The Corporation is a subsidiary corporation of the Minister for Government Enterprises established pursuant to the provisions of the Public Corporations Act 1993. It has a Board which is its governing body whose members are appointed by the Minister.
The Corporation was established on 24 December 1997 by regulations pursuant to the Public Corporations Act1993 to undertake activities formerly controlled by the MFP Development Corporation, the MFP Projects Board and the Minister for Government Enterprises. The regulations establishing the Corporation, as amended, provide for it to undertake the following functions:
The Board of the Corporation was appointed on its establishment by the Minister for Government Enterprises at that time.
Net assets of the Corporation were $98.2million and included cash assets of $56.9million, land inventories of $27.9million and investments in joint ventures valued at $10.7million.
The Corporation is a subsidiary corporation established pursuant to the Public Corporations Act 1993. Clause13(3) of the Schedule to the Act requires the Auditor-General to audit the accounts and financial statements of subsidiary corporations.
The audit program covered all major financial systems and was directed primarily towards obtaining sufficient evidence to enable an audit opinion to be formed with respect to the financial statements and internal control.
During 2000-01 specific areas of audit attention included, for both controlled and administered items:
At the conclusion of the audit a letter was forwarded to the Chief Executive communicating the issues arising from the audit to which a satisfactory response has been received.
Audit review of the systems and transactional processing of the Corporation revealed that general financial controls existed which support the completeness and accuracy of transaction processing.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987,the audit of the Land Management Corporation included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities.
Audit formed the opinion that the controls exercised by the Land Management Corporation in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
The Corporation’s surplus from ordinary activities before the effect of a change in accounting policy was $9.9million, ($14.9 million) which reflected operating revenues of $16.0million, ($20.9 million in 1999-2000) revenues from government of $8.9million ($8.8 million) and operating expenses of $15.1million ($14.9 million).
The following chart shows movements over the past three years in revenues, expenses and the surplus and shows that the reduction in the surplus in 2000-01 was due to the overall reduction in total revenues while total expenses remained virtually unchanged.
The following chart shows the changing composition of the Corporation’s revenues over the past three years.
The factors having the most impact on the operating result were as follows.
Sales of land comprising sales proceeds from joint venture entities to which the Corporation is a party and other land sales by the Corporation gave rise to a net profit of $4.1 million representing 25.8percent of the Corporation’s operating revenues. The proceeds from sales were $7.0million with costs of sales of $2.9million. The value of land sales is highly dependent upon the extent of demand for undeveloped land. In 2000-01 sales were down for both the Corporation $5.7 million ($8.4 million) and joint ventures, $1.3 million ($2.7 million)
Property income (principally rental income) decreased to $3.8 million ($4.1 million) as a result of significant asset sales in the previous year.
The reduction of $1.4million in Other Income to $2.0 million is due principally to a decrease in profit on asset sales. In the previous reporting period, significant asset sales of $6.9million occurred, netting a profit of $1.5million.
Cash holdings of the Corporation continued to increase in 2000-01. As at 30June2001, cash assets of the Corporation totalled $56.9million ($50.4 million). For the 2000-01 year, interest income totalled $3.1million ($2.6million).
Interest bearing liabilities totalled $3.9million ($3.9 million) at balance date which for the 2000-01 year required interest payments of $0.5million ($0.5 million).
The net interest income for the Corporation, therefore, totalled $2.6million ($2.2 million) representing 26.8percent of the surplus from ordinary activities before income tax equivalent. If the growth trend with respect to cash assets continues, given that interest on borrowings is fixed, it is likely that net interest income will continue to increase over time.
The value of the Corporation’s land inventory at balance date was $27.9million, an increase of $0.8million. Inventory purchases in the 2000-01 year totalled $3.5million.
Sales values are determined by market conditions at a point in time. In turn, the profit is also influenced by the carrying amount of assets. The values ascribed to the Corporation’s assets mainly reflect the closing carrying values of the assets transferred from the former MFP Development Corporation and the Minister for Government Enterprises (formerly the MFP Projects Board) to the Corporation effective 1 May 1998 which were revalued immediately prior to transfer.
This prior revaluation of land inventory recognised the net realisable value of the assets by determining the net present value of the estimated future cash flows from holding, developing and sale of the land inventories as part of a planned sales process. The cash flows are projected over an extended period, in some instances up to thirty years, and consequently involve significant uncertainty. The timing of the land sales, which has a direct impact on the timing of cash flows and consequent values, is based on projected demand for residential land. This is also inherently uncertain.
The discount rate used to determine net present values was a market rate of 25percent reflecting the rate of return a private sector developer would require from investing in land inventory. The discount rate adopted was consistent with the requirements of the Department of Treasury and Finance Accounting Policy Statements.
The final inventory value brought to account in the financial statements is further supported by an independent valuation of land holdings obtained as at 30 June 2001.
The decrease in investment in joint ventures reflects the finalisation of the Northfield Joint Venture in the previous year, together with the completion of all land sales of the Seaford Joint Venture in the current period and a cash distribution from the Golden Grove joint venture.
