Brendan O'Connor (Gorton, Australian Labor Party, Shadow Parliamentary Secretary for Industrial Relations) Share this | Link to this | Hansard source

On behalf of the Parliamentary Standing Committee on Public Works, I present the first report of the committee for 2007 relating to the proposed redevelopment of propellant manufacturing and other specified capabilities at Mulwala.

Ordered that the report be made a parliamentary paper.

by leave—On behalf of the Parliamentary Standing Committee on Public Works, and in particular on behalf of the member for Pearce, the chairperson of the committee, I would like to place on the record the following.

This report addresses the redevelopment of propellant manufacturing and other specified capabilities at Mulwala at an estimated cost of $338.7 million. This was a particularly complex project in terms of its nature. On one hand, the arrangements between the Commonwealth and the lessee are, to all intents and purposes, commercial. On the other hand, the current relationship between the Commonwealth and the lessee, while continuing to ensure that the propellant and ordnance needs of the ADF are met, maintains the arrangements that existed when Mulwala was government owned and operated.

The committee accepts the significance of Mulwala as the only facility in Australia that produces propellant for the Australian Defence Force, and its needs as part of the overall defence infrastructure are beyond question. So too is the ongoing requirement for Australia to be self-reliant for both the manufacture of propellant and ordnance to meet the demands of the Defence Force. However, financial arrangements in place for the operation of the plant at Mulwala are problematic, particularly as to whether they reflect the Commonwealth’s best interests. The Commonwealth is investing a large amount of public money in this project with little return on investment. Indeed, arrangements that have been entered into between the current operator and the department as the agent for the Commonwealth skew the financial arrangements between the lessee and the Commonwealth in favour of the former. This situation has emerged largely as a result of the Mulwala agreement, which was signed off in 1998 but which has not been revisited since the new lessee took over the lease of the Mulwala facility in 2006.

The Mulwala agreement is significant in the context of the redevelopment of Mulwala. It establishes the terms and conditions under which the lessee occupies the facility, the lessee’s commitments to the ADF in terms of product supply and related issues, and the obligations of the Commonwealth to the occupier. This includes a number of conditions, but of specific interest to the committee were those arrangements associated with the payment of a capability payment, the actual leasing arrangements of the property and the distribution of revenue between the Commonwealth and the lessee. Prior to Mulwala becoming fully commercial, financial arrangements between the then Australian Defence Industries and the Commonwealth could be seen as circular transactions— that is, these occurred within the Commonwealth’s financial framework. However, with the introduction of a wholly commercial operation into the equation, accompanied by the Commonwealth’s commitment to a major investment in the facility, the circumstances have changed.

In a commercial environment a lessee occupies a building and pays the lessor whatever rental has been determined by the lessor. The occupier leases the property for a specified period and, apart from some obligations that the lessor meets, the leasing arrangements generate income for the lessor.

However, in the case of Mulwala there are some fundamental differences. The requirement under the Mulwala agreement for the payment of capability payment has brought about a situation whereby the Commonwealth receives no benefit in terms of revenue from the lease arrangement and where the Commonwealth is now offering the occupier considerably enhanced and more modern facilities to undertake its business. Existing rental payments made by the lessee appear not to be in line with current market rates. Therefore, it would be appropriate for the agreement to be renegotiated by the department to take these circumstances into account. As the committee has recommended in its report, the renegotiation of rentals should include an assessment of comparable current commercial market rentals paid for purpose-built buildings in order to deliver an enhanced revenue stream to the Commonwealth.

The effect of the capability payment on the capacity of the Commonwealth to earn revenue from its investment also extends to other sources of potential revenue. The committee was informed at the inquiry into this project that the production of Mulwala is in excess of defence requirements, to the extent that the lessee has successfully achieved sales, in both domestic and overseas markets, for surplus products. However, the Commonwealth share of this revenue, as provided for under the Mulwala agreement, is also subsumed into the capability payment. Accordingly, the committee has recommended that the ongoing capability payment to the lessee be reviewed on the basis that the lessee is satisfying the requirement that the needs of the ADF have been met and that there is potential revenue from sales of surplus product for which the Commonwealth should derive a benefit.

Similarly, the Mulwala agreement determines the share of revenue between the Commonwealth and the operator. In one sense this is an academic exercise, since the capability payment absorbs almost all revenue. However, the potential to review the capability payment would provide an opportunity to reassess the distribution of revenue, particularly since it is contingent on the Commonwealth’s $338.7 million investment in this project.

In conclusion, the concerns of the committee that I have outlined are contained in recommendations in its report. These are significant issues and the committee hopes that at the earliest opportunity the department will look constructively at our recommendations at a time when the arrangements with the current occupier can be revised.

Finally, it is important for agencies and departments to consider all aspects of expenditure of public moneys on projects of this magnitude to ensure that they deliver value for money to the Commonwealth.

Having given detailed consideration to the proposal, the committee recommends that the redevelopment of propellant manufacturing and other specified capabilities at Mulwala proceed at the estimated cost of $338.7 million.

In closing, I wish to thank those who assisted with the site inspection and public hearing, my committee colleagues and secretariat staff.

I commend the report to the House.