24.9.1 LAND
24.9.5 SUMMARY

24.10.4 SUMMARY




A Group Structure
B Financial Position of Entities involved with the State Bank Centre
C Dates of Approval of Annual Financial Statements for Entities involved with the State Bank Centre






The State Bank Centre Project is relevant to my Terms of Appointment A (a), (b) and (c) and C. The construction of the building has been a matter that has resulted in the Bank holding a significant asset that is non-performing.

In the period from late 1985 to the end of 1988, the State Bank of South Australia ("the Bank") acquired land which adjoined its premises at 97 King William Street and had a thirty one storey building erected on that land.

The Bank's Chief Manager, Administrative Services said that the development would provide:

(a) Long term accommodation for the State Bank Group (at the time the decision to build was made, the Bank had offices located throughout the central business district).

(b) A commercially viable major office development.

(c) A building which would complement the existing State Bank Head Office.()

Those matters are referred to in detail hereunder.

The consequences of this development have been:

(a) Funds totalling $23.5M advanced by the Bank to the off-balance sheet associated entities were designated non-accrual from October 1990.

(b) The Bank is subsidising entities associated with the State Bank Centre on an annual basis in consequence of a deficiency of income to outgoings ie total annual expenses exceed rental received.

(c) The tax structured financing package has not been as effective as originally planned owing to changes in corporate tax rates and capital gains tax issues which can be resolved only in 1996, when that finance package is finalised, and when the Commissioner of Taxation assesses the financiers of the project. As the financiers had an agreed after-tax rate of return, this has resulted in a substantial increase in the anticipated final cost to the Bank.

(d) Significant doubt still exists on certain capital gains tax matters which affect the ultimate payment ("the compensatory payment") required to be made to the financiers by April 1996. This payment is guaranteed by the Bank.

(e) Original predictions for a significant capital gain for the Bank should the land and building be sold have been replaced by an expected loss if sold, or in April 1996, the amount of the compensatory payment exceeding the market value. At 30 June 1991, the estimated compensatory payment was $154.2M whilst the market value of the building at that date was $93.4M.




The scope of this Chapter is limited to events which occurred prior to the date of my appointment. Special consideration has been given to project initiation, approval, and control (including reporting to the Board), as well as to reviewing financing arrangements and ownership structures. I have also considered the adequacy of reporting on the project in the financial accounts of the Bank.




In this Section, a summary of events is given so that the reader may appreciate the circumstances in which various important decisions were made about the Centre. An appreciation of them is also necessary so that the reader may understand the discussion of specific topics later in the Chapter.

The possibility of a project first appeared in the Board Minutes of 26 September 1985. Passing reference was made to the possible acquisition of premises immediately behind the Bank.

"The Managing Director reported that the adjoining property immediately behind the Bank may be available for purchase. Premises Department has yet to undertake a cost analysis and feasibility study on the property, but it was considered the property may be useful in the long term to accommodate future growth of the Bank.

The Board endorsed Management's action in investigating the suitability of the property for purchase and a report is to be submitted to the next meeting." ()

The land then referred to was not, in fact, the land later acquired for the Centre project.

Prior to that meeting a real estate agent had informed the Managing Director that the land was to be put on the market. Independent advice was sought from Mr D Archbold of Baillieu Knight Frank (SA) Pty Ltd ("Baillieu Knight Frank"), who suggested that the Bank consider buying land on the other side of its King William Street building. The Managing Director informed Mr Archbold that if Baillieu Knight Frank obtained an option on that land he would approach the Board with the proposal.()

On 7 November 1985, Baillieu Knight Frank acquired an option to purchase three properties - at 91 King William Street, 19 Currie Street and 23 Currie Street for $7.0M.

A group of three professionals were selected to consider the project in principle. They were Mr Archbold, Mr R Roach of Rod Roach Architecture Pty Ltd, and Mr M Lamond of Cameron and Middleton Australia Pty Ltd, Quantity Surveyors.

They were then invited to address the Board on 28 November 1985.

"It was proposed that the Bank should consider purchasing the properties located at 91 King William Street, 19 and 23 Currie Street, to allow the Bank to develop the site to accommodate a multi-storey building which would become the landmark in the City of Adelaide.

The total capital cost of the development was estimated at $80.0M with an initial investment of $7.0M to purchase the sites.


The high rise building would provide opportunities for naming rights on several faces of the building and it is perceived that the building, "State Bank Centre", would attract high quality tenants and prove to be the focal point in the City of Adelaide.

The Managing Director outlined a worst possible profit projection and capital position which indicated that the Bank could afford to completely fund the project at this time. If a profit risk did arise, and the Bank wished to reduce its exposure to the project, the current market suggests that the Bank could divest itself of all or part of its investment quite easily at any time.

The Managing Director suggested that the site provided the opportunity for the Bank to secure adjacent land which could be utilised to satisfy the space requirements for future Group operations, while developing a viable property investment which could be developed in sympathy with the existing heritage.


After a thorough and lengthy discussion, IT WAS RESOLVED that the Bank should exercise its option to purchase the properties on the 6th January 1986 and to establish a project team to proceed with the project to the planning approval stage.

IT WAS FURTHER RESOLVED that the Bank investigate potential partners for the project and whether the project should proceed on a managed construction or tender basis." ()

The following persons were then invited to join the group, which would plan the project up to planning approval stage. Mr W Steele of Woods Bagot Architects; Mr C Ingham, of Baillieu Knight Frank; and Mr F Moretti, of Kinhill Stearns Consulting Engineers. The Bank's representative was Mr K P Rumbelow, at that time Chief Manager, Administrative Services. (He subsequently became Chief Manager, Property.)

The group entrusted with this task is variously referred to in the Bank records as the "Project Team", and "Project Control Group".

On 6 January 1986, the Bank contracted to acquire the land for $7.0M.

Woods Bagot had been concerned in many large construction contracts in South Australia, but not one for the planning or construction of a thirty-storey building. However, according to Mr Steele:

"... the technical challenges were similar. There is nothing peculiar about a thirty storey building compared with a fifteen storey building other than a doubling of volume, and in fact the State Bank building is in effect two, fifteen storey buildings stuck on top of each other with an intermediate plant room."

And later:

"... if it had been a nuclear power station or a rocket launcher perhaps that would have intrigued us more but it was certainly not a challenge which was beyond our normal work." ()

Nor had any other members of the planning group been concerned in the construction of a building of similar size to the proposed building. (In due course Mr R Nalder of Concrete Construction (SA) was appointed as a building consultant to the project team. Concrete Constructions was part of a Victorian Group - Lewis Constructions, which, according to Mr Steele were "very big builders who had built such buildings before.") ()

It is important to bear in mind that Baillieu Knight Frank, was strongly of the opinion, which was accepted by the Bank, that the construction of the Centre had to be completed, and the Centre ready for occupation, by the end of 1988. It was said that the Centre had to be completed before several other large buildings eg the ASER building, and a building at 45 Pirie Street, so that the Bank could take advantage of anticipated demand for high quality premises.

