The Briefing: ‘Unreliable’ due diligence, self-regulation at heart of Infrastructure Department’s ‘Leppington Triangle’ scandal

By Chris Woods

Friday September 25, 2020

federal police
(Image: ANAO)

Crux of the issue

After finding that the Department of Infrastructure bought land in Leppington, NSW, from dairy farm operator Leppington Pastoral Company at 10 times the land’s valued price, the Australian National Audit Office found the department’s due diligence “fell short of ethical standards” and that its advice “on value for money was inadequate and unreliable”.

The debate: Why did the ANAO investigate?

On 31 July 2018, the Australian government purchased a 12.26 hectare triangular parcel of land, which its expects to need in about 30 years should a second runway be constructed at the Western Sydney Airport, from dairy farm operator Leppington Pastoral Company (LPC), for $29,839,026. The government then leased this part of the ‘Leppington Triangle’ back to the seller to maintain for agricultural purposes for 10 years, with options to renew totaling a further 10 years, and valued the land at $920,000 for lease-back purposes.

Following the release of the Department of Infrastructure’s 2018–19 financial statements, the ANAO found that the department valued the Leppington Triangle land at just $3,065,000 — one-tenth of the price it had paid 11 months earlier — and, unable to determine key aspects of the transaction from its financial statement audit, conducted an audit that it released Monday, September 21.

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ANAO findings

Auditor-General Grant Hehir found that the department held nine valuations of the Leppington Triangle land and that its purchase price was four times higher than the next highest valuation; as Crikey’s Bernard Keane details, the department made a series of accommodations to LPC, including using one of its nominated valuers, MJ Davis Valuations, requesting just a “desktop valuation” — good for only an “indicative assessment” — and even asking the company what instructions to give the valuer:

LPC demanded that the land not just be assessed for “highest and best use” but “highest and best use, including industrial purposes”. Then the instruction to the valuer was upgraded by the department to “rezoned for industrial purposes, adjacent to an operating airport”.

Amazingly, it was the valuer who pushed back on that. It warned the department “the revised instruction sits far outside typical valuation methodology” which meant “a figure which would be significantly higher than current land prices being achieved for property with speculative industrial rezoning”. This forced the department to revise its instructions back to “existing planning parameters with highest and best use reflected in speculative industrial rezoning potential”.

During the audit, the department tried to tell the ANAO there had been no additional instructions to the valuer, completely at odds with what the records showed.

Even then, the valuer was unhappy with the department’s instruction, warning that the department and LPC “need to acknowledge the report should not be construed as a valuation report”.

The department also met with landowners several times in coffee shops “with only one departmental officer present and where there was no record of the discussion” and recorded telephone conversations in a “an ad hoc manner”, and dismissed a valuation from the NSW Roads and Maritime Services for land in the area at 1/20th the price as “misconceived”.

The ANAO’s conclusions were, relatively speaking, blistering:

  • The Department of Infrastructure did not exercise appropriate due diligence in its acquisition of the Leppington Triangle land for the future development of the Western Sydney Airport. In the course of this audit it became clear that aspects of the operations of the department, both during and after the acquisition, fell short of ethical standards.
  • An appropriate acquisition strategy was not developed. While a strategy was documented and approved:
    • it was focused on incentivising an unwilling seller to dispose of their land some 32 years in advance of when it was anticipated to be needed for the airport expansion, an approach at odds with the department asserting that early purchase allowed it to capitalise on “goodwill” from the landowner;
    • the underlying analysis overstated the identified benefits, did not quantify costs and did not address risks; and
    • the acquisition approach eventually employed departed from the approved strategy.
  • The approach taken by the Department of Infrastructure to valuing the Leppington Triangle was not appropriate. The approach inflated the value of the land, which in turn led to the Australian government paying more than was proper in the circumstances.
  • Decision-makers were not appropriately advised on the land acquisition. Formal briefings omitted relevant information, such as: the purchase price; that the price exceeded all known market valuations of the land; and the method of acquisition. Advice from the department on value for money was inadequate and unreliable.
  • Decision-maker approval was not evident for some of the actions taken. A subsequent departmental review of the acquisition process lacked rigour and did not provide a reasonable basis for concluding that the transaction was settled for an appropriate value.
  • The incomplete advice provided to decision-makers, and the inadequate response by the department when questions were raised by the ANAO, was inconsistent with effective and ethical stewardship of public resources
Comparison of the price paid against nine valuations of the land. Source: ANAO analysis of Department of Infrastructure records.

