Cormann doubles down after audit casts doubt on Operation Tetris savings

By Stephen Easton

October 10, 2018

An audit finds the claim that the Commonwealth saved $300 million through office-space consolidation is not accurate, and Finance Minister Mathias Cormann agrees; he argues the true benefits were even greater.

Auditor-general Grant Hehir reports that Operation Tetris, the campaign to encourage federal agencies to move into empty space that was already being rented instead of signing new leases, has broadly achieved its aims.

The Department of Finance has also put in place coordinated procurement arrangements for real estate and improved its efforts to collect data from APS agencies while overseeing a reduction in the amount of empty space they are leasing. “It is evident that efficiencies and savings have been realised from this work, but Finance’s approach to estimating and tracking savings was not robust,” Hehir finds.

The reported $300m in savings from the Operation Tetris component was not confirmed through a “sound methodology” that included all the relevant costs, according to the report. It suggests the savings actually realised in five specific cases were not as much as would have been estimated, using the department’s methodology.

However, the report cautions that this does not necessarily hold for all the Tetris moves:

“The analysis undertaken by the ANAO did not include all of the then 16 moves attributed to Operation Tetris and does not provide a basis for extrapolating the results across the remaining moves.”

Indeed, it states that data from the department indicated that others saved the taxpayer more than would have been expected based on the department’s rough formula.

Cormann says he welcomes the audit report, but doubles down on the $300m-claim and argues the actual savings were more like $322m when the audit office’s approach is applied to a larger sample of lease arrangements.

“During the audit, the ANAO analysed five sub-leasing agreements, or Memoranda of Understanding (MOU), to consider savings realised by Operation Tetris,” said Cormann.

“Using information from this sample of five MOUs, the ANAO estimated that the savings realised by Operation Tetris were less than initially estimated by the Department of Finance.

“The Department of Finance has retested the savings from all 17 Operation Tetris moves using actual data from MOUs, leasing documents, and the Australian Government Property Register and confirmed its estimation of savings. Using the ANAO’s methodology total estimated savings were even higher at around $322 million.”

The $300m was based on an average rent of $460 per square metre and a 10-year average lease, and the assumption that agencies which moved into existing vacant offices would otherwise have signed a new lease for the same amount of space. The auditors suggest this simple formula was not based on a lot of strong evidence, and in the end the avoided costs should have been tracked and verified as the Tetris moves actually took place.

Moving costs left out of original assessment

The audit office reports that it undertook to retrospectively analyse how much the savings would have really been because the department appeared not to have done so.

“The need for verification of the actual savings was identified in Finance’s initial advice to the Minister in April 2015, where it said that the estimates provided by the external firm were approximate and needed further verification by a detailed cost–benefit analysis.

“No such analysis was undertaken, or advice provided to the Minister on the actual outcome of Operation Tetris compared to the estimated savings, which were then publicly announced.”

The initial estimates also did not take into account the cost of relocation and fit-out. Finance had argued these costs could be ignored as they would apply regardless of whether the agency signed a new lease or was slotted into vacant space through Operation Tetris.

The ANAO team took a different view, on the basis that signing a new lease did not necessarily mean moving into new offices, while moving via Operation Tetris did. Relocation costs about $100-250 per person and fit-out is about $2500 per square metre, according to previous Department of Finance analysis.

Cormann has previously said the coordinated procurement changes saved about $100 million, in addition to the $300m he has attributed to Operation Tetris, but the audit report casts doubt on this figure and the methods that produced it as well.

It notes “it is surprising” that the department received advice in 2016 via a Market Testing Review that this would save $105.3m over the four years to 2019-20, and then in March this year, claims to have separately projected the savings and arrived at exactly the same amount.

The department has agreed to two recommendations. First, to “ensure that its ongoing program of work to deliver savings and efficiencies on Commonwealth leased office property is supported by a robust and transparent savings methodology” by identifying all relevant costs and benefits and providing a clear rationale for any assumptions used.

It also promised to test those assumptions and principles against specific actual arrangements and verify estimates with actual data when it becomes available.

Secondly, it has agreed to “improve its framework for assessing and reporting on its program of work on Commonwealth leased office property and related activities by: setting clearly defined objectives; and better integrating performance measures, including cost indicators.”

“The Government is committed to ensuring that the Commonwealth’s property portfolio is appropriate to its expected needs and maximises value for taxpayers,” said the minister.

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