Report of the Auditor-General on the
Finances of the State of Victoria, 1999-2000

Part 6 State assets


SUMMARY OF STATE ASSETS


6.1       The State's assets comprise physical assets (including Crown and freehold land, buildings, plant and equipment, roads and other infrastructure), investments, receivables and cash at bank. These assets, together with the resources provided by employees and other service providers, are available for application towards the provision of services and the delivery of programs.

6.2       The Government's Annual Financial Statement discloses that, at 30 June 2000, assets with an aggregate value of $82.9 billion, were controlled by the Government - an increase of $4.1 billion on the previous year. The major factors contributing to the improved reported asset position were:

  • the re-valuation of physical assets across all sectors, contributing to an increase in the gross value of these assets of $2.3 billion;

  • construction and acquisition of physical assets during the year, which were largely offset by the sale of the rolling stock infrastructure of the transport passenger businesses to private sector franchisees; and

  • increased investment holdings of $1.8 billion reflecting the additional funds available resulting from the year's operating surplus.

6.3       Table 6A presents a summary of the assets controlled by the Government as at 30 June 2000.

TABLE 6A
SUMMARY OF STATE ASSETS
($billion)

Type of assets

1999-00

1998-99

Physical assets -

 

 

 Land and buildings
 Plant, equipment and infrastructure systems
 Roads and earthworks
 Other

26.3
19.0
12.0
1.7

24.3
19.3
11.3
1.7

 

59.0

56.6

Financial and other non-physical assets

23.9

22.2

Total State assets

82.9

78.8

 

6.4       Physical assets represent by far the largest asset category, accounting for around 71 per cent of total assets. Chart 6B further illustrates the major components of the State's assets.

CHART 6B
COMPOSITION OF STATE ASSETS
($billion)

Physical assets

6.5       The State's physical assets mainly comprise Crown and freehold land, buildings, roads, infrastructure systems, and other plant and equipment. While the general government and public trading enterprises sectors are responsible for the control and management of the vast majority of land and buildings, the majority of plant, equipment and infrastructure assets are held by the public trading enterprises sector, reflecting their role in providing key services to the community, including water and health services.

6.6       The enhanced management of these resources has been a major focus of government reforms over many years, upon which comment has been made in my previous Reports to the Parliament.

6.7       Certain assets of the State continue to remain unrecognised in the State's Balance Sheet, mainly including the State's share of assets and liabilities managed by the Murray-Darling Basin Commission, and land associated with the State's road network. Comment on this matter is included in Part 2 of this Report.

Financial and other non-physical assets

6.8       Financial assets included in the Government's Annual Financial Statement can be broadly described as those assets that can be liquidated by public sector agencies and generally do not include items of a fixed asset nature. The major categories of financial assets include investment holdings, receivables from external parties, and cash and deposit balances.

6.9       The financial and other non-physical asset holdings of the public sector at 30 June 2000 stood at $23.9 billion - an increase of around $1.7 billion on the previous financial year. Table 6C shows the composition of these balances as at 30 June 2000.

TABLE 6C
FINANCIAL AND OTHER NON-PHYSICAL ASSETS OF THE STATE
($billion)

Type

1999-00

1998-99

Investments

18.2

16.3

Receivables

3.9

4.0

Cash

1.2

1.3

Other assets

0.6

0.6

Total State assets (a)

23.9

22.2

(a)The total balances are presented net of inter-entity eliminations, i.e. after deducting amounts relating to other public sector agencies.

 

6.10     As previously commented on in this Part of the Report, the increase during the financial year in the level of the State's financial assets mainly reflects the additional funds available resulting from the 1999-2000 financial year's operating surplus.

6.11     The State's cash and investment holdings increased from $17.6 billion to $19.4 billion with a net amount of $3.9 billion held by the Treasury Corporation of Victoria, which is available for application towards the retirement of debt as it matures and for meeting the State's prudential liquidity requirements. A further amount of $1 billion has been set aside for infrastructure investment over future years under the Government's "Growing Victoria" initiative.

Infrastructure development

6.12     As illustrated in Chart 6D, the State's investment levels in public infrastructure have been consistently below the national average over the past decade.


CHART 6D
PUBLIC CAPITAL SPENDING AS A PROPORTION OF GROSS STATE PRODUCT (GSP) / GROSS DOMESTIC PRODUCT (GDP) – VICTORIA AND AUSTRALIA
(per cent)

Source: Department of Infrastructure. Based on source date compiled by the Australian Bureau of Statistics.

 

6.13     One of the long-term financial objectives of the Government, which in part aims to address this trend, is to undertake capital works to enhance social and economic infrastructure throughout Victoria. A short-term initiative to improve the State's infrastructure asset base, without incurring additional borrowings, has been the establishment of a $1 billion "Growing Victoria" infrastructure reserve, funded through the 1999-2000 budget surplus.

"Growing Victoria" Reserve

6.14     The key purpose of the Government's "Growing Victoria" initiative is to increase budget sector asset investment expenditure with the aim of contributing to an improved and modern State infrastructure. The $1 billion allocated for this purpose is expected to be utilised to support asset investment expenditure totalling around $64 million in 2000-2001 and a projected $312 million per annum over the 3 year period to 2003-2004.

6.15     Eligible projects for funding under this initiative include:

  • major transport infrastructure projects;

  • modernisation and replacement programs in the education sector; and

  • information and communications technology facilities and capabilities.

