Introduction

The Department of Defence (Defence) provides formal tri-service training through the Australian Defence College (ADC), comprising the Weston Creek campus and the Australian Defence Force Academy (ADFA) in Campbell ACT. The 1997 Defence Reform Program identified a need for greater efficiency in officer education. In response, the ADC Weston Creek site was refurbished over the period 1999–2000 to 2001–02, at a cost of $26.2 million, to provide for co-location of all service officer training. A re-organised ADC commenced operations at the site on 1 January 2001.

The ADC Weston Creek property was one of 41 properties included in the Defence property disposals program for 2002–03. The property was advertised for sale with a 20 year lease, including an option for a further 10 year period, and initial rent of $2.2 million per annum with a fixed annual 3 per cent increase. The property sold in May 2003 for $31.7 million, inclusive of GST. The 20 year lease commenced between the Commonwealth, represented by Defence, and the new owner on 13 June 2003. Defence is supplemented for the annual lease payments for the property. This was the second property disposal via sale and long term leaseback managed by Defence.¹

Audit scope and objectives

The audit examined the process of identifying the ADC Weston Creek property for sale and leaseback and the management of the sales process, within the 2002–03 Defence property disposals program. The objective of the performance audit was to examine the efficiency and effectiveness of the management of the sale process by Defence. In particular, the audit: assessed the effectiveness of the management of the sale process, including the extent to which the Government's sale objectives have been achieved; examined the long term sale and leaseback arrangements for the property and assessed whether they adequately protect the Commonwealth's interests; and identified principles of sound administrative practice to facilitate improved administrative arrangements for future Defence property sales.

Key Findings

2002–03 sales program

In the 2002–03 Budget, 41 Defence properties were approved for sale with a total revenue target of $659.5 million. Excluding the sale of Russell Offices in Canberra, to be managed by the Department of Finance and Administration (Finance), the Budget revenue target for Defence was $473.5 million. Proceeds from the property sales, up to the revenue target, were paid into consolidated Commonwealth revenue. Proceeds in excess of the target could be retained by Defence.

Defence achieved aggregate sale proceeds above the total of the market valuations for the properties sold. Aggregate proceeds also exceeded the Budget revenue target for 2002–03 by $104.5 million. Defence advised ANAO, in April 2004, that Finance had not yet agreed the proceeds to be retained by Defence from 2002–03 property sale proceeds.

A comparison of sale proceeds for Defence properties sold in 2002–03 with estimates supporting the Budget revenue target highlighted the need for revenue estimates, used as a basis for calculating the amount of proceeds to be retained by Defence, to be appropriately based and rigorously derived. For a number of properties, a low Budget revenue estimate compared to the properties' market valuations resulted in Defence potentially securing a significant windfall gain in funding. ANAO notes that a number of the Budget revenue estimates for individual properties significantly understated the value of the property. For example, one Sydney property was valued by the Australian Valuation Office (AVO) at more than 1 100 per cent of the Budget revenue estimate ($33 million) and a second at more than 47 per cent higher than the Budget revenue estimate ($49 million).

Business case

Defence engaged a firm to undertake business case analyses of the divestment strategies for 36 Defence properties identified for divestment in 2002–03. Five properties, including the ADC Weston Creek, were not reviewed. The report of July 2002 noted that no information was available on the ADC Weston Creek property for the firm to review. ANAO was unable to identify from Defence records any business case analysis to support a proposal to dispose of the ADC Weston Creek property from the Defence Estate through a sale and leaseback transaction. Nevertheless, a disposal strategy was developed for the sale process.

Appointment of advisers

A number of external advisers were engaged by Defence to assist in the sale and leaseback of the ADC Weston Creek property. A competitive tender process was followed for the engagement of only one of the advisers. Direct engagement of the other advisers was based on those advisers' earlier performance in the previous sale and leaseback of the Campbell Park property, managed by Defence.