"The whole project was driven by a perceived real estate opportunity of having it completed and on the market for what they called a window of opportunity.

A gap in the commercial market." ()

Mr Rumbelow said that the Bank obtained other advice:

"... the professional advisers were parties to the decision that that finishing date was the right date. That wasn't just plucked off the wall. That was done carefully by looking at what the current take up situation in office space in Adelaide was, what we knew that was being created and what we believed the demand would be to the future .... but we had to get in before this other lump came onto the market in the form of ASER and 45 Pirie Street."

He said:

"I think we challenged (the advice) by going to people like BOMA and the assessment of other real estate firms in Adelaide. They released that sort of information in their report." ()

This perception was important because it influenced the project in a number of significant ways. I shall refer to them in this Chapter.

The most important consequence was the decision made to construct a building by what has been called "a fast track" method. In essence, it meant that the construction work had to be commenced before all the technical documents were done. There was a degree of risk employing such a method.

Mr Rumbelow said:

"... there was always concerns about the following of fast track method because ... it's not cut and dried. ... There are uncertainties that arise so that you always go into something like that with some apprehension ...".

He added that the disadvantages expressed by members of the professional team were "uncertainty as to cost".

"It was always sort of discussed along the lines that we will have to be very careful and that everybody was well aware of the dangers there and we ... had some misapprehension about it but the alternative was ... not really possible ... if we missed that window of opportunity and if ASER site was developed first at 45 Grenfell Street, well, there was uncertainty about the marketplace that did the leasing".()

I shall say more about the "fast track" method later in this Chapter.

An immediate consequence of the Board's decision, on 28 November 1985, was that the project team had to develop the concept which Mr Roach had proposed in sufficient detail to enable the costing to be undertaken.()

During the latter half of December 1985, and throughout January 1986, a total team of about seventy professionals worked to that end.

"So the process was in a sense normal. It was compressed, it was managed extremely tightly and I believe effectively in that ... at the end of January you could have virtually built the building from the design at that stage." () "We were commissioned by the Bank to do a certain part of the work and that was to go up to the point where a detailed submission could be given to the Board." ()

The team, under the direction of Mr Steele, was "very sensitive to construction cost ...".

"It was obvious ... it was very obvious to us in that and any commercial project that cost was an overriding consideration and I might add that then ... the cost of construction in South Australia of commercial CBD buildings is not much less than the equivalent construction in the eastern states CBD but office rents in those days were probably between 1/2 and 2/3 so obviously the sensitivity of construction costs is much greater." ()

The task was to give the Board:

"... documents sufficient to describe the building in detail, documents sufficient to provide an informed estimate, documents sufficient to be readily converted into a planning submission, bearing in mind that a planning submission is not a Board submission." ()


"You could not build the building from those documents because they were advanced design, or developed design documents, sufficient with a minimum modification for planning approval."

"But the process of going from there to actual constructability would be normally six months of intense technical documentation." ()

On 6 February 1986, the preliminary feasibility study was presented to the Board. The net cost, at that stage, was estimated at $82.0M. The study itself had been prepared by Baillieu Knight Frank, and included an analysis of anticipated income, outgoings, construction costs, taxation implications, contingencies and cash flows. It indicated that the quantity surveyors (Cameron and Middleton) had provided construction cost estimates. Sensitivity analyses were included with this feasibility study in percentage terms only, without, detailing the potential impact on Bank profits.

The Board Paper accompanying this item included a schedule outlining the impact on Bank profit for the financial years 1988-1989 to 1997-1998. (The expenses prior to 30 June 1988 would be substantially interest and construction related costs which would be capitalised with no resultant impact on Bank profit.) This analysis was based on the Bank funding the building itself. There was no sensitivity analysis of the impact should costs or other variables change.

The analysis of impact on Bank profit indicated that the negative effect on profit was considered to be outweighed by an expected ultimate capital gain. The analysis stated that "worst case parameters" had been utilised, although those "parameters" were not disclosed.

The Board resolved to proceed to "Planning Approval stage".()

The project team which had been gathered then continued to the next stage.

"There were two things happening. One is that we were beavering on producing technical documentation and on a parallel, we were negotiating to pull the old bank down, conserve the tin ceiling, do up the heritage frame around the site." ()

The heritage issue, said Mr Steele:

"... delayed the process of getting approval from the City Council. And by the delay of that approval - and the approval was in the first instance to demolish - my recollection was that the delays that occurred through that what I could politely call frigging around with the Council, became the critical issue rather than the ability of the design team to complete documents, so I would suggest ... that the perceived start of demolition was delayed by that process and therefore the whole building process became tighter and more critical."

The delay was "certainly more than weeks. It may have been months." () He said that that did not cause panic, but "it really meant that we had to review the process by which the construction would proceed. We had to review the process by which we obtained commercial submissions." ()

According to Mr Steele, those delays had an impact on the way in which the project was carried out. I have said already that it was perceived by those responsible that the building had to be complete and ready for occupation by the end of 1988, so as to take advantage of "the window of opportunity". Therefore, the longer the delays, the tighter the building schedule became. This concern manifested itself ultimately in the decision which was made as to how the construction was to be carried out:

"... whether it should be all the design work done first and then go out with completed plans and drawings and have a hard money contract or whether we would fast track the thing and have a sort of a contract that enabled us to develop it as it went and there were a lot of implications like that considered.

The recommendation that was accepted in that area ... was that because we believed that there was a window in the rental market and that there were other buildings that would be in direct competition with us ... we should aim to finish the building around about the end of 1988 and that ... in order to achieve that it was necessary to ... fast track it so that they split the actual ... job of building it into trade packages and ... develop detailed drawings to such an extent that they could do the next step and then the next step and then the next step so that the design team was coming along behind the builder and that the thing we developing as it was being built - the detailed design of the upper areas of it were being developed as it was being built." ()

The "fast track" was the approach recommended by the professionals, and in Mr Rumblelow's view, the decision was one to which the team was "driven" in light of the "window of opportunity". "I think that was one of the major factors in it. If there had been ... no pressure to finish by a certain time we may or may not have taken another - an alternative method." ()

As part of the fast track method, the Project Control Group decided that the project would require a Construction Manager.()

On 27 March 1986, the Board resolved to proceed on a construction management basis.()

"A report outlining various forms of contractual methods for the construction of State Bank Centre was discussed. Two methods were considered appropriate and were analysed by the Project Control Group ie lump sum tender based on partly completed documents and provisional bill of quantities, and Construction Management.

The Project Control Group prefer the construction management form of contractual agreement.