6.16     The 2000-2001 Budget Papers indicated that $190 million had been allocated over the next 3 financial years to fund school modernisation and rail infrastructure projects.

6.17     Allocation of the balance of the funding relating to "Growing Victoria" will be approved as part of the Government's annual budget process.

Regional Infrastructure Development Fund

6.18     In addition to the "Growing Victoria" initiative, in December 1999, the Regional Infrastructure Development Fund was established as a Trust Fund within the Public Account under the authority of the Regional Infrastructure Development Fund Act 1999. The Fund is administered by the Department of State and Regional Development.

6.19     The Fund has been established to provide $170 million over the next 3 financial years ($50 million in 2000-2001, $50 million in 2001-2002 and a further $70 million in 2002-2003) towards infrastructure developments in regional communities, including:

  • industry development, including physical works to facilitate economic development;

  • transport improvements, including roads, rail, ports or airports of strategic regional significance;

  • tourism-related capital works for new and improved facilities; and

  • strategic education, and information and communication technologies infrastructure.

6.20     As at June 2000, the Department of State and Regional Development had approved only one project for funding under this program (cattle underpass initiative which is to receive $4 million) from approximately 100 applications received at that time. (At the date of preparation of this Report the Department was in the process of assessing a further 50 applications for funding.)

Partnership Victoria

6.21     In recognition of the contribution that the private sector has made to date to the development of public sector infrastructure, in June 2000, the Government announced the Partnership Victoria policy. This policy applies to the provision of public infrastructure and any related ancillary services which involve private investment or financing, under which the present value of government payments is in excess of $10 million over the period of the partnership.

6.22     At the date of preparation of this Report, the Government was in the process of developing detailed guidelines and documentation to support implementation of this new policy framework. Collectively, these infrastructure initiatives are designed to assist in improving the State's infrastructure so as to enhance service delivery and the State's competitiveness.


GOVERNMENT ASSET SALES PROGRAM


6.23     In recent years, a major component of the public sector reform program has been the privatisation of government business enterprises and the sale of surplus and underutilised properties. The application of privatisation proceeds towards the reduction of State debt has been a major factor contributing to the strengthening of the State's financial position.

6.24     This Part of the Report outlines the major business and property sales undertaken or completed by the Government during the 1999-2000 financial year and up to the date of preparation of this Report including:

  • Public passenger transport businesses;

  • Residual assets of the Public Transport Corporation;

  • Bourke Street, Melbourne property;

  • Baryn Street, Heatherton property; and

  • Todd Road, Port Melbourne property.

Public transport passenger rail privatisation

6.25     My June 2000 Report on Ministerial Portfolios commented on key developments associated with the public transport reform program of the former Government, including a detailed analysis of the privatisation of certain assets and liabilities of the passenger transport businesses (the former business units of the Public Transport Corporation) and related franchising arrangements. Below is a summary of these arrangements, which were outlined in detail in that Report.

Sale process and arrangements

6.26     Following an extensive bid and selection process, which was administered by the former Transport Reform Unit of the Department of Treasury and Finance, in June 1999 the Public Transport Cabinet Committee accepted the recommendations of the evaluation teams established to assess the bids (comprising representatives from the Departments of Treasury and Finance and Infrastructure, financial and engineering advisers), with the exception of Hillside Trains. The bidders for Hillside Trains were requested to re-submit their bid in early July 1999 to address particular areas of concern and having regard to the more favourable results achieved by the State for the other rail passenger businesses. Shortly after, the Committee also approved the bid relating to Hillside Trains.

6.27     Under the sale arrangements of the 5 passenger transport businesses to the 3 separate franchisees, the State received a nominal consideration of $3 for the transfer of the rail businesses' net assets, which mainly comprised rolling stock and plant and equipment, to the franchisees. As a result, an abnormal loss of $665 million for the sale of the net assets of the businesses was reported in the State's operating statement. The sale arrangements excluded the software and equipment associated with the automated ticketing system. This is operated by OneLink Transit System Pty Ltd (OneLink). Although the State only received a nominal consideration for the transfer of these net assets, the State nevertheless received a right to receive future services from each franchisee at a reduced subsidy payment from the State.

Franchise arrangements

6.28     The Director of Public Transport of the Department of Infrastructure entered into agreements with each franchisee for the purchase of passenger services, over a franchise period of between 10 to 15 years. Under these agreements, the franchisees are required to meet minimum operational requirements such as the minimisation of overcrowding, safety standards and adequate levels of maintenance of the rolling stock units and infrastructure. In addition, the franchisees will be required to maintain the number of train and tram annual kilometres travelled at a level of at least that existing at the commencement of the franchise period, and introduce additional services during the franchise period.

Subsidy payments to franchisees

6.29     As the projected revenues from the sale of fares will be insufficient, particularly in the initial stages of the franchise periods, to operate the public transport businesses the State has agreed to provide a number of subsidies to the franchisees. Over the franchise period it is anticipated that the State will provide subsidies to the franchisees with an aggregate value of $2.8 billion in net present value terms, comprising fixed subsidies of $1.9 billion and variable subsidy payments of $934 million, with the latter including concession fare top-up payments of $501 million.

