Introduction

1. The Department of Foreign Affairs and Trade (DFAT) is responsible for implementing the Australian Government's foreign and trade policy objectives. It does this through its head office in Canberra, its State and Territory offices and its network of 89 overseas diplomatic posts.

2. Australia's overseas posts occupy a mix of owned and leased properties. At 30 June 2009 the Australian Government's overseas owned estate comprised 404 properties in 60 overseas locations with a total value of $1.7 billion. Properties included 35 chanceries, 51 Head of Mission (HOM) residences and 297 staff residences.

3. The selection and maintenance of suitable properties is important to the success of Australia's overseas missions. Appropriate and well-maintained properties help project a positive image of Australia, provide a safe and secure environment for staff and their families, and contribute to good working relations between the various agencies operating at the post.

4. In the late 1990s, the then Government decided that property management would be undertaken on a ‘fully commercial' basis, with the full cost of properties charged to tenants, and with the domestic and overseas property portfolios required to achieve a commercial rate of return on their assets, benchmarked to industry standards.

5. Responsibility for the management of the overseas owned estate was subsequently transferred from the then Department of Finance and Administration (Finance)¹ to DFAT in November 2001, resulting in the creation of the Overseas Property Office (OPO). While having distinct funding arrangements from DFAT, OPO is part of DFAT's corporate management structure and reports to its Senior Executive.²

6. OPO acts as landlord of the overseas owned estate, leasing office and residential accommodation to Australian Government tenants—known as ‘attached agencies'—who have representatives at overseas posts. Its largest tenant is DFAT which pays 65 per cent of all rent collected.

7. OPO contracts out the delivery of a range of property management, facility management and financial services to a service provider. Among other things, the contracted service provider supplies on-site facility managers to 24 large posts which occupy owned chanceries.

8. OPO operates as a business unit and pays costs from a Special Account. Reserves in the Special Account are used to fund major construction projects, meet outsourced property management costs and operating costs, and pay annual dividends.

Audit objectives and scope

9. The objective of the audit was to assess the effectiveness of OPO's management of the overseas owned estate. In particular, the audit examined whether:

• sound arrangements are in place to effectively plan and oversight the management of the overseas estate;
• OPO effectively manages owned property on a day-to-day basis;
• the condition of the overseas owned estate is adequately maintained by structured and systematic repair and maintenance arrangements; and
• OPO has appropriate information to facilitate the effective management of the owned estate, and appropriately consults with stakeholders.

10. The audit focused on the overseas owned estate. The management of the overseas leased estate was excluded from this audit, although some management aspects which are common to both, such as strategic planning, were examined in this audit.

Overall conclusion

11. The management of the overseas owned estate is a challenging task, involving some 400 properties in 60 overseas locations, with a total value of about $1.7 billion. Some buildings are old and have heritage significance, which can make maintenance, and compliance with current standards, difficult and expensive. The requirement to manage the estate on a commercial basis and the increased priority given to security-related upgrades in recent years have added to the complexity of the task.

12. Against the background of these challenges, the administrative processes for planning, managing and maintaining the estate, and reporting on its performance, are not yet sufficiently developed to support the effective management of a property portfolio of the scale and complexity of the overseas owned estate. Some of the work required to strengthen the administrative processes is underway or has been identified, but will require close management oversight to achieve.

13. Since assuming responsibility for the management of the overseas owned estate in 2001, OPO has put in place the basic elements needed for effective estate management. These include a strategic planning process, arrangements to monitor the condition of properties and undertake repairs and maintenance, arrangements to review property compliance with building standards and occupational health and safety requirements, and a range of performance indicators to monitor the estate's performance.

14. However, weaknesses in the implementation of these elements are reducing their effectiveness. It will be important to address these, particularly given the significant additional challenges that OPO faces in managing major upcoming embassy relocations and construction projects in Jakarta and Bangkok, and the potential project in Kabul.