An examination of the cost benefit/penalty of Construction Management has been carried out by Cameron & Middleton Pty Ltd which indicates the total end cost for construction management would be 2.25 per cent less than that achievable using a Lump Sum Contract on the project.

IT WAS RESOLVED that the construction of State Bank Centre be performed under Construction Management by a contractor who will be approved by the Board and recommended on the basis of ability to perform and price." ()

Mr Steele, whilst not agreeing with the description "fast track", agrees that construction management meant that the Bank would be proceeding with a project for which the final sum was not set.

"The Construction management process by its nature did not have all the costs of the building tendered and committed before work proceeded with the project and the construction management would have fast tracked - as you call it - construction management of the process is such that the various trade packages are called at the time that they are needed." ()

At the time the Board resolved to proceed on a construction management basis, it had been informed that the quantity surveyors had indicated a possible 2.25 per cent overall cost saving by following the construction management method. Mr Rumbelow, however, was of the view that the time constraints were the principal reason for the professional advisers recommending the construction management method. ()

On 24 April 1986, the Board was advised that an investigation had been undertaken which had examined the impact of acquiring Delmont Building adjoining the State Bank Centre site at the corner of Anster Street and Cordwainers Lane.

"... there are a number of advantages in purchasing the building which affect the direct cost benefit of State Bank Centre, plus other logistical benefits which would enhance the overall administration of the building project and prevent any compromise of security of Savings Bank Building.

A revised feasibility study incorporating the purchase of Delmont Building provided in the report indicates a return on total development costs of 7.22 per cent (subsequently revised to 7.24 per cent). The current market value of the building has been estimated .... at $800,000 to $850,000.

IT WAS RESOLVED to approve the purchase of the [sic] Delmont Building ..." ()

After the Board's resolution on 27 March 1986, tenders were invited from four building contractors to act as construction manager, and, after assessment of submissions and interviews, Baulderstone Pty Ltd was appointed as Construction Manager on 29 May 1986, again upon the recommendation of the Project Control Group.()

Finally, also on 29 May 1986, the Board formally resolved to proceed with the building project.


. The construction budget for the erection of State Bank Centre be set at $55.55M (escalated).

. The total project budget, including interest, holding charges and income during development, be set at $85.48M." ()




The Managing Director had ensured that the Treasurer was aware of the project. As early as 6 February 1986, he had informed the Board that:

"... he had met with the Acting Premier and advised him of the latest details of a pending announcement. However, the Government had not been informed of the revenue implications of proceeding with the building project at this stage. In this regard, it was suggested the Government should be treated as any normal shareholder and the Bank should be conscious of providing a reasonable rate return on a shareholder's investment.

The Managing Director suggested the Bank would need to re-examine its current property holdings policy and the 1986/87 Strategic Plan would examine this issue and suggest appropriate action to achieve the preferred property investment level.

The Bank's current free capital was more than sufficient to meet statutory requirements and it was considered not necessary for the Bank to make an immediate decision to sell existing properties to ensure the Bank maintained adequate reserves." ()

Later there was correspondence between the Managing Director and the Treasurer.

First, a letter from the Treasurer, dated 24 March 1986.

"Mr Tim Marcus Clark
Managing Director
State Bank of South Australia
Box 399 GPO

Dear Mr Marcus Clark

Proposed Office Building

I refer to your letter of 6 February 1986 and subsequent discussions on this matter.

Consistent with the commercial thrust of the Bank, it is not my intention to raise any objection to the proposal, subject to the planning/regulatory aspects which are under examination and subject to some points which I wish to make concerning the framework within which this proposal has been developed and will be implemented. There are five such points.

The first relates to the timing of your advice to me on the matter in relation to its consideration within the Bank and in relation to your public announcement on it. I note, for example, that your "media release" took place one day after the date of your letter to me and on the same day as that letter reached my Department. As we have discussed previously it is my wish that proposals of this significance - for the Bank, the economy, and the State's budget - be the subject of consultation at an early stage.

Second, it is unclear at this stage what the effects of the proposal will be on the Bank's profits. They will depend, inter alia, on the way the building is financed, interest rates, rental returns and so on. It is equally - if not more - unclear what the efects (sic) would be on the amounts in lieu of income tax payable by the Bank to the South Australian Government under section 22 (1) (a). In these circumstances, I would wish to make it clear that I would not expect this project to have any net negative effect on the total annual return being received by the Government from the Bank. Thus, if there were to be a negative effect under section 22 (1) (a), I would expect it to be offset by an increased payment under section 22 (1) (b) - i.e. what we might refer to as the "dividend element". I ask that Bank officers keep in contact with the Treasury on this aspect.

Third, I believe that it is accurate to say that the principal analysis made available to us is based on an assumption that the capital funds for the project come from within the Bank at a cost equivalent to the opportunity rate of return. I also believe, however, that some consideration is being given to the possibility for alternative financing arrangements which are tax-effective in terms of Commonwealth taxation legislation. I regard it as vital that this aspect be examined as thoroughly as possible. As you may well be aware the South Australian Government Financing Authority ("SAFA") has considerable experience and very valuable market contracts in this field (over the past year or two it has probably been the largest user of this kind of finance within the Australian public sector. I ask that close consultation take place with SAFA to ensure that no opportunities are missed in this respect. I have asked SAFA to report to me on this important aspect of the proposal.

Fourth, I note that, in the material which has been made available, some prominence is given to analysis of the expected post-tax returns to the Bank -i.e. the returns after taking account of effects on payments to the government under section 22 (1) (a). As I have mentioned in previous correspondence, it is of fundamental importance that proposals of this kind be looked at and compared with alternative uses of funds on what I might refer to as a gross or "whole of State" basis. To put is bluntly, if the effect of a particular proposal is to reduce payments in lieu of tax to the Government that should not be regarded as a plus for that project.

Fifth, this proposal brings to the forefront an issue which has been in my mind for some time. We now have a number of public sector organisations within the State into the business of long term investment, including the SGIC, the Superannuation Fund Investment Trust, SAFA, the Bank and potentially the Workers Compensation Board. The question of whether, and if so how, this activity needs to be coordinated is clearly important. I have asked the Treasury to put this issue to study and would expect officers of the Department to be in touch with the Bank as the study progresses. Your cooperation would be appreciated.

I would be grateful if you could draw these comments to the attention of the Board. If you would like to discuss further, naturally I and/or Treasury officers would be available as appropriate.

Yours sincerely,


(J.C. Bannon)


The Managing Director replied by letter, dated 17 April 1986.

"The Hon, J.C. Bannon, M.P.,
Premier and Treasurer
State Administration Centre.
Victoria Square,

Dear Mr Premier,

I refer to your letter of March 24th, 1986 and as requested I have drawn your comments to the attention of the Board of Directors.

We are most concerned at the implication in your letter that the Bank did not correctly inform the government of its proposal to develop a new office building.