6.30     Table 6E outlines the major components of the fixed subsidy amounts payable by the State to the franchisees over the franchise periods. The real annual franchise sum represents the core subsidy paid by the State to the franchisees and is subject to certain adjustments which are outlined in my June 2000 Report on Ministerial Portfolios. As part of the subsidy arrangements, the State has also agreed to make:

  • rolling stock adjustment payments to the franchisees in order to fund the lease costs incurred by each franchisee for the procurement of new rolling stock;

  • refurbishment rolling stock payments which are equivalent to more than 90 per cent of the cost to be incurred by the franchisees based in the metropolitan area for the refurbishment of the existing (Comeng trains) rolling stock; and

  • other mandated work payments, representing specified amounts to be paid for other required works on the franchisees' existing rolling stock and the State-owned infrastructure.


TABLE 6E
TOTAL FIXED SUBSIDY PAYMENTS UNDER THE
FRANCHISE ARRANGEMENTS (a)
($million)

Component

Amount

Annual franchise payments (b)

923.6

Rolling stock adjustment payments (c)

801.9

Capital grants - infrastructure lease

136.2

Capital grants – franchise agreement (d)

70.8

Core infrastructure lease rental (e)

(2.4)

Non-core infrastructure lease rentals (e)

(58.0)

Net cost to the State

1 872.1

(a)All amounts expressed in net present value terms as at 30 June 1999, using a discount rate of 4.5 per cent which was the rate used by the Department of Treasury and Finance for the assessment of bids.

(b)The real annual franchise sum will be subject to movements in the CPI and has been based on the assumption that fares will increase by 5 per cent, in real terms, to take into account the introduction of the GST.

(c)   The rolling stock adjustment payment to the franchisee of Hillside Trains will be subject to the impact of the GST (capped at 5 per cent) and movements in the CPI.

(d)Capital grants under the franchise agreements payable to the franchisees of Bayside Trains, Swanston Trams and Yarra Trams will be subject to the impact of the GST (capped at 5 per cent) and the payments to the latter will also be subject to movements in the CPI. These payments include works valued up to $38 million and will be undertaken in the event that feasibility studies prove that the proposed works will generate a commercial rate of return.

(e)Represents rental payments for the use of the core infrastructure such as the track and signalling equipment and non-core infrastructure such as certain depots and buildings.

Source: Department of Treasury and Finance.

6.31     In return for these fixed subsidy payments from the State, the franchisees have broadly accepted the financial risks associated with the day-to-day operations of the franchise businesses, including expenditure in excess of the costs of operating each franchise. However, this risk is to an extent mitigated by the fact that the Director has retained the financial risk associated with movements in the CPI and his obligation to fund any change to the scope of operations.

Rolling stock units

6.32     Under the franchise arrangements, the train franchisees have agreed to refurbish a specified number of rolling stock units by December 2003, which they acquired under the abovementioned sale arrangements for a nominal amount. The Director has agreed to provide fixed subsidy payments totalling $104 million in net present value terms, to the franchisees for this purpose. The franchisees bear the risk of any overruns in refurbishment costs and penalties may be imposed by the Director for any failure of franchises to complete agreed refurbishment works.

Example of tram rolling stock sold to franchisees.

6.33     In addition, the franchisees are required to provide, on terms approved by the Director, a specified number of new rolling stock units (committed rolling stock) and take possession of these units so that they are in regular service by September 2004 (trams) and December 2004 (trains). The estimated acquisition price of the new rolling stock units will be in excess of $1.09 billion.

6.34     The franchisees have provided the State with additional performance bonds totalling $60 million to ensure compliance with their obligation to bring into regular service the committed rolling stock. These performance bonds will be extinguished once the acquisition and associated funding arrangements, and other direct agreements with the Director of Public Transport, for the committed rolling stock are finalised. Consistent with the security arrangements established in relation to existing rolling stock, the lessors are required to provide a security interest in favour of the Director over the committed rolling stock.

6.35     The Director has the power to impose significant penalties on franchisees in the event that the committed or option rolling stock is not in regular service by the required dates. If the stock is not introduced within 12 months of the required date, then this will constitute a franchise breach and a termination event.

6.36     Under the arrangements, the key risks associated with the procurement and delivery of the committed rolling stock units have been effectively transferred to the franchisees. These risks relate to the franchisees' responsibility to procure and commission the units by specified timeframes, consistent with projected costs. In addition, the lessors of the committed rolling stock units have accepted the following key risks associated with the construction and ongoing ownership of the units:

  • Risk of movements in the cost of financing the purchase price of the units;

  • Risk of movements in the value of currencies, as certain units or components thereof may be purchased from non-Australian sources; and

  • The residual risk of the units at the end of the lease period. The Department of Treasury and Finance advised that certain franchisees have purchased insurance to mitigate this risk.

6.37     To protect the State's interest in respect of the committed rolling stock units, the Director has provided an undertaking to the lessor that the State will ultimately be responsible for the minimum lease payments for the units over the entire lease period which ranges up to 15 years for units which have estimated useful lives of 30 years. Therefore, in the event of early termination of the franchise arrangements where the Director is unable to procure a successor franchisee to perform the required obligations to the relevant lessor, the Director may be required to directly fund the minimum lease payments.

6.38     As a result of this obligation, the Annual Financial Statement and the financial statements of the Department of Infrastructure recognise a contingent liability associated with the remote possibility of the Director being required to meet these lease payments.

