initiatives were only recently implemented and required further refinement. Notably, the ATO had still to review and update the agency’s Property Management Plan (2010), to establish an overarching strategy for its property portfolio and integrate the property planning function within the ATO’s broader corporate planning cycle. Additionally, the linkages and dependencies between the ATO’s property management plan and its location plans could be more clearly defined. Lack of security certification also restricts the ATO’s use of the accommodation planning system, despite the system being in use for some 18 months, and the ATO has not yet met the Government’s occupational density target.¹⁴ The new property management approaches are not yet fully implemented, and will require ongoing senior executive oversight and agency-wide promotion and understanding.

Administration of property management services contracts (Chapter 3)

21. The property management services contract reflects the range and complexity of the services required to manage the ATO’s extensive property portfolio. The contract performance framework encompasses a comprehensive range of performance standards with a focus on the most important indicators but does not attempt to monitor the full suite of the services provided. The ATO advised that to do so would require significant additional resources.

22. Rather, the structure of the framework, through contract management groups¹⁵ and a mix of high-level critical success factors¹⁶ and key deliverables, is designed to support a professional relationship based on good communication and trust between the parties. The ATO advised that the relationship with the provider has matured in recent years, supported by changes in the agency’s approach to property management.

23. Performance management arrangements allow many opportunities for communication between the ATO and the provider, and monthly performance monitoring provides for early redress of any lapses in service provision. Assessing the provider’s performance is conducted, initially, by relevant staff in the Property, Security and Environmental Services branch who are required to document their reasons for the score they are recommending, prior to formal discussion with the provider in the contract management groups. The branch also consults more broadly across the ATO on the standard of services provided.

24. Under the ATO’s property management services contracts, 15 key performance indicators (KPIs) are routinely measured to assess the provider’s performance.¹⁷ These KPIs are relevant and sufficiently complete in that they allow the ATO to monitor essential aspects of the services being delivered. They are also measureable without imposing an unreasonable administrative burden on either ATO staff or those of the provider. Reliability is evident from the rigour and broad consultation undertaken as part of the monthly scoring process.

25. The KPI results are applied in a balanced scorecard approach¹⁸ to assess the provider’s annual performance and bonus payment, introduced through a contract variation in 2005. In each of the six years since the introduction of the balanced scorecard, the overall score has remained static and the provider has received a bonus payment, although there was little evidence for the basis of these payments in the early years. However, contract management has strengthened since 2009–10, and close monitoring of the KPIs promotes continuous improvement in the provider’s performance and eligibility for bonus payments.

26. The contract management framework applied by the ATO has been assessed by an external consultant as appropriate, and the critical success factors and KPIs have been reviewed and revised to align with the ATO’s service priorities. Overall, the ATO has an effective process to manage the contract management services contract, and to monitor the provider’s performance under the contract.

Contract payment arrangements (Chapter 4)

27. The ATO has detailed, documented procedures that set out the stages of the contract payment process, from receipt of an invoice to fee payment.¹⁹ The procedures effectively support the approval and correct payment of invoices of project management fees.²⁰ The ATO also applies a number of measures to control and verify the payment of ‘pass through’ expenses²¹ that include conducting a monthly quality assurance process on the provider’s invoices and selecting a monthly sample of invoices to check if they have been paid within the 30 days timeliness standard. The controls the ATO applies provide assurance that they are correctly paid and within the required timeframe.

28. The ANAO reviewed 178 invoices for project management fees, and tested two key stages of the ATO’s payment process. The results of the testing indicated that these procedures were largely followed, however:

• 37 of the 178 invoices, valued at $643 851 (21 per cent) were not signed or marked as required, before being emailed to the accounts section for payment; and
• 22 invoices, valued at $191 404 (17 per cent) that included variable fees were not signed and approved by the relevant ATO project manager.

The ATO has established these processes to reduce the risk of incorrect or fraudulent payments, and they should be consistently applied.

29. The amounts paid to the provider in project management fees are included in the value of the property management services contracts the ATO publishes on AusTender. The ATO publishes this information to meet its obligations under the Commonwealth Procurement Rules.²² Finance provides procurement policy and guidance to assist agencies’ to comply with AusTender reporting requirements.²³

30. In relation to the ATO’s reporting of the value of its property management services contract, 2004–12, the value of the contract has included, at different times, lease costs, and different components of the fees: fixed fees only, or fixed and variable fees. In June 2009, the ATO’s entry on AusTender included ‘pass through’ expenses for the first time, increasing the reported value of the contract by $302.9 million; with the final value of the contract reported at around $555 million, in contrast to the estimated value of $10.8 million at commencement of the contract in January 2005. However, the treatment of ‘pass through’ expenses, with regard to the value of the contract, is not defined in AusTender guidance. The ANAO sought advice from Finance on the reporting requirements for complex property contracting arrangements, particularly the treatment of ‘pass through’ expenses. Finance advised that further whole-of-government guidance would assist in ensuring transparency of the financial commitment made by an agency for these more complex procurements.