On Tuesday, December 10th, 1985, which was shortly after the Board had resolved to purchase the land, I advised you and Mr Bruce Guerin that the Bank had purchased the land and commissioned a feasibility study into the construction of a new office building.

I showed you an artist's impression of the proposed 32 storey building, indicating that it was very much in the planning stage, but the cost would be approximately $85 Million.

After that meeting with you I telephoned the Under Treasurer and advised him of the purchase of the land and the proposed feasibility study.

On February 3rd, it was apparent that we would recommend to the Board that we would proceed with the project and therefore make a planning application. A special Board meeting was called for Thursday, February 6th to consider this matter.

I was advised that as soon as planning application was made, there would be publicity. If the Board approved seeking planning approval at its meeting on February 6th, it was planned to submit the application on Monday February 10th, and therefore, it was considered appropriate that the Bank should make a release on the subject on Friday, February 7th.

I wanted to make sure the Government was informed as soon as the Board made a decision to proceed. I telephoned the Under Treasurer to seek his advice.

He strongly suggested that the Government, which in your absence would be represented by the Acting Premier, Dr. Hopgood, should be advised as soon as possible. I saw Dr. Hopgood on the afternoon of February 4th with Peter Rumbelow, the Bank Executive responsible for the project and the Under Treasurer.

On Thursday, February 6th, the Board met and reviewed the project at length. It agreed to make a planning application. That afternoon, we hand delivered to you at your office, formal notification of the Bank's decision. You might note that in this letter we referred to our visit to Dr. Hopgood on Tuesday, 4th February.

Reviewing the above chain of events, we believe the Bank adequately, and appropriately, advised the Government of its plans.

We note the other comments in your letter, and would advise as follows:-

* The Bank does not expect the development of State Bank Centre to reduce the flow of funds to the Treasury of taxation and dividends.

* In assessing the cost of financing for the project, the Bank conservatively worked on an opportunity cost of funds to evaluate the feasibility of the project. We are now investigating the most cost effective method of obtaining finance, and are using as advisers Beneficial Finance (experience in packaging leases) Thomson Simmons (legal advisers on tax effective structures) and Arthur Anderson (Accountants and Consultants) to overview the best method of financing.

* We agree that we should consider major projects on "whole of state" basis, and consistently take this approach.

* We note your comments concerning co-ordination, and will await further advices from Treasury.

Yours sincerely,"

At the Board meeting of 29 May 1986 (when the Board resolved to proceed with the project), the following note appears:

"Relationship with Treasury

Recent discussions between the Managing Director and Treasury officials suggested that Treasury are now in general agreement with the project. Treasury's main concern is that the Bank does not use State Bank Centre to avoid paying revenue to the State. Treasury were advised that the Bank regards the State as a normal shareholder and, as such, could expect to receive an appropriate return on its investment.

It was agreed that the Managing Director convey to the Treasurer a clear statement that the Bank does not see the initiative to proceed with State Bank Centre, on its own, would cause a reduction in revenue to the State. On current projections, it would seem that the project may reduce Bank profits by $3m during the 1988/89 financial year, with break even occurring after year six. It was considered the projected level of loss would not be a significant drain on Bank profits, however, the project would provide the Bank with a substantial capital gain." ()

I have found no later reference to this topic in the material I have examined.




Before I proceed to the construction phase, it is appropriate that I comment upon the events that led to the Bank's decision on 29 May 1986 to proceed with the project.

On 29 May 1986, the Bank Board resolved to embark upon a project to construct a building of a size which had never been built in this State before. With the exception of Mr Nalder and other advisers from Construction Services (SA), none of the Project Team had been involved in a building project of this magnitude.

It was understood that the project had to be finished before the end of 1988 - to meet a "window of opportunity". Apart from the enquiries that Mr Rumbelow has given evidence about, the Bank sought no formal second opinion about the assertion of Baillieu Knight Frank that such a "window of opportunity" would exist.

I am of the opinion that, having regard to the nature of this project, it would have been prudent to obtain a second formal opinion. If there had been no such "window of opportunity", it would have been unnecessary to complete the project by end of 1988. And, therefore, a fast track method would not have been necessary, and more detailed planning could have been completed before the commencement of construction.

The decision to proceed with the project was a commercial decision made by the Board, on advice received from a group of professionals who were regarded by the Bank to be leaders in their respective fields. My concern is rather whether the comparatively risky fast track method need have been employed.

I also note that neither the Management nor the Board required an independent audit of cost estimates for the project. I am of the opinion that such an audit review would have been prudent because there was a substantially greater risk of cost escalation from the fast track method which was followed. However, it must be noted as pointed out by certain of the non-executive directors the Board had received advice that the fast track method proposed would in fact reduce the overall project cost.

In this respect, I note that, on 13 June 1989, the principal Consultants engaged in the project, reviewed the project. They expressed their views about "how it could perform better in the future". Included in their suggestions were:

"1. Resisting project commencement until documentation was further advanced


3. Establishing more detailed elemental cost budgets before project commencement and more sophisticated cost forecasting systems.

4. Performing an independent audit of cost estimates at an early stage in the project." ()

These conclusions support the observations I have made above.




I have already said in this Chapter that the original project team consisted of Mr Archibald, Mr Roach, and Mr Lamond.

As the planning proceeded, the group was expanded to include Mr Steele, Mr Ingham, and Mr Moretti. Baulderstones were also a member. Mr Nalder of Construction Services assisted as a building consultant, but was not a member of the group.

Baulderstones, the Construction Manager, were governed by a detailed written contract between them and the Bank. That was in contrast to the appointment of the various consultants, who were appointed by letter.

The Bank's representative was Mr Rumbelow.

In a paper presented to the Board Meeting of 6 February 1986, it had been "proposed to maintain control over this project through the Chief Manager, Administrative Services ..." That was reinforced by a proposal to the Board when it resolved to proceed with the project on 29 May 1986.()

I understand that it was intended that Mr Rumbelow would control the project for the Bank, with the assistance of the Project Control Group. He described himself as the "Administrative Co-ordinator". "I was the person within the Bank to which the team came to present the recommendations...".()

Mr Clark has accepted that Mr Rumbelow was "the person entrusted by or appointed by the Bank to make all relevant decisions from day to day in relation to the construction of that building."

He was "the sort of Chairman of the Board, if I could put it in that way, for that particular operation ...".()

Mr Rumbelow had had no relevant experience in building construction.