Overall assessment of arrangements

6.39     In summary, under the arrangements, the State has retained ownership of the infrastructure associated with the public transport train and tram network, except the rolling stock, and has transferred the responsibility for the day-to-day management and operation of the network, including its ongoing maintenance to the franchisees in accordance with documented mandatory performance guides, over the contracted term of each franchise. To ensure the maintenance of appropriate operating capacity, the franchisees have agreed to procure and commission a specified number of new rolling stock units and to perform various works such as the refurbishment of the existing units and the upgrade of the infrastructure.

6.40     The aggregate cost to the State for the delivery of these services by the franchisees over the next 15 years, in net present value terms, will be around $2.8 billion. This level of subsidy has been impacted by the transfer and sale of the existing rolling stock units which had a book value of $663 million to the franchisees for a nominal consideration, which is reflected in the reduced level of subsidy.

Residual assets of the Public Transport Corporation

6.41     As part of public transport reform program, the Public Transport Corporation has been actively seeking to dispose of residual public transport assets which are no longer required. This activity resulted in the sale of a number of workshops and other facilities. While the Preston Workshops were included in the sale process they did not attract satisfactory bids and, at the date of preparation of this Report, remained unsold.

Overview of sale processes

6.42     The workshops and the multi-user service facilities that were offered for sale or lease provided a variety of maintenance and repair services to the metropolitan train and tram network, and the rural passenger and freight rail network. The sale of the facilities, which were located in both Melbourne and regional centres, broadly included plant and equipment, land and buildings, existing service contracts, including vehicle maintenance agreements and mechanised infrastructure maintenance agreements with the public transport businesses, together with guaranteed minimum workloads to ensure the short-term viability of the facilities. Where land and buildings were specifically excluded from the sale, these were available for lease to the successful tenderer.

6.43     The State's specific objectives relating to these sale of these residual assets were to:

  • maximize the value realised by the State from the sale of each facility;

  • provide improvements to, and continuity of, the services to the public transport businesses;

  • provide continuing employment with comparable conditions to the maximum number of staff; and

  • in the case of the Ballarat Workshops, to realise a long-term commitment to develop the business through diversification.

6.44     In December 1998, the Transport Reform Unit of the Department of Treasury and Finance offered these assets for sale or lease, calling for registrations of expressions of interest to purchase the workshops, maintenance operations and multi-user facilities and in March 1999 proceeded to issue tender documentation to the pre-registered bidders. This process had 3 stages: expressions of interest; the receipt and evaluation of indicative bids; and assessment of final binding bids.

6.45     The indicative and final bids were assessed against the following key criteria:

  • the net present value of the sale proceeds and other related cash flows to the State;

  • the bidders' ability to operate and manage the business, including the bidders' understanding of the obligations to maintain the rolling stock and infrastructure assets of the public transport businesses;

  • the bidders' commitment to renewing the current service contracts;

  • the number of employees to be transferred with each facility; and

  • the extent of any risk transferred to the State, having regard to the State's ongoing exposure to residual risks and liabilities associated with the facilities.

6.46     At the end of July 1999, final bids were received and evaluated by the Transport Reform Unit which ultimately resulted in the sale of:

  • Ballarat Workshop;

  • Mechanised Track Maintenance and Audit Facility;

  • Bendigo Locomotive Depot;

  • Newport Workshop;

  • Geelong Locomotive and Maintenance Facility; and

  • Scientific Services Facilities and Training Facilities.

6.47     In August 1999, a probity auditor appointed by the Transport Reform Unit to oversee the bid selection and evaluation process for the sale of the residual assets reported that there were no issues of probity outstanding associated with the disposal of the residual assets of the Public Transport Corporation.

Newport Workshop.

Sales arrangements and results

6.48     Under the sale arrangements for the residual assets between the Public Transport Corporation and the approved bidders the key obligations of the respective parties were as follows:

  • each employment offer made by a purchaser to the existing employees was for terms and conditions no less favourable than the terms and conditions which the nominated employee received prior to the completion date;

  • the purchasers agreed to reimburse the State agreed sums if they engaged a former employee who within a period of 12 months prior to the sale completion date received a redundancy payment from the State;

  • from the date of sale completion, the purchasers were required to assume responsibility for the performance of specified contracts and provide an indemnity to the State against all liabilities emanating from any breach or failure by the purchaser to fulfil any such contract;

  • the purchasers agreed that they were not entitled to make any claim for any breach of any representation, warranty or obligation until the total of such claims exceeded $50 000; and

  • where a claim is made against the Public Transport Corporation and within 12 months of the sale completion date, the liability of the State is limited to specified amounts which range up to a maximum of $1 million.

6.49     Under the sales agreements, the State received net sale proceeds of $9.7 million for the sale of these residual assets, some $11.9 million less than their book value.

Baryn Street, Heatherton property

6.50     Our 1998-99 Report on Victorian Government Finances commented on the sale of the former Heatherton Hospital site and part of the Kingston Centre site, as part of a government reform program to transfer the delivery of health services from institutional-based bodies to community-based settings.

6.51     Following these sales, a site totalling 40.2 hectares, which formed part of the former Heatherton Hospital, remained in State ownership. This site included an area of native growth which was considered worthy of preservation.

