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The department assumed responsibility for managing all aspects of the Commonwealth's overseas owned property estate on 26 November 2001. This function had previously been the responsibility of the Department of Finance and Administration.
We established a departmental office-the Overseas Property Office (OPO)-and created new budgetary and reporting arrangements to enable us to discharge this responsibility. We also took on, under a separate contract, the overseas property management alliance with PricewaterhouseCoopers that the Department of Finance and Administration had entered into in March 2001 (see output 4.2 at page 188 for further detail).
In managing the overseas owned estate, we applied a rigorous commercial approach to ensure that the value of the Commonwealth's assets was maintained. We adhered strictly to the Commonwealth Property Principles.
The return on investment of 5.01 per cent was outside the external industry benchmark range due to stagnant markets in major international locations. We returned a dividend of $88 million to the Commonwealth. Divestments returned $21.6 million to the Commonwealth.
We consulted on relevant property issues with other agencies operating overseas through a joint introductory meeting and individual briefing discussions following the establishment of the OPO.
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Provision of accommodation
The Commonwealth's overseas property needs are met through a combination of owned property and leasing from private landlords (information about the department's leased estate can be found in Section 3-Corporate Management and Accountability-on page 215.)
The overseas owned property portfolio comprises 141 properties in 49 countries. It consists of office properties (chanceries), and residential properties (a mix of free-standing residences and apartment blocks). At 30 June 2002, the estimated market value of the overseas owned estate was $1.19 billion-a value determined by a global real estate services firm engaged by the department for the purpose.
The strategic framework for the provision of accommodation is provided by the Commonwealth Property Principles. During the year, we ensured that current and emerging property needs were met, based on the number and range of Australian Government representatives and activities abroad, and consistent with the need for office and residential accommodation to support appropriately the Government's international objectives.
We faced challenges in providing staff with appropriate accommodation due to deteriorating security environments in certain locations. For example, in Honiara, we acted to provide secure accommodation for Australian representatives in the absence of leased accommodation that met our needs. We also initiated a number of other construction and refurbishment projects to meet new needs and replace facilities that were no longer adequate (see output 4.2 for further detail).
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Physical management of assets
We developed a model for measuring and monitoring the physical condition of the properties in the overseas owned estate. This model provides the baseline for measuring future improvements in the portfolio. The model uses measures and standards from the property industry including: expenditure on repairs and maintenance as a percentage of asset value; compliance with safety and storage codes; structural soundness; strategic importance of the individual properties; age of the properties with allowances for mid-life upgrades and refurbishments; and functionality and amenity of the properties.
The model produced an overall rating for the estate of satisfactory, out of a four-point range (unsatisfactory, poor, satisfactory, good). The model incorporated several measurements, including age of building (as an indicator of asset depreciation), maintenance expenditure, compliance with safety and health and environmental standards, functionality, and structural condition. It was applied to evaluate the condition of the 20 most valuable properties (assessed at current market value) in the overseas owned estate.
The ratings delivered by the model for age, functionality and structural condition were good. For expenditure on maintenance and repairs the rating was poor. For compliance with safety and other codes the rating was unsatisfactory.
The department will address compliance issues, and work to redress the maintenance shortfall. We expect that the current capital works program of refurbishments and provision of new facilities (Berlin, New Delhi and Colombo) will also lead to a measurable improvement in the estate.
In conjunction with PricewaterhouseCoopers, we moved towards completion of five-year assets plans for posts. These plans will form the basis for future physical management of the overseas owned estate.
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Financial management of assets
The OPO was established with accounting and funding structures separate from the department's regular appropriations framework (see Section 3-Corporate Management and Accountability-on page 213 for further detail on financial management and the OPO). The Minister for Finance and Administration approved the establishment of a Special Account through which the office operates. Under the Special Account, funds from operating revenues accrued during the year were substantially applied to dividend payments, major construction projects, recurrent operating expenses and outsourced management costs.
We paid to the Commonwealth an agreed dividend of $88 million from income proceeds from the overseas owned estate. Return on investment fell short of the external industry benchmark range-which had been set by the Department of Finance and Administration, and was derived from returns of the Property Council of Australia and from Europe and North America-due to stagnant markets in major international locations, particularly London and Tokyo.
Following our assuming responsibility for the overseas owned estate, we managed the overseas divestment program that the Government had agreed in 1999 for 2001-02. We returned to the Commonwealth an equity payment of $21.6 million representing the net proceeds from divestment activities.
This fell marginally short of the original divestment target which had been set on the basis of valuations made in 1999 and had been agreed formally in the portfolio additional estimates process for 2001-02. In some instances, although properties were sold at full current valuation, the property markets had moved downwards since 1999. A memorandum of understanding between the department and the Department of Finance and Administration in April 2002 revised the divestment target from $23 million to $22.3 million.
Our management expense ratio of 0.73 per cent was within the acceptable range of external industry benchmarks, based on management expense ratios of Australian listed property trusts.
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