His only experience at all with building construction related to bank branch buildings.()

Mr Rumbelow explained the management structure in this way:

"Essentially there was a project committee that comprised all of the consultants on the job and they met, say, fortnightly. There was also a control group that really didn't comprise all of the consultants. It comprised an executive of the consultants if you like." (Mr Steele, Mr Moretti, Mr Ingham, Mr Lamond and Mr Rumbelow)

"In the committee structure if there were changes to be made to contracts that would influence the cost they were discussed and there might be alternative terms that were being examined or alternative methods. Certainly I would take advice from the consultants, but the committee would discuss those sorts of issues there would be a consensus out of the committee." ()

Although Baulderstones were also on the Project Control Group(), according to Mr Rumbelow, there were occasions where there was conflict between the Project Control Group and Baulderstones. In that event, it was Mr Rumbelow who made a decision, or, if the problem was too difficult for him, he would refer it to the Managing Director, and to the Board, if necessary.()

I have the following observations to make of the Management Structure.

Mr Rumbelow should not have been the Bank Officer responsible for making final decisions about this very large construction project. He had had negligible experience in building construction.

Mr Steele was asked about Mr Rumbelow's suitability:

"... I would not have appointed a Bank person. I would have appointed an experienced project manager with construction skills ... But having said that, I think with the amount of input that the technical members of the control group gave, I suppose we probably recognised Rumbelow's shortcoming in the building experience and provided those to him. So the short answer is I would have suggested somebody to lead the project with probably more experience in a major project." ()

In my opinion, notwithstanding the evidence that the consultants endeavoured to give their best advice to Mr Rumbelow, the fact remains that Mr Rumbelow should not have been the Bank's representative in the project. From the very nature of such a project, the consultants may have been involved in conflicts of interest from time to time. The Bank should not have left it to the consultants to advise, but rather they should have appointed a project manager for and on behalf of the Bank, who would have been professionally equipped to deal with whatever advice he received, and, wherever necessary, to make independent judgements on behalf of the Bank.

Not only should the Bank not have allowed Mr Rumbelow, with his lack of experience in this complex area, to make important decisions on its behalf, but the respective responsibilities of the consultants should have been more clearly defined. In this respect, I note also the review (carried out by the consultants) of the 13 June 1989 (after project completion) where it suggested, inter alia:

"... 2. Appointing a professional manager instead of managing by committee.


5. More clearly defining the responsibilities of the consultants and construction manager before project commencement."

No evidence has been made available to the Investigation of the enquiries being made into any definition of the respective responsibilities of the consultants in the Project Control Group. As I have commented above, each consultant was engaged simply by letter of appointment, which did not set out the necessary terms of their contract. It seems to me that the project was, in reality, managed by a committee, rather than by a single project manager.

I am of the opinion that the management structure for the project was inadequate. Mr Rumbelow, whose integrity and application I do not doubt, was not professionally equipped for his role and there was inadequate definition of the responsibilities of the Construction Manager vis-a-vis the consultants. Nor, in my opinion, was there adequate definition of the roles of the consultants; this was important in and for a project of this type.




Between April 1986 and June 1989, the Board received a monthly report on the progress of the Centre.

Such reports outlined matters such as the building programme, industrial relations, tender details, and performance guarantees provided by the Bank in respect of contracts between Kabani Pty Ltd ("Kabani") and contractors, leasing progress etc. An estimate of final construction cost, as compared with the previous month's estimate and budget, was also submitted to the Board with the paper.

The monthly report was primarily an information update to the Board.

Regularly, the Project Control Group increased its estimate of the cost, and the Board was informed of this too.

From the inception of the project, Mr Rumbelow, and presumably the Board, was aware of the risks of cost escalation from the fast track construction method. If the Board was not aware of the potential cost escalation attributable to the fast track method, it was at least informed of the increase in estimates. For example

[insert table here]

The information presented to the Board to explain the increases included(): change in scope of the project(); inclusion of work not originally budgeted for; and() increases due to heritage issues. Added to these were the problems frequently encountered in building construction, such as weather delays. In the latter stages, there were accelerated costs, expended in respect of, for example, additional labour and overtime incurred in the attempt to finish the project by the end of 1988.

Mr Steele in his evidence offered a further insight:

"The construction industry at that point in South Australia was busy, and I guess like many aspects of business in the mid '80's and late '80's, was in an overboiled situation. REMM Project came on line late in the project, and that absorbed a lot of the capacity of the building industry. What we did not take into account, or were unable to predict ... at the designer stage was that the construction industry saw this project as an opportunity to screw more out of the system. Collude, if you like ...".()

There were only two occasions on which the cost escalations were brought to the attention of the Board and on those occasions the Board resolved to take some action about the cost escalations.

On 26 March 1987 the Chief Manager, Property, submitted to the Board a paper proposing that the budget for total development outlay be increased to $93.1M. The Board approved this subject to:

"... management taking whatever action necessary to prevent the future escalation of costs. The Chief Manager, Property, taking a firm hand in managing the consulting team. Directors indicated support for appropriate action being taken in the event that cost variations result from non performance of consultants." ()

There is no indication in the paper accompanying the Minutes that Mr Rumbelow had expressed dissatisfaction with the performance of the consultants. Indeed that would have been inconsistent with the evidence which he gave to the Investigation.

There is no evidence that the Board took any action to follow up that direction at its subsequent meetings.

On 28 July 1988, the Board considered another paper submitted by the Project Control Group which indicated that the total development outlay would then be approximately $120.0M. Following this, the Board agreed that the Bank would implement an independent inquiry into the management and the "cost blowout" of the project, and report to the Board on its findings.




Mr T Ellis, an independent building consultant, with management experience of multi-storey building projects, was appointed to perform that enquiry. On 22 September 1988, almost two months after the Board had decided upon an independent enquiry, Mr Ellis' report was presented to the Board. His findings were, in summary:

"The total cost of the project to completion is assessed to be $122.5M.

The tower block should be ready for occupancy by Christmas 1988, with final completion likely to be by mid February 1989.

The reporting systems with respect to forecasting of time and cost to complete were inadequate.

The scheduling and co-ordination of activities linking documentation and construction had been inadequate.

There is no evidence of mismanagement of project costs." ()

(Mr Ellis' finding corroborates the opinion which I have already expressed about inadequacy of the management of the project).

The relevant Board Minute recorded Mr Ellis' major findings, but there is no mention of any further action which the Board initiated in consequence.() It is, however, true, as submitted to me by the non-executive directors, that by this late stage, there was very little effective action which the Board could have taken.




The ownership structure of the State Bank Centre development is represented diagrammatically in Appendix A.

This structure was specifically designed to enable financing of the development by a third party, and to keep the State Bank Centre off the Bank's balance sheet.

24.9.1 LAND

The land upon which the State Bank Centre is situated is currently owned by the following companies ("the land owning companies"):

(a) 91 King William Street No 1 Pty Ltd ("91 King William Street No 1") - formerly Emanuel (No 10) Pty Ltd.

(b) 91 King William Street No 2 Pty Ltd ("91 King William Street No 2") - formerly Emanuel (No 12) Pty Ltd.

(c) Bulwark Pty Ltd ("Bulwark").