6.52     In March 1999, the Kingston Heath Golf Club submitted an offer to the Department of Treasury and Finance to purchase an additional 8.54 hectares of land located at Baryn Street, Heatherton for $6.4 million. The offer price was based on a valuation obtained by the Golf Club.

6.53     As a result of the valued area of native growth on the site, effectively restricting any other form of development, the Minister for Finance agreed not to offer the sale of the site to the public and to negotiate directly with the Kingston Heath Golf Club.

6.54     In March 1999 valuations were obtained from the Valuer-General and an independent valuer for this area. The valuations ranged from $6.5 million to $6.8 million and the valuers concluded that the highest and best use of the site would be as a residential subdivision if the adjoining Golf Club did not purchase the property. After taking all factors into account, the Valuer-General considered the proposed offer as not unreasonable and recommended that it should be accepted. The Minister for Finance subsequently accepted the offer and approved the sale of the site to the Kingston Heath Golf Club for $6.4 million.

6.55     Subsequently, as part of the intended sale arrangements the Minister for Finance approved the purchase of a 3 187 square metre site from the Kingston Heath Golf Club for $239 000, for future disposal by the State following its re-zoning to residential purposes. The purchase price was equivalent (on a per square metre basis) to the price offered by the Golf Club for the acquisition of the site at Baryn Street, Heatherton.

6.56     In accordance with the terms of these arrangements, a deposit of $616 000 was paid into the Consolidated Fund in July 1999 and the net balance of $5.54 million was paid in October 1999. The land transferred to the Kingston Heath Golf Club will be restricted for golf course use only for a period of 3 years from the date of settlement.

Bourke Street, Melbourne property

6.57     A property located on the south-eastern corner of Bourke Street and King Street was declared surplus to the Government's requirements in July 1998. The property, comprising a 10 storey commercial office building and basement car parking, covered a total area of around 8 300 square metres. The property, which accommodated the Enforcement Management Unit of the Department of Justice and the Traffic Camera Office of the Office of the Chief Commissioner of Police, no longer met current building codes and regulations.

6.58     Prior to the commencement of the marketing of the property, in February 1999 the Department of Treasury and Finance received a valuation from the Valuer-General which estimated the value of the property at $5.2 million. A private valuation obtained at the same time indicated a lower value of $4.5 million. Overall, the valuers agreed that interest in the property would be minimal as it was located at the western end of the Melbourne Central Business District and it was being offered for sale on the basis of vacant possession.

6.59     At that time, the Department of Treasury and Finance was advised by consultants that the buildings contained minor levels of asbestos and that the estimated cost of removing the asbestos would be around $600 000.

6.60     In February 1999, the Department received only one expression of interest for the purchase of the property. Subsequently, 2 offers were received in March 1999 from one interested party. The first offer of $4.6 million conformed with the Department's tender requirements and was unconditional. The second offer was set at a higher purchase price of $5.2 million but was conditional on a delayed interest-free settlement period.

6.61     Following further negotiations between the Department and the interested party, in April 1999 the Minister for Finance approved the sale of the property for $5.3 million and agreed to an extended settlement period.

601 Bourke Street. Melbourne.

Key terms of the sale

6.62     The Minister for Finance and the purchaser immediately entered into a contract of sale, with a deposit of $1.06 million paid into the Consolidated Fund in April 1999 and the balance of $4.24 million paid at settlement, in April 2000. The key terms of the sale agreement included:

  • the purchaser was exempted from the payment of stamp duty (which would have been equivalent to $291 500); and

  • the purchaser will be required to retain a camera on the building, which belongs to VicRoads and is used for traffic management purposes.

6.63     Our analysis of the sale result shows that the net proceeds from the sale of the property, after taking into account costs of sale of $57 000, were $5.24 million and the purchase price were consistent with the valuations received by the Department of Treasury and Finance and the recorded book value of the property.

Todd Road, Port Melbourne property

6.64     A former tip site of the City of Port Phillip which was situated on Crown land at Todd Road, Port Melbourne ceased operations in the early 1990s. This site was originally a quarry for sand extraction and has been operating as a waste disposal facility for both industrial and domestic refuse since the early 1930's. The 6.9 hectare site which also has frontage on to Williamstown Road is encumbered by a series of easements affecting around 25 per cent of the site.

6.65     Following the declaration of the site as surplus to the Government's requirements by the Minister for Finance, in June 1998 the Department of Treasury and Finance sought expressions of interest in the site's sale and in the following month received 6 conditional bids. The Department proceeded to short-list 2 bids and entered into private treaty negotiations with the relevant parties.

6.66     Prior to the assessment of the final bids, in June 1998 the Department of Treasury and Finance commissioned 2 valuations of the site, including one by the Valuer-General. The Valuer-General estimated the market price of the site at $4 million and a private valuer provided an estimate of $4.1 million. Both valuers concurred that the valuation of the site was discounted by approximately 15 to 20 per cent due to the site's heavy easement restrictions and the level of site contamination requiring special design elements and compliance with long-term safety protocols.

6.67     Following the completion of negotiations, in December 1998 the Minister for Finance approved sale of the site to the Melbourne Grammar School for a purchase price of $4.3 million which was consistent with the valuations obtained for the site. However, the sale was conditional upon an environmental assessment of the site and the provision of relevant town planning approval for the development of the site for the purpose of playing fields and associated sporting facilities.

