10.20 Management of the Commonwealth property portfolio

Background

Management of the Commonwealth estate presents special challenges reflecting the nature of the property, legislative obligations and legacy issues, which include underinvestment in repairs and maintenance and contamination. Property ownership, development and management require highly experienced and skilled people.

Commonwealth legislation governing the acquisition, management and disposal of property interests includes the Financial Management and Accountability Act 1997, the Lands Acquisition Act 1989, the Native Title Act 1993, the Aboriginal Land Rights (Northern Territory) Act 1976 and the Environment Protection and Biodiversity Conservation Act 1999. In addition, the Work Health and Safety Act 2011 and the Public Works Committee Act 1969 apply directly to the management of Commonwealth property and construction projects.

Most commercially attractive Commonwealth properties have already been sold. Since 1996, the Commonwealth has considerably reduced its property ownership through large-scale divestments and outsourcing of services that are peripheral to the core responsibilities of government.

Commonwealth office accommodation and other infrastructure such as airports and related property services are now provided primarily by the private sector. Excluding Defence, the Commonwealth owns about 6 per cent of its total office space, compared with 60 per cent of property occupied by the British Government, 43.5 per cent of property space owned in Canada and 72.5 per cent owned in New Zealand (Harris, Schumann and Henry, 2012).

Commonwealth leases include office accommodation, border protection facilities within airports, the Australian Antarctic Division facilities, the Royal Australian Mint and the National Science and Technology Centre.

In September 2009, the Commonwealth Government held 613 office tenancies through 711 leases from the private sector and 11 leases from the Commonwealth (Department of Finance and Deregulation, 2011). Around 87 per cent of the leased area was office space; the rest was used for operational or other non-office purposes (Table 10.20.1).

Table 10.20.1: Leases as at September 2009 (office space more than 100 000 m2)

Agency

Tenancies

Total area
(m2)

Total office
area (m2)

Department of Defence  39 246,391 223,805
Centrelink  73 238,731 217,421
Department of Education, Employment and Workplace Relations  33 128,800 128,214
Department of Immigration and Citizenship  21 133,141 123,831
Australian Federal Police  22 139,426 110,768
Other agencies  380 1,584,657 1,319,262
All agencies  613 2,920,639 2,552,335

Source: Department of Finance and Deregulation, 2011.

The Commonwealth owns 23 out of the 613 office tenancies referred to in Table 10.20.1.

The 23 owned properties comprise: Old Parliament House; eight Commonwealth Law Court buildings; four Defence properties; two properties held by the Official Secretary to the Governor-General; four other Commonwealth properties; and, one property held by each of the following agencies – the Australian Federal Police, Australian Radiation Protection and Nuclear Safety Agency, Department of Industry and Department of Social Services.

Rationale for government intervention

A central oversight of the Commonwealth’s strategic property needs is essential to foster competition, commercial tension and value for money in relation to the Commonwealth’s property requirements.

However, government core expertise does not, and should not, relate to the development, maintenance and leasing of office accommodation and other buildings that are commercially available. The Commission considers that these roles are best left to the private sector.

Current structure of the Commonwealth estate

The Commonwealth estate is quite diverse and comprises the following main elements.

  • The Defence estate of about three million hectares, with some 400 owned properties including 72 significant bases, 25,000 buildings and 6,000 other structure assets. The Defence estate has an estimated value of about $20 billion.
  • The Department of Foreign Affairs and Trade manages the Commonwealth Government’s overseas property interests valued at about $1.5 billion, through its Overseas Property Office.
  • The Commonwealth Scientific and Industrial Research Organisation (CSIRO) is also a significant holder of land and buildings. Its assets include some 1,000 buildings in 54 locations, with land valued at about $378 million and buildings valued at $1.1 billion.
  • Defence Housing Australia manages a total portfolio of around 18,000 properties, valued at around $10 billion.
  • The Department of Finance (Finance) estate comprises 106 properties including: key accommodation (such as the Treasury Building and John Gorton Building); special purpose properties (including the Commonwealth Law Courts and the Australian Security Intelligence Organisation headquarters); vacant land and other properties with unique features; and, remnants of an extensive residential portfolio acquired over 60 years ago. The Finance estate is valued at about $1.4 billion (Table 10.20.2).
Table 10.20.2: Finance estate

Property Category

Number of Properties

per cent of properties

2013-14 Valuation (Fair Value, $ million)

per cent of portfolio value

Key accommodation 14 13.20% 424.8 30.30%
Land or Buildings - Planning , Environment & Heritage Obligations 15 14.20% 80.7 5.70%
Special Purpose Property 10 9.40% 879.8 62.70%
Remaining Properties 67 63.20% 18 1.30%
TOTAL 106 100.00% 1,403.30 100.00%

Source: Department of Finance.

In general, the condition of the Commonwealth estate has deteriorated, which has resulted in the need for increased expenditure on maintenance and related functions to upgrade and maintain assets to minimum standards. Examples include the urgent repairs on the heritage‑listed John Gorton Building facade to meet work health and safety requirements, the repair and maintenance of The Lodge and remediation projects on contaminated sites on the Cox Peninsula and Malabar Headland.