15. The ANAO has made four recommendations aimed at strengthening OPO's management of overseas property. In particular, OPO can better manage agency tenancy arrangements by improving the timeliness of lease renewals, reviewing and articulating its rent-setting policy, and developing a client services charter. Arrangements to maintain the estate could be significantly strengthened by improving the property condition rating system and the quality and consistency of annual inspection reports, reporting against repairs and maintenance benchmarks, and strengthening the approach to compliance auditing. In addition, the estate's performance indicators require review and strengthening to enable stakeholders to be able to form a view on whether its performance is currently satisfactory, and whether it has been improving or declining over time.

16. Overall, there are a number of issues that are impacting on the ‘commercial' business model adopted for the overseas owned estate and causing tensions between OPO and its Australian Government agency tenants. These include: unresolved issues relating to the future of supplementary budget funding provided to tenant agencies to reflect the special value of diplomatic properties; responsibility for meeting the cost of shared space in new chanceries; and rent increases for existing and new chanceries. These issues may have consequential impacts on the capacity of OPO's Special Account to fund relocations and refurbishments, maintain property to an appropriate standard, and pay annual commercially based dividends. The pressures that are emerging suggest that the self-funded commercial model, as currently constituted, would benefit from review.

Key findings by chapter

Strategic planning and guidance (Chapter 2)

17. OPO has established a strategic planning approach that incorporates many elements of sound practice. Plans are documented and updated annually, address performance and outcomes, and set out a five-year rolling program of activity. However, the planning process is largely reactive in nature and tends to result in a focus on projects that predominantly address current needs. The risk is that major projects are not built into the plans until they become urgent. At the time of the audit OPO was developing a 20-year forward plan to forecast major capital works which has the potential to substantially strengthen its strategic planning process.

18. Prioritisation of projects in the past has been largely ad hoc and driven by the need for security upgrades. Such an approach means that other important and/or more difficult projects are not given sufficient weight and could be overlooked. OPO advised that it will develop a more formal process to prioritise projects.

19. At the individual property level, detailed operational plans for individual properties have not been established as originally intended, although one pilot plan had been prepared. OPO advised that it has put in place management arrangements to ensure that plans are now developed in a timely manner and remain current.

20. At the strategic level, DFAT's agency-wide risk management register identifies a small number of high-level, property-related risks. OPO has not put in place a process to systematically identify and manage all strategic risks for the overseas estate. At the project level, risk management would benefit from a clearer and more formal identification of risk and remedial action. There was work under way to improve project risk management at the time of the audit.

21. OPO's key reference document—the Overseas Property Management Guide—provides property officers with useful and relevant guidance. OPO also provides ongoing support to posts on property issues. Posts generally reported OPO to be helpful and responsive to their needs. OPO also runs a mandatory pre-posting training course for property officers being posted overseas. While the training course is useful and well-presented, about one-third of staff do not attend.

Managing property projects and relations with tenants (Chapter 3)

22. OPO is responsible for the development and delivery of projects, including the relocation, construction and refurbishment of chanceries. OPO's project management process reflects standard industry practice by following four key phases: concept and feasibility, development, implementation and finalisation. In addition, OPO follows good practice by undertaking lessons learned exercises for completed projects.

23. Major projects (over $15 million) are required to be reviewed by the Parliamentary Standing Committee on Public Works (PWC). In addition, significant departures from the initial concept or cost should also be brought to the PWC's attention. A review of 13 OPO projects for compliance with these requirements found that while there had been significant increases to the scope and cost of one project, some of these had not been brought to the PWC's attention as required.

24. In addition to managing projects, OPO acts as landlord of the overseas owned estate, leasing office and residential accommodation to tenants (including DFAT), and deriving income of approximately $150.6 million a year from the rents charged. Lease terms and conditions are set out in agreements with tenants, however, at the time of the audit, about 30 per cent of these agreements had expired, with some having expired over two years ago.

25. These lease agreements are administered by OPO's contracted service provider as part of the property services it provides to OPO. However, there was widespread dissatisfaction among tenants with the timeliness and accuracy of lease renewals and associated invoices.