The shares in the land owning companies are owned by Ollago Pty Ltd ("Ollago") as trustee for the Ollago Unit Trust. All future references herein to Ollago will be in its capacity as trustee for the Ollago Unit Trust. The ownership of Ollago is as follows:-

(a) 10 ordinary shares: Executor Trustee Australia Ltd as trustee for the Ollago No 1 Settlement Trust.

(b) 10 preference shares: Thomson Simmons Nominees Pty Ltd as trustee for the Ollago No 2 Settlement Trust.

The units in Ollago Unit Trust are held equally for the benefit of the same owners as Ollago.

The beneficiaries of the Ollago No 1 and No 2 Settlement Trusts are the Bank, any subsidiary of the Bank, any company in which the Bank has a substantial shareholding, and an eligible superannuation fund. Accordingly, beneficial ownership of the land lies effectively with the Bank Group.

The original project required the acquisition of three blocks of land. Two of these were owned by Emanuel (No 10) Pty Ltd and one by Emanuel (No 12) Pty Ltd.

An option to purchase three blocks was signed on 7 November 1985, with an expiry date of 6th January 1986. When the option was due to expire, agreements were signed to acquire the shares in the landowning companies rather than purchasing the land itself.

The reason for doing so was explained to the Board as follows:-

"The purchase of the land is due to be completed on the 4th April, 1986 and we have been advised to hold the shares in the companies owning the land in another company rather than directly by the Bank. This will provide greater flexibility and avoid a further transfer in the event that an off balance sheet situation is favoured as the eventual mechanism for ownership." ()

In addition, by purchasing the shares rather than the land there was a saving in stamp duty.

Subsequently, when the project was varied by the acquisition of Delmont Building, this property was acquired by using a shelf company - Bulwark Pty Ltd.

All of the land acquisitions were funded by the Bank providing facilities to Ollago and Bulwark.

The initial facility to Ollago was $7.0M, in April 1986, to enable the acquisition of shares in Emanuel (No 10) Pty Ltd and Emanuel (No 12) Pty Ltd and payout of loan funds used by those companies to acquire the land which was held in their balance sheets.

Ollago was also provided with a $10.0M facility for demolition and initial development costs.

In June 1986, Bulwark was provided with a facility of $1.0M to purchase the adjoining property known as Delmont Building.

Consequently, all land acquisitions were funded directly by the Bank's providing finance to acquire the land owning companies, and replacing any other existing funding within those companies.


Building demolition and construction progressed initially without external finance. Beneficial Finance, as the finance packagers, produced an Information Memorandum for distribution to prospective participants in the financing of the development.

The basis of this package was outlined in the Board Minutes of 25 September 1986:

"Funding of State Bank Centre

The paper providing an outline of the proposed financial package to fund the construction of State Bank Centre was noted.

It was proposed that a partnership of financiers be formed to construct the building and to obtain the tax benefit from the interest and depreciation costs.

The financing partnership would lease the land from Ollago and pay rent which would cover interest costs on the sum borrowed to purchase the land.

Funding for the initial construction would be provided to the partnership by loans from third parties. Interest would be capitalised and, upon completion, the partnership would repay the loan with equity and establish a lease over the remainder of the ten-year term for the total asset cost.

Net rental income received by Ollago from tenants was projected to adequately cover the lease rental payable to the partnership over the ten-year lease.

At the end of the lease term, the equity participants would retire from the partnership and the property owners would pay a "compensatory payment" estimated at $101.9m to the partners. The property owners would then own a building projected to be valued at $150m.

The proposed structure has been created by Beneficial Finance Corporation Limited and reviewed by R.J Rosenblum and Partners, Solicitors (Sydney), Thomson Simmons & Co. (Adelaide) and Arthur Anderson & Co. A confirmatory opinion from Queen's Counsel would be obtained before final commitment.

The proposal allows the Bank's profit to be unaffected by the development of State Bank Centre and at the end of the lease period, the Group may choose to own a building at a significant capital gain.

IT WAS RESOLVED that State Bank Centre be developed by a partnership of financiers through a package created by Beneficial Finance Corporation Limited, the final arrangements of which would be advised to the Directors for noting."

Documentation for this finance package was not completed until 19 March 1987 ie about ten months after the Board had formally approved the project.

During construction, funding was provided by the Bank of Tokyo, and all interest capitalised until completion, and then the temporary finance was repaid by funding provided by the State Bank Centre partnership ("the partnership"). The partnership comprised the following entities, which have provided the funding for the building:

[insert table here]

Kabani Pty Ltd ("Kabani") which is an off-balance sheet company associated with Beneficial Finance acts as nominee for the partnership.


The partnership, through Kabani, leases the land from the land owning companies and pays rental on a six monthly basis.

The partnership leases the building to Ollago and receives rental six monthly. In addition, the partners are entitled to a final "compensatory payment" at the end of the lease in 1996. This payment is ultimately guaranteed by the Bank.


Ollago sub leases the available office space in the State Bank Centre to the respective tenants who pay rental on a monthly basis.

24.9.5 SUMMARY

The original expectation was that, on completion of the project:

(a) Landowning companies would receive sufficient rental to pay interest on the borrowings to acquire the land.

(b) The financiers would receive an agreed rate of return and return of their funds by way of a "compensatory payment".

(c) Ollago would receive sufficient tenant rental income to meet all outgoings, including interest.

(d) In the event of a change in circumstances, the Bank would be able to sell the investment and make a capital gain.

At this point, it should be noted that, as to land ownership and the finance package, the Board received advice from professionals outside the Bank.




Earlier in this Chapter, I referred to the difficulties with the financial package adopted for the project.

It is now necessary to consider the circumstances in which that package was approved by the Board, and the appropriateness of that decision.


On 29 May 1986, the Board resolved to proceed with the State Bank Centre development.

On 26 June 1986, the Board resolved to establish a tax effective off-balance sheet company structure, as described in the paper submitted to it. Further details of financing arrangements were provided to the Board meeting on 25 September 1986. A Board Paper, prepared on 19 March 1987, was discussed at the Board meeting of 26 March 1987, which advised that the details of the financing package for the State Bank Centre development were executed on 19 March 1987.

Ten months elapsed between the decision to proceed and the finalisation of the financing arrangements. The documents for the final financing arrangements were executed seven days before the full details were presented to the Board.

It was suggested to me that there was no need to have arranged finance sooner, because the Bank itself could have carried the finance. I am of the opinion that such a course was imprudent for a project of this size.

The financing arrangements should have been finalised before construction began, and the Board should have been presented with a detailed feasibility review, which included financing arrangements.

Whilst the cost of funds raised under the eventual financing package was considered to be lower than could be obtained by other means, the financing package was based upon a number of assumptions that could reasonably have been expected to vary, and the impact of such variations should have been considered more carefully. Ultimately, the underlying assumptions did vary, resulting in the substantial additional cost to the Bank; the total cost cannot be ascertained until 1996 (as reported above).