6.68     In October 1998, the Department of Treasury and Finance and the Melbourne Grammar School jointly engaged an independent environmental consultant to assess the suitability of the land given its past use by the City of Port Phillip and the proposed usage of the site. As a result of these investigations, the environmental consultant concluded that the groundwater at the site was contaminated with heavy metals and other pollutants. Nevertheless, the consultant concluded that the environmental condition of the site was suitable for the open space and recreational purposes planned by the Melbourne Grammar School through the application of certain design, construction and management controls.

6.69     In November 1999, consistent with the recommendations of the environmental consultant, the Melbourne Grammar School agreed to acquire the site. The City of Port Phillip issued a planning permit for the development of the site to the School in February 2000.

6.70     The Melbourne Grammar School paid a deposit of $42 600 into the Consolidated Fund in June 1998 and the balance of $4.2 million in February 2000. The key terms of the sale contract are outlined below:

  • from the date of settlement, the purchaser assumed all risks of ownership, including any loss or damage to any person, corporation or property through the use of the site, site improvements or the presence of any site contaminants;

  • the State is not required to undertake any site remediation activities; and

  • the State provided no assurance that the site would be suitable for the construction of any improvements.

Redevelopment of the State Netball and Hockey Centre

6.71     The Office of Major Projects in association with the Department of State and Regional Development, is in the process of redeveloping the existing State Netball Centre and State Hockey Centre facilities on an elevated area west of Royal Park adjacent to the Melbourne Zoo, into a combined State Netball and Hockey Centre. The Centre will include 5 indoor netball courts with seating for up to 3 000 spectators, 4 outdoor netball courts, an upgrade of the existing hockey pitch, the development of a second pitch and a grandstand with fixed undercover seating for 1 000 spectators. It will also include sports offices, a gymnasium, function rooms and café, bar and retail facilities.

6.72     The key development objectives of the Centre are:

  • provision of player, administrative and spectator facilities that can support local, State, national and international fixtures for both netball and hockey;

  • increased use of the complex compared with current facilities including those of other compatible sporting codes;

  • support for Melbourne's bid for the 2006 Commonwealth Games with the provision of netball and hockey facilities that can easily be adapted or upgraded for Commonwealth Games use; and

  • a complex that will operate on a financially sound basis in accordance with a business plan that seeks to maximise operational efficiencies and opportunities.

6.73     The Centre is a project nominated under the Project Development and Construction Management Act 1994with the Secretary of the Department of Infrastructure nominated as the facilitating "agency". The facilitating agency has the ability to enter into contracts and agreements and other arrangements with any person for the purposes of the nominated project. The principal purpose of nominating projects under the Act is to facilitate the development of projects that are significant to the State.

6.74     As a result of amendments to the Project Development and Construction Management Act 1994, currently before the Parliament, the functions of the Office of Major Projects are proposed to be transferred from the Department of Infrastructure to the Department of State and Regional Development effective from 1 January, 2001.

6.75     The overall operational management responsibility for the new Centre is to be undertaken by the State Sport Centres Trust (formerly, the Melbourne Sports and Aquatic Centre Trust).

Feasibility study for the construction of a State Netball and Hockey Centre and its funding

6.76     A Royal Park Master Plan was prepared by the City of Melbourne in 1996, which incorporated a proposed new integrated State Netball and Hockey Centre, and detailed the submission and consultation process to be followed prior to the Master Plan being endorsed.

6.77     Following the public release of the Master Plan, the Department of State and Regional Development engaged an external consultant in March 1997 to conceptualise the redevelopment of the State Netball and Hockey Centre followed by a feasibility study in August 1997. The feasibility study highlighted a number of deficiencies with the present netball and hockey facilities at Royal Park, including amenities for players and spectators and the overall ability of the respective associations to attract major events with the existing facilities.

6.78     The Melbourne City Council endorsed the Royal Park Master Plan in November 1997 following a 4 month consultation period involving various stakeholders included residents, the Melbourne Zoo and interest groups. The endorsed Master Plan included the redevelopment of the existing State Netball Centre and State Hockey Centre into a combined Centre similar in location and nature to the current development.

6.79     The feasibility study estimated the total redesign cost to be $23.8 million for the re-development of the Centre. Subsequently, a cost review was undertaken at the request of the Office of Major Projects, which revised the cost estimate of the proposal to between $30 and $31 million. The differences in cost included, adjusting costs for retractable seats, landscaping, and an upward revision of consultants fees to a more realistic level. In addition, the feasibility study made no allowance for preliminaries and contingencies for external works, common works and for cost escalation if the construction exceeded a 12 month period. The Office of Major Projects advised the Department of State and Regional Development, in December 1997 that a total budget of $28 million would be a more realistic cost to deliver the project. However, the budget was reduced to $24.5 million by significantly reducing the quality of finishes, external appearance, start-up costs, and furniture and equipment.

6.80     In May 1998, the administrators of the Community Support Fund approved a funding submission from the Department to fully fund the construction of the Centre to a cost of $24.5 million and the State Government publicly announced that it was proceeding with the redevelopment of the State Netball and State Hockey Centre at Royal Park.