Recommendations and reactions

The auditor-general made three recommendations, all of which the department agreed to:

  1. The Department of Infrastructure, Transport, Regional Development and Communications prepare comprehensive and balanced written analysis on the benefits, costs and risks of proposals to spend public money.
  2. The Department of Infrastructure, Transport, Regional Development and Communications put in place meeting and communication protocols for when staff engage directly with individual landowners, developers or similar parties with heightened probity risks. The protocols should: include guidelines regarding suitable venues; require the presence of at least two departmental representatives; and require properly recorded minutes of meetings and conversations.
  3. The Department of Infrastructure, Transport, Regional Development and Communications develop policies and procedures to govern its approach to obtaining purchase valuations.

The department has since launched both an independent review and management review of staff, but, curiously, argued in its response to the report that its valuation strategy was “unorthodox” but “the strategy was developed in consultation with the Department of Finance and the Australian Government Solicitor and was designed to mitigate the risk of costly and lengthy legal challenges.”

As the report notes, the land-holding company had previously challenged land acquisitions at the airport site with the Department spending over ten years in legal proceedings.

The politics: LPC and ministerial advice

Founded by Kolombo and Julia Perich in 1951, LPC is currently run by their sons sons Tony and Ron, who ranked 36th on The Australian Financial Review’s 2020 Rich List ($) with an estimated fortune of $2.05 billion.

As The New Daily reported at the time, Labor’s shadow infrastructure minister Catherine King immediately pointed to the fact the company donated nearly $59,000 to the Coalition in 2018 and 2019; as Crikey noted, this company donated a full $149,000 from 2002, and $28,000 to Labor between 2002 and 2007.

However there is no suggestion in the report of political interference, and a spokesperson for Urban Infrastructure Minister Alan Tudge in turn argued there “is no question of ministerial involvement” and the matter “goes to the administrative actions of the department, more than two years ago”.

Then-urban infrastructure minister and current Communications Minister Paul Fletcher has since stressed that the ANAO specifically found he was never informed of the valuation methodology or the fact the land would cost nearly $30 million, and has welcomed the report itself.

According to the ANAO, only one of the 10 relevant briefings to decision-makers and ministers contained a reference to value for money, a March 2018 briefing to a deputy secretary obtaining their approval to expend up to $31,780,000 to acquire the land, which included:

The purchase price has been agreed in-principle between the department and LPC as $30,000,000 minus the value of the 1.36 hectare portion of the parcel that RMS will acquire …, with an 8% per annum interest rate payable should settlement not occur by 31 July 2018. These terms form part of a set of commercial principles agreed in-principle by the parties …

The purchase figure is based on a July 2017 valuation report by MJD Realty Appraisals’ (MJD), which valued the land (then 13.62 hectares) at $30,000,000. We consider this figure reasonable and consistent with our own estimations, albeit reflecting the recent sharp increase in property prices in the area. WSU is satisfied that, after these reasonable enquiries, this procurement achieves a value for money outcome.

For comparison, ministerial briefing ‘‘Leppington Triangle acquisition update’ from the day of purchase, July 31 2018, advised the minister that the “July 2017 report valued the land at $30 million” and that the NSW government had commenced an acquisition process to acquire a 1.36 hectare portion; crucially, it did not state that $29.84 million had been paid to LPC for the 12.26 hectares on the expectation that the NSW government would pay $0.16 million for its 1.36 hectare portion, only that:

The eventual Triangle purchase was, therefore, 12.26ha, with a reduction in price from [the July 2017] valuation commensurate with the amount [the NSW government] pays to LPC for its 1.36ha parcel. As the Valuer General has not yet determined the final price of the NSW [government] parcel, an adjustment will be made post-settlement in favour of either the Commonwealth or LPC to ensure that LPC receives no more and no less than $30 million for the full 13.62ha.

Shadow attorney general Mark Dreyfus has since argued that Fletcher’s defence amounts to an admission of negligence and that the scandal demonstrates the need for a national corruption watchdog.

What to look out for: evolution of self-regulation, land purchasing and the ANAO

Interestingly, the ANAO issued a review of the acquisition process as part of its performance audit, but that “there was no indication that any officer from outside the Western Sydney Unit had participated in the conduct of the review, which would have been prudent in the circumstances.”

