Stephen Parry (Tasmania, Liberal Party) Share this | Hansard source

On behalf of Senator Troeth, I present the report of the Joint Standing Committee on Public Works on the redevelopment of propellant manufacturing and other specified capabilities at Mulwala. I move:

That the Senate take note of the report.

I seek leave to have the tabling statement incorporated in Hansard.

Leave granted.

The statement read as follows—

On behalf of the Parliamentary Standing Committee on Public Works I present the Committee’s first report of 2007.

This report addresses the redevelopment of propellant manufacturing and other specified capabilities at Mulwala at an estimated cost of $A338.7 million

Mr President, this was a particularly complex project in terms of its nature.

On the one hand the arrangements between the Commonwealth and the lessee are to all intents and purposes commercial.

On the other, 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 need as part of the overall Defence infrastructure is beyond question.  So to is the on-going 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 Commonwealth “best interest”.

The Commonwealth is investing a considerable amount of public monies in this project with little return on investment.  Indeed the 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 latter.

This situation has emerged largely as a result of the Mulwala Agreement signed off in 1998, but which has not been revisited since the new lessees took over the lease of the Mulwala facility in 2006.

Mr President, the Mulwala Agreement is of significance 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 arrangement generates income for the lessor.

In the case of Mulwala, however, there are some fundamental differences.

The requirement under the Mulwala Agreement for the payment of a capability payment has brought about a situation whereby the Commonwealth receives no benefit in terms of revenue from the lease arrangement.

Where the Commonwealth is now offering the occupier considerably enhanced and more modern facilities to undertake its business, and that existing rental payments made by the lessee appear not to be in line with current market rates, it would be appropriate for the Agreement to be renegotiated by the department to take into account these circumstances.

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 so as to deliver an enhanced revenue stream to the Commonwealth.

Mr President, 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 production at 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 product.  However, the Commonwealth’s 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, Mr President, 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 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 monies on projects of this magnitude to ensure that they deliver value for money to the Commonwealth.

Mr President, 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 Senate.

Question agreed to.