Drivers

The Public Governance, Performance and Accountability Act 2013 (PGPA Act), the substantive provisions of which will enter into force on 1 July 2014, sets key parameters on the use and management of Commonwealth resources, including real property. Under the PGPA Act, Commonwealth bodies and their staff have a range of accountabilities and responsibilities and will be expected to set and report performance information on a systematic basis in a range of areas.

Non-Defence property management

Decisions in relation to government property involve a complex array of statutory and social obligations. To deal with this complexity, Finance has developed the Commonwealth Property Management Framework. This framework is intended to encourage value for money, better planning, more efficient design and appropriate accountability measures. Under the Framework, decisions on major property initiatives are subject to:

  • agency cost-benefit analysis;
  • endorsement by the Finance Secretary for lease proposals (mandated steps); and
  • submission of proposals to the Expenditure Review Committee, Cabinet and scrutiny from the Public Works Committee for new building proposals.

Data management is a necessary element in managing the Commonwealth estate and in reducing liabilities and risks. Finance collects property data annually in the Commonwealth Land Audit and the Australian Government Property Data Collection Framework that reports leasing data on properties with 500m2 or more of office space.

To assist in planning priorities and expenditure for capital works, scheduling, repairs and maintenance, Finance is collecting property capital data. This will lead to the establishment of a rolling ten-year projection on property capability – the Property Capability Plan.

In relation to office accommodation, the Property Framework includes an occupational density target, which is progressively being reduced to 14m2 of usable office area per occupied workpoint. The Commission understands that in the private sector, many companies are achieving densities of 10.2m2 per person. This target, together with associated efficiency measures and increased efficiencies in Commonwealth property management, are anticipated to achieve savings of approximately $1.2 billion between 2010-11 and 2030-2031.

Data collected in 2012-13 from 128 agencies shows that planned capital expenditure on property beyond 2015-16 is trending downwards, with the total reducing significantly when compared to 2015-16. Office fit-outs are one of the most significant cost components of capital expenditure.

Defence property management

Since 1997, over 280 Defence properties have been sold, returning about $1.5 billion to the Commonwealth. This programme of disposals is continuing with some 40 properties currently identified for disposal, with expected gross revenue estimates at around $370 million. These disposals represent nearly 25 per cent of the Defence estate by number, but are relatively minor in terms of their contribution to Defence capability.

The Defence estate is ageing and the cost of sustaining it is expensive and increasing. Defence has been considering options to better allocate its funding, including the option of consolidation of the Defence estate. Consolidation would enable Defence to allocate its funding to fewer sites and enable more funds to be directed to improving the condition of the estate. In addition, closure and divestment of Defence bases can have a considerable community benefit by enabling a more productive use of the land. For example, the Moorebank Units Relocation Project will release land for development of an intermodal freight terminal in western Sydney.

Defence has been developing a long-term strategic plan to adopt an estate profile that supports Defence capability, is more financially sustainable and will result in a more strategically and functionally aligned estate. The Commission understands that this may result in the rationalisation of some 19 bases over the period 2013 to 2031.

Issues

The disposal of properties that remain in Commonwealth ownership is often constrained by factors such as contamination, national security, parliamentary zoning, heritage and ecological values, and limited marketability.

Managing contamination

Contamination on Commonwealth land is an emerging issue with unforeseen costs and risks. These risks include site remediation costs, the potential for land value to decrease, legal risk and the injury, disease or death of Commonwealth employees, contractors, tenants and other land users. Of particular concern is the risk that remediation costs may exceed revenue generated from a market value sale.

Commonwealth property disposals are also constrained by obligations under various environmental legislation. Under the ‘polluter pays principle’, disposal of contaminated sites can generate significant ongoing liabilities for the Commonwealth unless:

  • the site is properly assessed and then remediated; or
  • the recipient makes an informed decision to accept transfer of the risks following full disclosure.

Information on the Commonwealth estate

There appears to be no complete whole-of-government public register of Defence and non-Defence Commonwealth-owned property. However, there is a Register of Surplus Commonwealth Land Potentially Suitable for Housing and Community Outcomes, which is published on the Finance website. Also, the Commission understands that the Departments of Defence and Finance each have records of the properties they own. Still, there is no central list of properties owned by other Commonwealth agencies.

A central register of the Commonwealth estate would benefit planning and strategies to improve the use of property, including identifying properties with potential for sale.

The Defence estate

The Department of Defence is in the process of planning a Defence estate profile that supports defence capability in a more affordable and efficient way. It proposes a newer, smaller estate with lower operating costs, with assessment supported by some broad principles, including:

  • base locations should be aligned with strategic requirements and ensure critical capabilities are suitably dispersed for security reasons;
  • units should be consolidated into fewer, larger and sustainable multi-user bases aimed at increasing the alignment of functions and capacity to support operations;
  • aim to group bases near strategic infrastructure and industry to prompt knowledge sharing and innovation, and maximise the effectiveness of industry support to the Australian Defence Force;
  • where possible, bases should be located in ‘family friendly’ areas that provide better employment and specialist medical and educational opportunities for families; and
  • maintain an urban and regional disposition to enable the continued provision of part-time capability into the future.

