OTHER MATTERS CONSIDERED
THE STATE BANK CENTRE PROJECT
24.2 THE SCOPE OF THE REVIEW
24.3 CHRONOLOGY OF EVENTS
24.4 COMMUNICATION WITH THE
TREASURER AND THE TREASURY DEPARTMENT
24.5 SUMMARY OF EVENTS TO MAY
24.6 PROJECT MANAGEMENT AND
24.7 PROJECT MONITORING AND
24.8 REVIEW BY INDEPENDENT
24.9 OWNERSHIP AND FINANCING
24.9.2 BUILDING CONSTRUCTION - FINANCING
24.9.3 LAND AND BUILDING LEASING ARRANGEMENTS
24.9.4 TENANT LEASING ARRANGEMENTS
24.10 FINANCING ARRANGEMENTS
24.10.2 DEVELOPMENT FUNDING AND FUTURE COMMITMENT
24.10.3 ONGOING FINANCIAL ISSUES
24.11 FINANCIAL REPORTING
24.11.1 THE STATE BANK
24.11.2 OPERATING SHORTFALLS OF OFF-BALANCE SHEET ENTITIES
24.11.3 ACCOUNTS OF OFF-BALANCE SHEET ENTITIES
24.12 FINDINGS AND CONCLUSIONS
24.13 REPORT IN ACCORDANCE WITH
TERMS OF APPOINTMENT
24.13.1 TERMS OF APPOINTMENT A
24.13.2 TERM OF APPOINTMENT C
A Group Structure
B Financial Position of Entities involved with the State Bank
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
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
(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
(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
(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.
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.
24.2 THE SCOPE OF THE REVIEW
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
24.3 CHRONOLOGY OF EVENTS
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.
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,
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
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
"... 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
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:
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."
"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
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
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
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
"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
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
"But the process
of going from there to actual constructability would be
normally six months of intense technical
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
The heritage issue, said Mr
"... 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
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
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.()
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
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
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
"IT WAS RESOLVED
. 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."
24.4 COMMUNICATION WITH THE TREASURER
AND THE TREASURY DEPARTMENT
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
Later there was correspondence
between the Managing Director and the Treasurer.
First, a letter from the
Treasurer, dated 24 March 1986.
"Mr Tim Marcus
State Bank of South Australia
Box 399 GPO
Dear Mr Marcus Clark
I refer to your letter
of 6 February 1986 and subsequent discussions on this
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
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
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
The Managing Director replied
by letter, dated 17 April 1986.
"The Hon, J.C.
Premier and Treasurer
State Administration Centre.
ADELAIDE S.A. 5000
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
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
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
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
* 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
* We agree that we
should consider major projects on "whole of
state" basis, and consistently take this
* We note your
comments concerning co-ordination, and will await
further advices from Treasury.
At the Board meeting of 29 May
1986 (when the Board resolved to proceed with the project),
the following note appears:
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.
24.5 SUMMARY OF EVENTS TO MAY 1986
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:
project commencement until documentation was further
3. Establishing more
detailed elemental cost budgets before project
commencement and more sophisticated cost forecasting
4. Performing an
independent audit of cost estimates at an early stage in
the project." ()
These conclusions support the
observations I have made above.
24.6 PROJECT MANAGEMENT AND CONTROL
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.
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
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
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
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:
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
"... 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
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,
"... 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
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
24.7 PROJECT MONITORING AND REPORTING
Between April 1986 and June
1989, the Board received a monthly report on the progress of
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:
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:
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
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.
24.8 REVIEW BY INDEPENDENT CONSULTANT
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
"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
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.
24.9 OWNERSHIP AND FINANCING STRUCTURE
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.
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
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
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)
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
All of the land acquisitions
were funded by the Bank providing facilities to Ollago and
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
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.
24.9.2 BUILDING CONSTRUCTION -
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
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.
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
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
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
24.9.3 LAND AND BUILDING
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.
24.9.4 TENANT LEASING
Ollago sub leases the
available office space in the State Bank Centre to the
respective tenants who pay rental on a monthly basis.
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,
(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.
24.10 FINANCING ARRANGEMENTS
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
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).
24.10.2 DEVELOPMENT FUNDING AND
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.
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,
[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
These figures caused the
Managing Director to seek an independent overview and
recommendation back to him as indicated in his memo of the
Mr. T.L. Mallett
Mr. K.L. Copley
Mr K.P. Rumbelow
FINANCING - STATE BANK CENTRE
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
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
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
Tim Marcus Clark
December 13 1988"
The response was:
General Manager, Treasury & International
Chief Manager, Group
Chief Manager, Property
FINANCING STATE BANK CENTRE
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.
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
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
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
1) Should we
change the basis for financing?
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?
arrangements are such that the Bank does not own the
building until the final compensatory payment is made
to the equity participants.
representations made by Beneficial, the Bank is
committed to the present finance structure. While the
arrangements could be unwound, it would be at a
In summary, the
initial and compensatory payment advised $102.9m was
only an estimate based on assumptions which were
valid at March 1987.
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.
T.L. MALLETT, K.L.
COPLEY, K.P. RUMBELOW,
General Manager, Chief
Manager, Chief Manager,
Treasury and Group
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"
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
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.
24.10.3 ONGOING FINANCIAL
On 25 October 1990, the Board
considered a paper in relation to the State Bank Centre
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
(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.
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
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.
24.11 FINANCIAL REPORTING DISCLOSURE
24.11.1 THE STATE BANK
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
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.
24.11.2 OPERATING SHORTFALLS OF
OFF-BALANCE SHEET ENTITIES
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
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
24.11.3 ACCOUNTS OF OFF-BALANCE
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
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.
24.12 FINDINGS AND CONCLUSIONS
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
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.
24.13 REPORT IN ACCORDANCE WITH TERMS OF
24.13.1 TERMS OF APPOINTMENT A
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
(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
(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
(e) It did not insist that
there were more detailed elemental cost budgets before
project commencement, and more sophisticated cost
24.13.2 TERM OF APPOINTMENT C
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.
INSET APPENDIX A FROM HARVARD
FINANCIAL POSITION OF ENTITIES APPENDIX B
INVOLVED WITH THE STATE BANK CENTRE
|NET DEFICIENCY OF SHAREHOLDERS
|91 KING WILLIAM STREET (NO 1)
||91 KING WILLIAM STREET (NO 2)
DATES OF APPROVAL OF ANNUAL
FINANCIAL STATEMENTS APPENDIX C
FOR ENTITIES INVOLVED WITH THE STATE
Pty Ltd/Ollago Unit Trust
King William Street No 1
King William Street No 2