26. Under the Australian Government Property Ownership Framework, proposals to acquire new property or construct new buildings are assessed by Finance against criteria which, among other things, involve agencies achieving value for money. This consideration, together with the requirement to manage property on a commercial basis, has resulted in OPO changing the basis of rents for new chanceries, from market to economic rents. The impact of this change, together with the improved facilities inherent in new properties, is significantly increasing some rents, with implications for tenants' budgets.

27. About a quarter of OPO's rental income has come from supplementary budget funding provided to tenant agencies which was introduced in 1999 for a 10-year period to reflect the ‘special value' or ‘true cost' of properties at that time, over and above the market rent (termed building ‘amortisation' by OPO and tenant agencies). However, there is a general lack of clarity about the intended status of the supplementation provided to agencies once the 10-year period ended in 2009. OPO considers that without the funding, the financial viability of the Special Account³ would be undermined. The amortisation funding has been quarantined by Finance pending the Government's consideration of the issue.

28. There are a number of other unresolved rent-related issues that are causing tensions between OPO and its tenants and preventing the renewal of some leases. These include tenants' access to rent revaluations and disputes over tenant contributions to the cost of additional shared space in chanceries.

29. It is particularly important that OPO, as a monopoly provider of property services to Australian Government agencies overseas, has effective consultation arrangements in place with its tenants. OPO holds useful biannual briefings/forums for agency tenants. However, there are tensions, and in some instances OPO has not consulted with tenants prior to announcing key decisions. A more formal expression of service and client expectations through the establishment of a client service charter would assist in this regard.

Maintaining the owned estate (Chapter 4)

30. OPO monitors the condition of the overseas owned estate through a property condition rating system which enables the condition of individual properties to be monitored over time and compared to other properties, and provides useful information to the Senior Executive on the overall condition of the estate. However, there is significant scope to strengthen the system to make it more robust and reliable, by documenting it, defining the ratings categories used, and taking into account the more systematic ratings identified by its contracted service provider in the provider's annual repair and maintenance inspection reports.

31. OPO proactively seeks to identify upcoming repair and maintenance requirements for each property through an annual inspection process which involves a regular and systematic approach to identifying requirements, and facilitates inter-year comparisons of property condition. However, many inspection reports are of poor quality and too brief to provide any real insight into the work that might be required and its timing. This undermines their usefulness to OPO in prioritising work.

32. The ANAO's visits to the Australian High Commission, London and the Australian Embassy, Washington identified that preventative maintenance had been ad hoc and inadequate in the past, resulting in some infrastructure that is old and overdue for replacement. Because of this, facility managers at the posts had a difficult job keeping the facilities running. While some upgrades to those chanceries are now being planned, a more systematic approach would involve identifying the expected life cycles of all mechanical and electrical equipment across the owned estate. OPO advised that it has initiated some work on life-cycle analysis.

33. Complementing the ongoing repair and maintenance program is the need to periodically review each property's compliance with building standards and occupational health and safety requirements. To this end, OPO commenced a program of compliance audits in 2004 to identify remedial work that might be needed.

34. Some compliance audit findings raise significant duty of care implications for DFAT. At the posts visited by the ANAO there was a lack of clarity as to who, if anyone, is required to certify that appropriate remedial action has been taken (or cannot be taken) to address a compliance issue.

35. Compliance audit inspections of Australia House, London in 2005 and 2007 found a range of significant deficiencies, including a lack of fire separation of floors and lift shafts; inadequate provision for escape from the building; a lack of internal fire hydrants; incomplete sprinkler systems; and inadequate smoke detection systems. While most deficiencies were rated as Urgent, and subsequently identified as needing remedial action within six months, some key work had not commenced at the time of the ANAO's visit in July 2009, and will not be completed until at least 2012–13, some seven or eight years after the deficiencies were identified.

36. Similarly, compliance audit inspections of the Australian Embassy, Washington, in 2005 and 2007 found a range of deficiencies, including penetrations between walls and floors requiring fire-stopping measures, a lack of internal fire hydrants/hose reels; and inadequacies in the smoke detection and emergency warning systems. Most deficiencies were initially rated as Urgent, although many were subsequently downgraded to Medium (requiring completion within 12 months). At the time of the ANAO's visit in July 2009 most work had not commenced, although funding for the fire safety compliance work had been provided for in 2009–10.