ANAO found that the engagement of these advisers in the Campbell Park sale was also on a non-competitive basis. In that sale, direct engagement was approved to facilitate the completion of the sale in a tight timeframe and on the basis of assistance previously provided to Defence by those advisers and/or their inclusion on Defence panels. It was not identified, during the engagement process for the Campbell Park property sale, that those advisers would be appointed for the following sale of the ADC Weston Creek property. The approach taken in appointing the advisers for the ADC sale process is not consistent with providing effective competition in order to achieve value for money.

Sale tender process

Overall, the tender process was well conducted and was completed on time. The Request For Tender specified the mandatory and other requirements; and tenders were evaluated against specified criteria during the evaluation.

As part of the decision to retain property, or to sell it under a leaseback arrangement, the total cost of the commitments under the lease, and the method for financing those lease payments should be assessed against the investment of the potential proceeds from sale. However, the Tender Evaluation Report for the ADC Weston Creek sale did not specifically address the issue of value for money to the Commonwealth.

Total rental payments due under the lease over the 20 year term amount to $59.9 million. ANAO calculated that a breakeven point will be reached during Year 14, after which the net cash outlay for rental payments will be $21.8 million. ANAO estimated that the sale transaction could result in a negative net present value (NPV) of $9.3 million, when the net sale proceeds are compared with the lease payments over the 20 year term. ² The ANAO sought property and valuation advice from the AVO on the terms and conditions of the sale of the ADC Weston Creek property. The AVO considered that a breakeven point during Year 14 of this 20 year lease was within an acceptable range for an investment decision for freeing up capital.

Financial returns

The sale of the ADC property, and leaseback to the Commonwealth, provided an attractive investment opportunity for prospective purchasers. Strong interest was expressed in the transaction, with 11 of the 17 bids tendered exceeding the market valuation. The sale was conducted in a competitive manner and the contract was awarded to the highest priced conforming tender.

The sale realised proceeds of $31.7 million (including GST). The sale price exceeded the assessed fair market value prior to sale of $27 million (excluding GST). However, the sale proceeds were less than the Budget revenue estimate for the property ($45 million). The cost of sale was 2 per cent of the sale price, the major components being legal and technical advice.

Additional accommodation

Prior to the ADC Weston Creek property being put to the market, a need for additional accommodation on the site, including a new building and an extension to an existing building, had been identified within Defence. The additional facilities were proposed to accommodate an increase in both student numbers and demand for the use of the ADC's facilities, and to allow more efficient use of the educational facilities at the site. Immediately following the sale, Defence accepted a proposal for a consultant to provide a concept design of the additional accommodation requirements.

The sale and leaseback process was driven by the requirement to sell the property in the 2002–03 financial year, and to maximise the sale price. However, such objectives could be at odds with protecting the longer term interests of the Commonwealth in terms of providing for future development needs at the ADC Weston Creek site. In particular, the executed sale and lease documents do not adequately address the Commonwealth's identified future accommodation needs for the site over the 20 year term.

Overall conclusion

Overall, the ANAO found that Defence's management of the sale process was consistent with Government intentions. The sale realised proceeds in excess of the market valuation and was completed on time within the 2002–03 financial year. However, it is noted that the sale was not supported by a business case justifying selection of the property for sale and leaseback.

ANAO identified that the sale and long term leaseback arrangements for the property may not adequately protect the longer term interests of the Commonwealth in the site. The need for additional accommodation, identified prior to sale, was not resolved prior to finalising the sale. In order to meet the sale deadline and to maximise financial returns, Defence has assumed the risks associated with potential future development at the site.

Response to the report

The ANAO made five recommendations on the management of the property sale and long term leaseback process. Defence agreed to the five recommendations, two with qualification.

Footnotes

1 The first property sale and leaseback managed by Defence involved Campbell Park Offices in the ACT.

2 This analysis does not include costs, other than lease payments, that the Commonwealth is responsible for under the terms and conditions of the lease. For example, maintenance and insurance costs.