Summary of agencies’ responses

Australian Taxation Office

31. The ATO provided the following summary response to the audit report:

The ATO welcomes this audit and considers the report supportive of our overall approach to managing the ATO Property Portfolio. The audit recognises a level of complexity that exists with managing a large service provider and portfolio and is positive in acknowledging the significant improvements made since 2009. The ATO has also worked to ensure our active support for the Department of Finance and Deregulation in the building and introduction of the Commonwealth Property Management Framework. The ATO agrees with recommendation one and supports the second recommendation for the Department of Finance and Deregulation.

Department of Finance and Deregulation

32. Finance provided the following summary response to the audit report:

The Finance website guidance on reporting of contracts does not include specific information on the reporting of complex procurement arrangements. Finance will develop additional guidance to assist agencies in this area.

33. Agencies’ full responses are included in Appendix 1.

Recommendations

Footnotes

[1] ATO, ATO Annual Plan 2012–13, Corporate overview. Staff numbers provided by ATO.

[2] The ATO also: had 18 regional outposts, which are smaller offices in regional centres; provided a limited service from shared premises with the Department of Human Services in seven locations across Australia; and maintained four storage sites. ATO, Commissioner of Taxation Annual Report, 2011–12, p. 145, and ATO advice.

[3] Department of Finance and Deregulation, Property Management Planning Guidance, January 2012, section 3.

[4] One of these principles was that the Government should only own property where the assessed long-term yield exceeded a nominated rate, or it was in the public interest to do so.

[5] The ATO’s property management services contracts are complex procurement arrangements that include: fixed and variable fees; ‘pass through’ expenses that the provider pays on behalf of the ATO; and contract extension options. The reported value of these contracts has varied, subject to the components of the contract that are included in the total value.

[6] The Property Management Framework is a component of the Australian Government’s Financial Management Framework. The financial framework underpins the appropriation, expenditure and use of money and resources within the Australian Government.

[7] Government legislation and policies that interact with the Commonwealth Property Management Framework are listed on the Finance website, available from <www.finance.gov.au/property/property/docs/legislation_and_policies_that…; [accessed 10 December 2012].

[8] Department of Finance and Deregulation, Overview of the Commonwealth Property Management Framework, Financial Management Guidance No.13, January 2012.

[9] Additional guidance is provided in the ANAO Better Practice Guide, Strategic and Operational Management of Assets by Public Sector Entities, 13 September 2010.

[10] The system improves the ATO’s accommodation reporting capabilities by overlaying office floor plans with staff locations listed in the ATO Staff Directory.

[11] However, the ATO’s property management services contract 2012–17 refers to an ‘overarching strategy of rationalising space and moving to purpose built facilities’. ATO, Property Management Services Contract, 2012–17, p. 207.

[12] Paragraph 3 outlines the services covered in the various property management services contracts.

[13] AusTender is the Australian Government’s procurement information system.

[14] The ATO aims to meet the Australian Government’s workpoint target of 16 square metres per occupied workpoint but has not fully achieved this target in recent years. For example, the ATO reported a reduction in the agency’s overall density footprint by 0.38 square metres, from 16.87 square metres in June 2011 to 16.49 square metres in June 2012. ATO, Commissioner of Taxation Annual Report 2011–12, p. 146.

[15] Contract management groups link relevant staff in the ATO with their service provider counterparts, aligned with the various services delivered under the contract.

[16] Critical success factors are not designed to be measured but are used by the ATO to view the success of the overall contractual relationship.

[17] Fourteen KPIs were specified in the 2004–12 contract. An additional KPI measuring the quality of the contract manager’s key personnel was added in the 2012–17 contract.

[18] The balanced scorecard is a strategic management and measuring process used to help align specific business activities with an organisation’s strategy and vision, developed in the 1990s in the Harvard Business School. The ATO is using a form of the balanced scorecard to align key contract objectives with provider performance.

[19] The ATO’s property management services contracts, 2004–12 and 2012–17, have four categories of fees: management; real estate and facilities management; project management; and implementation and transition to a new provider.

[20] Project management fees are paid for the: management of the capital works program, that is a fixed annual fee, paid by monthly installments; and delivery of individual projects. Where fees are variable, they are calculated on an incremental percentage scale based on the value of the work.

[21] Payments for outgoings, including rent, are made in advance by the ATO: the provider submits an invoice for the amounts and the ATO transfers the funds into an approved account that the provider can draw on when payments are due. These payments are referred to as ‘pass through’ expenses.

[22] The Commonwealth Procurement Rules represent the Government’s policy framework under which agencies govern and undertake their own procurement The Commonwealth Procurement Rules took effect from 1 July 2012, replacing the Commonwealth Procurement Guidelines issued in December 2008.

[23] Department of Finance and Deregulation, Buying for the Australian Government, Transparency in Australian Government Procurement, available from <http://www.finance.gov.au/procurement/procurement-policy-and-guidance/buying/accountability-and-transparency/transparency-procurement/principles.html> [accessed 22 February 2013].