Assessing and reporting on the estate's performance (Chapter 5)

37. OPO reports on five key performance indicators (KPIs) in the DFAT Annual Report, including three financial indicators. The indicators cover portfolio condition, tenant satisfaction, the annual dividend, the return on investment, and the management expense ratio. Combined, these indicators should provide a good picture of how the estate is performing, for example, whether property condition is being maintained or improved and whether the estate is being efficiently and effectively managed. However, the reporting of each has significant weaknesses. Some indicators do not have targets set in advance and those that do tend to be too vague. In addition, there is no sense as to whether the estate's performance over time, as measured by these indicators, is improving or declining. The current reporting of the three financial indicators, in particular, would not enable stakeholders to form a view on whether the performance of the estate is satisfactory.

Emerging issues impacting on the business model (Chapter 6)

38. A number of inherent factors are limiting the ability of overseas property to be managed on the ‘fully commercial' basis that was intended when the model was established in the 1990s. In particular, neither OPO nor agencies can behave in a fully commercial manner—OPO cannot let out vacant space to commercial tenants; agencies must operate from chanceries (OPO is a monopoly provider); and the Special Account cannot retain the proceeds of disposals, but meets the cost of acquisitions.

39. There are a number of indicators that the business model is under pressure. These relate to the future of funding for building amortisation payments; the impact of increased security measures on the funding reserves of the Special Account; and tensions between OPO and its tenants on a number of funding issues. These issues may have consequential impacts on the capacity of the Special Account to fund relocations and refurbishments, maintain property to an appropriate standard, and pay annual commercially based dividends.

Summary of agency response

40. The proposed report was provided to DFAT and an extract was provided to Finance for comment. The ANAO made four recommendations aimed at improving OPO's management of the overseas owned estate. All are agreed or agreed with qualification.

41. DFAT's full response to the audit is at Appendix 1. Its summary response is as follows:

DFAT welcomes the findings of the report, including that the Overseas Property Office (OPO) has put in place the basic elements needed for effective estate management. In particular, the report recognises that the management of the overseas estate is a challenging task in often difficult environments, and that maintenance of the estate to ensure compliance with current standards can be difficult and expensive. The report also notes that the necessary increased priority given to security related upgrades in recent years, and the requirement to manage the estate on a commercial basis, have added to the complexity of the task.

DFAT also welcomes the ANAO's acknowledgement of good practice in OPO's management of the estate, including implementation of a strategic planning process, monitoring of maintenance requirements, property compliance and indicators to monitor performance. The report also notes the high level of satisfaction of posts with OPO's response to their needs.

DFAT considers the report's four recommendations to be constructive in identifying opportunities for strengthening existing processes and procedures. The report's more general comments on the issues impacting on the current overseas estate management model, inherited by DFAT in 2001 from the then Department of Finance and Administration, are both relevant and timely. DFAT welcomes the recommended joint review of the funding model as a means to more fully define the Government's objectives for the overseas owned estate. DFAT also considers the suggested development, in consultation with tenant agencies, of a client service charter to be potentially useful in managing tenant agency expectations and obligations.

42. Finance's full response is at Appendix 2. It agreed with the three recommendations of relevance to it, and welcomed the opportunity to work with DFAT to improve the management of the overseas estate.

Footnotes

¹ The Department of Finance and Administration subsequently became the Department of Finance and Deregulation. In this report ‘Finance' is used to denote both.

² The DFAT Senior Executive comprises the Secretary and four Deputy Secretaries.

³ A Special Account—the Overseas Property Account—was established in 2002 to provide the financial mechanism for the commercial management of the estate. Revenue into the Special Account is derived from rents paid by Australian Government agency tenants. OPO costs are met from the Special Account and reserves are used to fund construction projects and pay annual dividends to the Australian Government.