The value of net assets administered by the Corporation decreased by $3.0million during the reporting period. This leaves a carry forward deficit of $5.7million, up from $2.7million in the previous year. The main reason for the carry forward deficit is loans payable to the Treasurer totalling $28.8million in respect of the East End and Port Waterfront Projects. Further discussion of these loans can be found under ‘Further Commentary on Operations’ below.
With regard to administered revenues and expenses for the year, administered revenues totalling $3.8million were sourced principally through State grants of $1.8million and interest revenue of $1.0million. These revenues were offset by administered expenses of $6.8million, comprising mainly interest expense of $2.1million and other operating expenses of $4.0million.
The East End Redevelopment project has been reported as an administered project in the Corporation’s accounts since the Corporation’s establishment in December 1997. This results from the arrangements for this project whereby the Corporation only administers transactions in relation to this project and has no control in regard to the assets and liabilities of the project.
The administered assets of the East End Redevelopment project at 30 June 2001 are $3.4million and the administered liabilities $22.9 million. This represents a net deficit of $19.5 million at balance date. The major transaction for 2000-01 for the project was the payment of interest of $1.6 million on a loan for the project. The outstanding loan balance increased by $350 000 during the year.
As indicated in Note 20.3(c), the Corporation advised the Treasurer during 2000-01 that the loan for this project, an amount of $22.7 million at 30 June 2001, is unlikely to be fully recoverable given that the project’s forecast net cash flows are substantially below the loan value. The Corporation estimates a shortfall of approximately $19.5million at project completion in 2003-04. The loan is from the Treasurer and is in the name of the Minister for Government Enterprises.
Immediately prior to reporting under the Corporation, the project was reported under the Minister for Government Enterprises (formerly the MFP Projects Board). At that time (December 1997) the reported financial position for the project was administered assets of $6.6 million and administered liabilities of $21million, a net deficit of $14.4million. Each year since then the project has reported a deficit from operations reflecting the excess of interest expenses above revenues for the project.
The section titled ‘Minister for Government Enterprises (formerly the MFP Projects Board)’ in the Auditor-General’s Supplementary Report for 1998 provided an overview of the project to the time of that Report.
The Report noted that the project commenced in December 1993 when the then Minister for Housing and Urban Development and Local Government Relations entered into a Development Agreement with a private developer with respect to the redevelopment of part of the East End Market Site. The Agreement provided for the developer to pay the Government, as landowner, a set percentage of sales as the developer took up the land.
It was reported that two changes were made to arrangements that resulted in reduced amounts payable by the developer to the Government. The changes were primarily based on the Government responding to analysis that indicated the developer was unable to obtain a satisfactory return from the development in the circumstance preceding the changes. The reductions in the projected revenue to the Government from the project were in the order of $6.5million. The Cabinet submission supporting the second of the adjustments estimated that the net cost of the development to the Government was projected to be $18.4 million. It was noted at the time that the estimate was subject to some uncertainty.
The Corporation’s current estimate updates the projected outcome for the project. The matter of the repayment of the loan for this project was not resolved at the time of this Report.
As part of the overall joint venture arrangements in respect of the Mawson Lakes Economic Development Project, the State Government committed to various infrastructure works in July 1997 under a project commitment deed. In February 2001 Cabinet approved a number of changes to this project commitment deed. In particular, included in the deed is a commitment to build the North East Ring Route, which connects the Main North Road and Salisbury Highway.
During the year detailed discussions occurred between the Mawson Lakes Joint Venture and Transport SA as to the alignment of the North East Ring Route. The Joint Venture proposed a new alignment, as it provided significantly better linkages within the joint venture area, including the town centre and eastern and western portions of the joint venture development area.
In exchange for Cabinet’s approval of the realignment, the Joint Venture agreed to provide a cash contribution of $1.0 million and to delay other externally funded infrastructure works. Cabinet approved the $1.0million contribution be applied to assist with funding of a bus interchange at Mawson Lakes. The contribution equated to approximately half the estimated increase in costs (in present value terms) stemming from the project commitment deed changes. As the Land Management Corporation is a 50percent stakeholder in the joint venture, the Corporation, through its joint venture investment, will ultimately fund half of the agreed contribution through the joint venture. The Corporation has advised, however, that this cost has been substantially offset by a similar reduction in planned joint venture expenditure on infrastructure, particularly on connector roads throughout the development.
The Corporation is currently managing a major urban renewal project of waterfront land at Port Adelaide on behalf of the State Government. The first step in the management of this process involves completing a detailed master plan for the economic and urban revitalisation of the inner Port Adelaide region. To assist in the completion of this detailed master plan, Cabinet approved the Corporation proceed with a registration of interest process. The Corporation called for registration of interest submissions in June 2001 and the process aims to ultimately lead to two key parties being contracted to present a commercially driven development proposal for the area that meets defined project objectives, including economic, environmental and social benefits.
After completion of the detailed development proposals by these two parties, a panel comprising Corporation Officers and External Consultants will review the two development proposals in depth and then make a recommendation to Cabinet.