6.81     A Project Control Groupcomprising representatives from the Department, officers administering the Community Support Fund and Office of Major Projects was established in May 1998.The Project Group's major responsibilities are to provide high level policy direction in the planning and funding of the facility and to oversee the project's delivery within agreed timelines, budget constraints and the agreed briefing requirements. The Project Group is assisted by a Project Working Group consisting of representatives from the Department and the Office of Major Projects.

6.82     The Working Group and design team identified a number of operational and capital cost savings and efficiencies of between $50 000 to $100 000 if all sections of the central infrastructure for both hockey and netball were integrated. The Minister for Planning and Local Government endorsed the Working Group's recommendation to consolidate the operations and provide a fully integrated Centre on the site.

Operational and viability issues

6.83     The Department prepared a business plan for the Centre with the assistance of external financial advisers. The plan, completed in April 1999, concluded that:

  • operational viability was largely dependent on the Centre generating a specified level of patronage;

  • the base case patronage projections required only a marginal increase in utilisation of the new facilities as compared with the previous facilities to meet targets;

  • expenditure projections were consistent with industry standards and facilities of comparable type; and

  • further sensitivity analysis was needed to identify the implications of reduced patronage or utilisation on the ability to achieve the business plan.

6.84     In April 1999, the Melbourne Sports and Aquatic Centre Trust provided approval in-principle to a variation of its business and financial model to take on the responsibility for the Centre, on the understanding that the Sports would meet their financial commitments as outlined in their Business Plan that had been developed by the Department. It proposed that under a licence agreement to be established, various aspects of the facility will be licenced by the Trust to the State netball and hockey sporting associations.

6.85     The Government introduced the Melbourne Sports Aquatic Centre (Amendment) Act 1999to rename the Melbourne Sports and Aquatic Centre Trust as the State Sport Centres Trust and to extend the powers of the Trust to enable it to manage the State Netball and Hockey Centre and other sports, recreation and entertainment facilities and services. The legislation also provided for the establishment of a State Netball and Hockey Centre Advisory Committee to provide advice to the Trust and the Minister on operational and management issues, especially relating to the Centre's interface with the other Royal Park stakeholders.

Tender selection and appointment process

6.86     In June 1998, the Office of Major Projects appointed a project architect following a selective tender process. The appointment of specialist sub-consultants to the project design team was the responsibility of the project architect. Tender specification and briefings were prepared by the Office of Major Projects for the construction of the Centre which were made public in October 1998.

6.87     During the tender period, interested parties were advised that the Office of Major Projects had selected the supplier of the existing hockey pitch for the redeveloped courts for a specific sum which took account of outstanding warranty obligations with that supplier in relation to the existing hockey pitch. An agreement was reached with the supplier to surface 1 of the 2 redeveloped pitches at no cost. The Office of Major Projects estimated the final negotiated price with the existing supplier achieved a saving of between $150 000 to $250 000 compared with other quotes obtained. In addition, the Department's desire would be to have identical surfaces on both pitches at the new Centre and that the carpet would be identical to that being used for the Sydney 2000 Olympics and would therefore support Melbourne's bid to host pre-Olympic events.

6.88     In December 1998, following the close of tenders, the Office of Major Projects short-isted 5 bidders. A tender assessment panel evaluated the submissions based on tender price, ability to comply with technical and contractual requirements, preliminary planning information, record of past performance, suitable experience and expertise, and financial capacity to undertake the works. The lowest tender was some $2.3 million over the agreed original budget. Consequently, the Office of Major Projects requested the 2 lowest tenderers to price a range of scope variations to generate savings. The lowest revised tender price was still $470 000 over budget and the panel believed that the priced scope reductions would deliver an inferior product, with the project contingency reduced to an unacceptably low level.

6.89     The Project Control Group recommended to the Minister of Sport that additional funds be sought to enable the acceptance of the original lowest bid with minor scope variations and to maintain an appropriate contingency provision, so as to deliver a sports facility to a quality consistent with other similar Centres. The Project Group negotiated an extension of the tender validity period to the end of January 1999 in order to resolve the funding issue. At the request of the Minister for Sport, in February 1999, the Community Support Fund provided an additional $2.5 million over the previously approved budget. The total projected cost of the project was revised to $27 million and was to be fully funded from the proceeds from the Community Support Fund.

6.90     Following the approval of additional funding, the tender assessment panel recommended the appointment of Multiplex Constructions Pty Ltd as the preferred tenderer. A contract between Multiplex Constructions Pty Ltd (the contractor) and the Secretary to the Department of Infrastructure was entered into in March 1999. Construction was required to be completed within 12 month, by March 2000, for a construction contract sum of $22.5 million.

6.91     A probity auditor was not appointed to oversee the tender process. While we would have expected that such an assessment process should have been established for this major tender, the Office of Major Projects informed my Office that it felt that such a process was not necessary due to the involvement of a number of committees, including representatives of a number of State Government agencies.

Enactment of the Royal Park Land Act1999

6.92     Under the Planning and Environment Act 1987, the Minister has the legislative power to appoint himself as a planning and/or responsible authority. In his capacity as the planning and/or responsible authority, he may undertake all planning functions required under the legislation such as preparing, approving, administering and enforcing planning schemes and approving planning permits.

6.93     As a result of exercising his power to call-in or intervene in planning cases and to appoint himself as a planning and/or responsible authority, the planning responsibilities of councils are effectively transferred to the Minister.