The Bank has provided various guarantees under a funding package, which will ultimately require the Bank to provide funding to repay external financiers. Current indications are that this will result in significant losses being incurred by the Bank. These particular losses arise from the variation in the assumptions referred to previously.

By memorandum dated 12 December 1988, the Chief Manager Property advised the Managing Director that equity participants in the partnership financing the Centre had agreed to cover the cost over-run.

He continued:

"The lease payments and compensatory payment have been adjusted and are detailed below compared to the corresponding amounts at present were the extra equity not required.

The over-all cost of funds, as calculated by Beneficial Finance Corporation, is 12.628%.

[insert table here

The value of the building at the time the compensatory payment becomes due is estimated to be $236,900,000.

Net rental streams (fully occupied building) are estimated to cover the lease payments required under the financial package."

These figures caused the Managing Director to seek an independent overview and recommendation back to him as indicated in his memo of the same date:

"MEMO TO: Mr. T.L. Mallett

Mr. K.L. Copley

Mr K.P. Rumbelow

FROM: Managing Director



The attached memo from Peter Rumbelow is self explanatory.

The last information that I can recall on this subject was that we were to pay approximately $102 million 7 years from finish of the building, and that the building was then estimated to be worth something like $160 million.

There have been cost over-runs, but I was surprised to note from the attached memo that the amount to be paid 7 years from now is in the order of 163 million, while the value of the building is estimated to be then $237 million.

Apparently the cause for the escalation is the change in company tax rates and cost over-runs.

With due respect to Peter Rumbelow, his Property Department colleagues, and his advisers from Beneficial Finance, I would like an independent overview of the financing of State Bank Centre, and the appropriateness of our current programme.

. Should we change the basis for financing?

. Should we start subsidising the rental cost so as to reduce the payment 7 years out?

. Should we seek to sell the building now rather than holding it on our books?

In other words, I would appreciate a total overview of the State Bank Centre financing, with the three addresses signing off on a joint recommendation to me.

This matter should be kept confidential.

Tim Marcus Clark

December 13 1988"

The response was:

"MEMO TO: Managing Director

MEMO FROM: General Manager, Treasury & International

Chief Manager, Group Finance

Chief Manager, Property


DATE: 23rd December 1988

In response to your memo, dated 13th December 1988, we have completed an overview of the State Bank Centre financing arrangements.

The questions raised in your memo were also concerns raised by Peter Rumbelow and Damian DeLuca upon receipt of advice from Beneficial that the Bank's obligations had changed since the time this deal was put in place.

Particularly concerning was the increase in the compensatory payment from a previously advised $102.9m to $162.9m. The reasons for this increase need to be carefully understood in assessing the appropriateness of the funding arrangements currently in place.

The additional $15m sought added $36.4m to the Bank's overall obligation. We were advised by Beneficial that the marginal cost of these additional funds was slightly below current bank bill rates. An analysis completed by Trevor Mallett showed that the cost of these additional funds is approximately 13.8%, which is significantly lower than any alternative source of funds.

The major component of the increase in compensatory payment, however, arose due to the revision of assumptions that were made at March 1987 which, apparently were not advised by Beneficial at that time.

Specific revisions were:-

1) The reduction in the tax rate from 49% to 39%. This had the effect of raising the after tax cost of funds.

2) Increase in the cost of construction.

3) The projected mix of the tax deductibility of items being changed toward lower depreciation items.

4) The initial model had not included any capital gains liability on the compensatory payment to Westpac. It has since been included as a matter of prudence.

We are unable to quantify the effect of each of the above on the compensatory payment as Beneficial is reluctant to release details of the funding model. We can only rely on representations made to us by Beneficial.

It should be remembered that the equity participants have been guaranteed a minimum yield on their investment. As any of the variables move, the rental streams and the compensatory payment will vary accordingly to preserve that minimum yield. The Bank is not privy to the guarantees given to each of the equity participants.

The latest projections provided by Beneficial indicate that the overall cost of funds after the further advance of $15m is 12.628%. Again, this cost is considerably lower than current interest rates.

We have been assured by Beneficial that should any of the variables move in the Bank's favour, then this would result in a lower rental stream and lower compensatory payment.

To address your questions specifically:

1) Should we change the basis for financing?

Our recommendation would be no in that any available alternative would not only be costly to establish but would also be at a greater interest cost to the Bank. The agreements in place include penalty clauses for withdrawal, ie, increased payout sums to the equity participants.

2) Should we start subsidizing the rental cost?

If we were to do this, it would not alter the overall cost to the Bank in that the yield guaranteed to the equity participants remains constant.

3) Should we seek to sell the building?

The financing arrangements are such that the Bank does not own the building until the final compensatory payment is made to the equity participants.

Based on representations made by Beneficial, the Bank is committed to the present finance structure. While the arrangements could be unwound, it would be at a considerable cost.


In summary, the initial and compensatory payment advised $102.9m was only an estimate based on assumptions which were valid at March 1987.

Although the rentals and the compensatory payment have increased significantly, so have the cost of production and estimated value of the building at the purchase date.

Since March 1987, the compensatory payment increased by 58% compared to the increase in the value of the building over the same period of 55% ($153m to $236.7m).

Given that the present forecasts indicates an overall cost of funds of 12.628%, the Bank would be best placed to continue with the present arrangements.


General Manager, Chief Manager, Chief Manager,

Treasury and Group Finance. Property.


I have included the correspondence to illustrate the inadequate monitoring of the financing package by the Bank, and the lack of appropriate communication between Beneficial Finance and the Bank, when it must have become apparent that the "assumptions" had varied.

This inadequacy was unacceptable, and negligent, because the Bank was carrying the risk of the underlying guarantee. This should have moved the Bank to seek a full and detailed understanding of the financing arrangements.

Doubt still exists as to the certain taxation matters, which are not discussed in detail in this report, as they have not yet been dealt with by The Commonwealth Commissioner of Taxation.


On 25 October 1990, the Board considered a paper in relation to the State Bank Centre financing arrangements.

The lease payments by Ollago to the partnership exceeded the net lease rentals receivable from the end user tenants. This was primarily due to the following reasons:

(a) Rentals from tenants had fallen short of anticipated levels due to the granting of substantial lease incentives. This was brought on by the softening of office rental markets before the building was tenanted.

(b) The lease obligation to the partnership had increased substantially due to variations to some of the "assumptions" underlying the financial package which guaranteed a specific return to the partnership.

The major factors which caused the increase in the lease payments to the partnership were:

(a) The cost of constructing the building increased significantly from the initial estimate of $85.48 to $125.3M.