Instead, the review-related activities were:

  • Officers from the Western Sydney Unit met with the relevant deputy secretary in August 2019 to provide a verbal update on the ANAO enquiries into the acquisition of the Leppington Triangle. At the meeting, the deputy secretary requested a minute providing a consolidated account and review of the process undertaken by the department in acquiring the land.
  • Officers who had been directly involved in the land acquisition drafted the 18 October 2019 letter to the ANAO (referred to in paragraph 4.72 above) and provided it for signature to their branch head. The branch head had joined the unit after the land was acquired.
  • Officers who had been directly involved in the land acquisition drafted the minute to the deputy secretary, providing the ‘consolidated account and review’ and attached a copy of the signed letter to the ANAO of 18 October 2019.
  • The signature block of the EL2 officer involved was unsigned and undated on the minute. A handwritten annotation said ‘8.11.19 Previously submitted October’, followed by the EL2 officer’s initials. The deputy secretary ‘noted’ and signed the minute on 13 November 2019. The Department of Infrastructure was unable to provide evidence to the ANAO that demonstrated this minute had been submitted to the deputy secretary in October 2019, or advise of the date on which this was said to have occurred.

Speaking to The Sydney Morning Herald, chair of the Centre for Public Integrity and former NSW Supreme Court judge Anthony Whealy QC says this self-regulation element reaffirms the need for a national corruption body:

“Those people who were charged with acting unethically then conducted a review into themselves and found they acted appropriately.

“If we had a body whose function was to examine corruption in the broader sense – I’m not necessarily talking about criminal offences – then such a body would have approached this matter quite differently from the audit office.

“They would be forcing answers out of people and compelling witnesses, even if those answers tended to incriminate people.”

The paper also reports that Liberal MP John Alexander has warned the sale is just the “tip of the iceberg” in terms of landholders making windfall gains from selling property around the Badgerys Creek airport, and stressed that reforms to purchase mechanisms — i.e. instituting a levy on gains — are needed to prevent a spike in billionaires as infrastructure spending grows post-COVID.

Finally, in a new series dedicated to the ANAO at Crikey ‘Is the public being served?‘, Keane recounts some of Hehir’s work since beginning to expand the ANAO’s purview in 2015,  mostly famously with the ‘sports rort‘ earlier this year and five separate, damning reports into Home Affairs, which range from “incompetence in running offshore processing; abuse of its powers; failure to monitor visa holders; and, most recently, a February 2020 audit that found its process for considering and granting citizenship applications was a disaster”.

As Keane notes, Hehir has sought to crackdown on “the tendency for departments criticised by the ANAO to promise to implement recommendations, only to not bother doing so after the publication of the damning audit.”

For example, a 2019 audit of the Agriculture and Infrastructure departments, Airservices Australia and the Australian Pesticides and Veterinary Medicines Authority found “none of the selected entities demonstrated that they had effectively implemented all agreed recommendations”. Agriculture and Infrastructure had also not implemented recommendations made by the ANAO’s parliamentary oversight committee, the Joint Committee of Public Accounts and Audit.

A particularly egregious example emerged this year when the ANAO looked again at the lobbyist register, which it audited in 2017 when PM&C ran it. The register has since been moved to the attorney-general’s department and the ANAO discovered not merely had this department failed to implement any of its recommendations, it had badly botched the transfer from PM&C.

This has meant stepping up its monitoring of the implementation of recommendations, “noting that in its 2018-19 audits, it made 146 recommendations, 131 agreed by agencies, some of whom “respond to external criticism defensively or dismissively (‘we are already aware of the issue’, ‘we are already addressing the issue’, ‘the report needs to be read in context’, ‘the issues raised are not material’)”.

Additionally, Keane notes that department heads are more than willing to criticise the ANAO, even when they nominally accept its recommendations:

When the ANAO discovered Australian Border Force had been abusing its powers, Pezzullo attacked the auditors as “unworldly” authors of a sub-standard report. Last year, Pezzullo mocked the ANAO’s recommendations for improved transparency and performance monitoring of his department’s citizenship applications as “cookie-cutter targets” that “drive poor behaviour”.

To spell out his displeasure, Pezzullo had a junior executive sign off on his department’s response to the ANAO. Pezzullo has also complained that his department is repeatedly singled out for critical ANAO attention in “a bit of a reoccurring pattern with the audit office”.

On the Leppington Triangle scandal, Keane ridicules the department’s argument that its “unorthodox” valuation process “was designed to discourage litigation — as though the Commonwealth should pre-emptively hand over taxpayer money out of concern than a billionaire will resort to litigation.”

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