6.94     In September 1998, approval for the new Centre was sought by the Office of Major Projects from the Minister for Planning and Local Government to a Ministerial amendment to the Melbourne Planning Scheme without exhibition. The "fast tracking" approval process was undertaken on the basis of the State significance of the Centre, the tight construction program, the need for substantial progress to be achieved in time for assessment by the 2006 Commonwealth Games Evaluation Panel in mid-1999 before the selection of the successful host city, and on the basis that the proposed use and development had been publicly exhibited via the Royal Park Master Plan in 1997. In November 1998, the Minister for Planning and Local Government provided planning approval under the Planning and Environment Act 1987.

6.95     Following the planning approval, the Office of Major Projects identified that the landscape plan, which was one of the many plans to be approved, had been excluded. As a result, the Minister for Planning and Local Government approved a further amendment to the scheme under the Planning and Environment Act 1987in December 1998.

6.96     In May 1999, legal action commenced from an interest group to stop the redevelopment at Royal Park on the grounds that the planning permit and development of the Centre was inconsistent with the purpose of the Crown land reservation. The Office of Major Projects and Department of State and Regional Development, consistent with advice received from the Department of Natural Resources and Environment were of the opinion that as the new Centre was to be partly developed on the existing hockey and netball site, no legislation would be required to clarify the land use issue raised by the interest group.

6.97     The Office of Major Projects sought approval from the Minister for Natural Resources and Environment to legislate and clarify the purpose of the reserve to include the proposed development and use as a State Netball and Hockey Centre. Subsequently, the Royal Park Land Act 1999 was passed, thereby elimating the principal basis of the objections by the interest groups to the development and use of the land for the purposes of a State Netball and Hockey Centre. This action eliminated any doubt that may have existed concerning the use of the land and avoided disruption possible from lengthy legal battles. In addition, the Act removed any right for compensation arising from the construction and use of the land as a Netball and Hockey Centre.

Environmental impact studies

6.98     A noise survey was undertaken by an external consultant in September 1998 which concluded that the noise levels from the operation of the new Centre would not increase beyond existing levels and, therefore, would not adversely impact on the Melbourne Zoo.

6.99     Concerns were raised, as early as 1995, by interest groups and the nearby Melbourne Zoo as to the impact of the light towers on the surrounding environment and the Melbourne Zoo habitants. The Office of Major Projects consulted with the Melbourne City Council and the Melbourne Zoo on the proposed development. On this basis and given that the redevelopment complied with the Royal Park Master Plan the Minister of Planning determined that an environmental impact statement would not be required as redevelopment would have no significant effect on the environment. In addition, the project was a redevelopment of existing facilities and fixtures not a new use within Royal Park. The existing hockey facility included one pitch and 8 light towers, while the new facility would have 2 hockey pitches with 4 light towers each. The existing outdoor netball facility had 6 light towers, while the new facility will have the same number of light towers.

6.100   Following concerns raised by the interest group and unions, the Minister for Planning and Local Government appointed an independent consultant in February 2000 to review all the design work regarding the outdoor sports lighting after all the relevant planning permits had been approved. The Report prepared by the consultants concluded that the proposed lighting design for the external hockey and netball courts were reasonable, the environment surrounding the Centre will not be affected above and beyond the effects of the pre-existing system with respect to the level of light spill at the Melbourne Zoo boundary wall, however, the levels of sky glow will be higher for televised modes (during the televising of major sporting events) of operation. The consultant estimated that the televised modes would only account for 2 per cent of the proposed total usage time during non-daylight hours. The Report concluded in that the new higher lighting masts would reduce the luminance and incident illumination at the Melbourne Zoo boundary below that which would have been provided from lower mast heights of the pre-existing system.

6.101   The Minister for Planning and Local Government subsequently approved an amendment to the Melbourne Planning Permit in May 2000 to allow installation of the sports lighting proposal as designed.

6.102   The contractor also commissioned a study that concluded that the lighting supplier's proposal would be able to achieve the stated design outcomes.

6.103   The Melbourne Zoo has agreed in writing that the design of the proposed light towers and related light spills was satisfactory, provided that there will be no additional light spill at the Melbourne Zoo boundary wall above and beyond the effects of the original lighting system in place. In the event that the light spill is greater than claimed, the contractor and supplier of the lighting system will be in breach of the contract and would be required to rectify the problem at their own cost.

Construction of the Centre

6.104   A review of contract administration records by our Office indicates that the Office of Major Projects identified a number of concerns relating to the due process and administration control of the construction of the Centre. One of the concerns related to the commencement of the construction of the netball light towers prior to the planning approval being obtained. The issues involved were taken up with the contractor during the construction phase for rectification.

Construction of the State Netball and Hockey Centre.
(Photo courtesy of the Office of Major Projects.)

6.105   The intent of nominating the project under the Project Development and Construction Management Act 1994was to assist with the timely and effective delivery of the project. Under the terms of the construction contract, the Centre was to be completed within a 12 months period, by late March 2000. As at October 2000, the most current construction program submitted by the Contractor indicates a completion date of early November 2000 and the costs incurred in relation to the construction contract was $22.9 million.

RESPONSE provided by the Acting Secretary of the Department of State and Regional Development

The Office of Major Projects has confirmed that its tender processes conform to the Victorian Government Code of Practice for the Building and Construction Industry. The Code, which is current government policy, does not require the use of a probity auditor for this type of tender process.

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