(b) Corporate tax rates changed from 49 per cent to 39 per cent reducing the tax effectiveness of the arrangement to the partnership. After the finalisation of the financing arrangements, there was a change in corporate tax rate from 49 per cent to 39 per cent. This was announced in May 1988, to take effect from 1 July 1988. Any long term package driven by taxation benefits should have considered the possible effect of changes in corporate tax rates.

24.10.4 SUMMARY

The original assumptions underlying the finance package did not provide sensitivity analysis to adequately cater for the impact of changes in variables. Consequently, the perceived capital gain from acquiring a building with a market value in excess of the "compensatory payment" is unlikely to eventuate, as evidenced by the entries made in the June 1991 financial records of the Bank. To effect the take up of the lease liability at 30 June 1991 on the basis of a worst case compensatory payment of $154.2M, and a current valuation of the building of $93.4M, the bank increased its loss for the financial year 1990-1991 by $41.2M, in addition to the $6.6M provision made in respect of Ollago and other entities directly funded.

The Bank relied upon Beneficial Finance's experience in respect of the financing package. It also obtained advice from accountants and solicitors. Although the changes will contribute to the Bank's eventual loss, I am not prepared to attribute fault to the Bank in this regard. To take the matter further would be outside my terms of appointment.





The State Bank Centre represented a substantial commitment of the Bank from early 1986, when the Board approved the development project. The financial statements of the Bank from 1986 to 1990 did not include any commitment or specific liabilities in respect of the development, as these were deliberately housed off-balance sheet in accordance with legal advice conveyed to the Board.

From March 1987 when the financing package was signed, the Bank guaranteed all commitments. These commitments included annual lease payments and a final "compensatory payment" due in April 1996. Due to the nature of the funding package, this figure can only be estimated, and at 30 June 1991 it was estimated at $154.2M. This balance was used to bring the finance lease liability on balance sheet at 30 June 1991. From 1987 until 1991 the financial statements of the Bank did not include any commitment (ie contingent) or liability in respect of the State Bank Centre.

The State Bank Centre was a material project which the Bank was committed to support by way of guarantees and ultimate payout of financiers.

Whilst legal opinion was obtained to specifically keep the State Bank Centre structure off-balance sheet, in substance the Bank had a substantial commitment which was not reflected in its financial statements either as a commitment (ie contingent) or an actual liability until 1991.


The rental received by the landowning companies from the partnership have been insufficient to meet interest costs on borrowings.

Ollago has each year had ongoing operating deficiencies because operating expenses have exceeded income. From October 1990, the Bank designated these advances as non accrual.

These companies could not survive without financial support from the Bank. Advances were, however, rolled over with interest capitalised until October 1990, when they became non accrual.

Appendix B outlines the net deficiency of shareholders funds for these companies over the period 1986-1991.

It is acceptable accounting practice to capitalise interest on development projects during construction, provided that ultimately the total cost will be recovered.

With the complex structure, however, the interest cost for the land owning companies was expensed resulting in significant losses in the off-balance sheet companies which could not be recovered. These losses, however, were not recognised by the Bank, as it continued to take up income and escalate loans which could not be recovered.


The financial statements for Ollago Pty Ltd, 91 King William Street No 1 Pty Ltd, 91 King William Street No 2 Pty Ltd and Bulwark Pty Ltd were not prepared in due time as 1986, 1987 and 1988 financial statements were all completed on 5 May, 1989 (with the exception of Bulwark Pty Ltd's 1986 accounts). Appendix C outlines the dates of signing by directors of the respective entities.

As the Companies (SA) Code requires accounts to be presented at an Annual General Meeting, I recommend that this matter be referred to the Australian Securities Commission for consideration as to what action may be appropriate.




The State Bank Centre project has cost the Bank much more than the original estimate. A proportion of that increased cost was due to change in the scope of the project. The increased cost due to the usual hazards of construction work, for example, delay due to weather, or due to disputation about heritage issues, is also understandable.

I question whether it was necessary to incur all the accelerated costs by way of, for example, overtime and additional labour in an attempt to finish the project by the end of 1988. There is clear evidence that the general rental market had weakened before that time. A commercial judgment was, however, made to continue in this vein, apparently in the belief that the particular rental market to which this project was addressed was still active and it would be unfair to criticise this decision in hindsight.

Not yet finalised are the increased costs to the Bank which will follow from the variations in the assumptions accepted by Beneficial Finance in its preparation of the financing package. The Management and the Board were, in my opinion, however, entitled to rely on the expertise that it was then believed Beneficial Finance possessed, which was backed by professional advice from legal practitioners and accountants.





As to my Terms of Appointment A (a), (b) and (c), on the basis of all the evidence available to me and for the reasons stated in this Chapter, in my opinion, the processes that led the Bank to acquire a significant asset that is non-performing ie the State Bank Centre, were inappropriate, and the Management of the Bank neglected to ensure that the Bank's interests were adequately protected in that:

(a) It did not obtain an independent audit of the relevant feasibility studies before the project was finally submitted to the Board for approval.

(b) It did not employ an experienced project manager with construction skills to act for the Bank.

(c) It did not clearly define the responsibilities of the consultants before project commencement.

(d) It did not resist project commencement until documentation was further advanced; that is, it allowed the project to be commenced when it was clear that necessary project documentation was incomplete.

(e) It did not insist that there were more detailed elemental cost budgets before project commencement, and more sophisticated cost forecasting systems.


For the reasons stated in this Chapter, as required by my Term of Appointment C, I am of the opinion, that this operation of the Bank was not adequately or properly supervised, directed or controlled by the Board of Directors of the Bank and the Chief Executive Officer of the Bank who were jointly and severally responsible.











1986 (283,359) (413) (413) (1,515) (285,700)
1987 (497,225) (795,665) (280,890) (102,250) (1,676,030)
1988 (1,192,682) (1,248,767) (429,102) (236,755) (3,107,306)
1989 (3,117,310) (1,672,810) (555,978) (403,150) (5,749,248)
1990 (10,488,958) (2,026,727) (648,027) (532,605) (13,696,297)
1991 Accumulated Losses (15,083,898) (2,155,801) (662,297) (716,314) (18,618,310)
Capital 20 2 2 2 26
Asset Revaluation Reserve   2,367,691 7,865,916 11,438 10,245,045
Shareholders Funds (Deficiency) (15,083,878) 211,892 7,203,621 (704,874) (8,373,239)




  1986 1987 1988 1989 1990
Ollago Pty Ltd/Ollago Unit Trust 05/05/89 05/05/89 05/05/89 23/03/90 31/01/91
91 King William Street No 1 05/05/89 05/05/89 05/05/89 21/03/90 31/01/91
91 King William Street No 2 05/05/89 05/05/89 05/05/89 21/03/90 31/01/91
Bulwark 28/08/86 05/05/89 05/05/89 21/03/90 31/01/91