The Non-Defence estate

The domestic non-Defence estate has continued to reduce in size following the divestment to the private sector of most of the commercial office buildings.

Through the Commonwealth Property Management Framework, Finance is progressing initiatives that contribute to efficiencies in property management and assist in reducing the costs of doing business with the Commonwealth.

Potential areas for reform

While there is a case for governments to own some specialised properties, there are opportunities for the Commonwealth estate to be used and managed more efficiently, effectively and at reduced cost to taxpayers. This includes considering options for the sale of Commonwealth property.

At a time of fiscal challenge, the Commonwealth can make better use of its scarce capital than property investment. In addition, property ownership, development and management require highly experienced and skilled people.

Notwithstanding recent divestments, scope exists for further property sales. Properties that might be considered for divestment fall into three broad categories:

  • genuinely surplus properties that can be divested relatively easily. Simple and unoccupied properties are relatively scarce, as most have been divested in recent decades. The current register of surplus land contains only 16 properties;
  • surplus unoccupied properties where the contamination remediation task is expected to be complex and expensive. Such properties normally require an up-front investment and ultimately may result in the cost of remediating contamination near to, or exceeding, the price that the Commonwealth can obtain; and
  • properties that may not really be needed in an efficient estate, but are either costly or otherwise difficult to vacate and get ready for divestment. These properties include situations where existing functions may need to be moved somewhere else, necessitating a sometimes very large up front capital cost for new facilities elsewhere. They generally fall in the Defence estate.

The Commission notes that the divestment of surplus property will not lead to the sale of important national cultural institutions and monuments, such those in the Central National Area of Canberra.

Property management skills in the Commonwealth

Property ownership, development and management are highly contestable markets. The Commission believes that it is unlikely that all the experience and skills essential to optimise outcomes and deliver value for money can be acquired or retained in the Commonwealth. Market remuneration for these skills is relatively high compared to the public sector. As such, these capabilities are likely to be more appropriately obtained by contracting the private sector.

Encouraging the disposal of Commonwealth property

Under current policy, all net proceeds (the price paid less the sales costs) of property divestment are returned to the Budget. The owning agency undertakes the disposal process and bears the risk, but receives no benefit arising from the sale. This provides no incentive for the agencies to allocate personnel, financial, political, intellectual and other resources to divestment, especially when resources are tight.

Consideration could be given to allocating a portion of the proceeds of any property sale to the disposing agency. Consideration would need to be given to the appropriate share. Given the uncertainties associated with Commonwealth land sales, perhaps 25 per cent of the sales proceeds could be retained by disposing agencies. This would mean that, even where there is a net cost, the disposing agency is rewarded for its endeavour and the Commonwealth will have disposed of both risk and any on-going future costs associated with the surplus property that has been sold.

The Commission considers that property disposal may be accelerated through the establishment of a small taskforce, chaired by an independent property disposal expert from the private sector, to establish a pipeline of properties for disposal. The taskforce would sit within Finance and establish, within 12 months, a list of properties for disposal, together with an order of priority, timeline and an indication of the risks associated with each property. The taskforce would include the Commonwealth’s major property owners – the Departments of Defence and Finance, together with two other permanent members and one or two co-opted members reflecting the nature of properties under consideration at the time.

Box 10.20.1 provides further details on implementing the Commission’s recommendations relating to management of the Commonwealth estate.

Box 10.20.1: Implementation notes

The Commission considers that the following actions should be taken to improve the Commonwealth estate:

  1. the central whole-of-government register of Commonwealth estate properties should be publicly available, except where there are security reasons not to, and should be managed by the Department of Finance with departments and agencies responsible for ensuring information is current;
  2. managers of Commonwealth estate properties should draw on greater private sector experience in property management, which will provide a catalyst to improve the property management skills base in the public service;
  3. a further divestment process, oversighted by an independent property expert, should include:
    1. identifying a list of properties for disposal;
    2. establishing indicative priorities and timelines;
    3. providing an indication of the risks associated with each property and any strategies that may address those risks, in part or full; and
    4. supervising the disposal of the identified properties;
  4. in addition, the Government could consider providing an incentive for agencies to actively seek to dispose of surplus Commonwealth property by allocating a portion of the proceeds of the sale to disposing agencies; and
  5. consistent with the Commission’s Principles of Good Government, and not addressed in the Report, the Commission supports the Commonwealth’s existing policy to use commercially available office and other accommodation as far as possible, ensuring that there is competition, competitive tension and value for money.
    1. The Commission suggests that, if Commonwealth agencies wish to purchase property, prior approval from the Minister for Finance should be required.

References

Australian National Audit Office 2001, Commonwealth Estate Property Sales, Audit Report no. 4, Canberra.

Department of Finance and Deregulation 2011, Australian Government Occupancy Report 2009, Canberra.

Harris, T, Schumann, M and Henry, E 2012 Office Politics: Improving Public Sector Management, Deloitte Research Study, Deloitte Development LLC 2012.