TfNSW's acquisition of 4–6 Grand Avenue for a suitable price in Camellia was consistent with the PLR project objectives

In 2014, a feasibility study for the PLR identified 4–6 Grand Avenue as one of several options suitable for a stabling and maintenance depot. The study found that a centrally located stabling and maintenance facility would be required for all routes serving the Parramatta CBD, and that the Camellia industrial area was a preferred location for such a facility. As such, the acquisition of the 4–6 Grand Avenue site in Camellia was consistent with the PLR project objectives.

However, the work to acquire the site occurred in advance of the PLR project officially commencing and before many of the processes that usually come with the initiation of a project, such as a property acquisition strategy. TfNSW recognised the risks associated with early acquisition and had considered the option of disposing of the site should it ultimately not be required.

TfNSW acquired the site by agreement with the then landowner, which is consistent with the requirements of the Land Acquisition (Just Terms Compensation) Act 1991

One of the objects of the Land Acquisition (Just Terms Compensation) Act 1991 ('the Act') is to encourage the acquisition of land by agreement instead of compulsory process. In this regard, TfNSW’s acquisition of 4–6 Grand Avenue site by negotiation and agreement with the landowner is consistent with the terms and the objects of the Act. Further, TfNSW's efforts to seek ministerial approval for compulsory acquisition should negotiations break down is also consistent with the Act.

Grand 4 Investments wanted to finalise the transaction quickly, and TfNSW did not escalate risks arising from this

Grand 4 Investments was a special purpose vehicle (a type of business entity with a specific purpose) created and controlled by the owners of Billbergia specifically for its purchase of 4–6 Grand Avenue.
In March 2016, TfNSW approached Grand 4 Investments regarding its interest in 4–6 Grand Avenue.

Grand 4 Investments advised TfNSW that it was seeking tenants for the site. In line with the requirements of the Act, TfNSW would have had to pay more in compensation if Grand 4 Investments had leased the site. Grand 4 Investments pressed TfNSW to finalise the transaction on the basis that a tenancy agreement was imminent. There is no evidence that TfNSW sought verification from Grand 4 Investments or any other source regarding the existence of prospective tenants.

Pressure applied by the vendor to hasten the transaction is a risk that TfNSW staff should have escalated to TfNSW’s executive leadership. It did not.

TfNSW did not obtain comprehensive, independent valuation advice to support its assessment of market value before it acquired 4–6 Grand Avenue

The Act requires compensation to be based on the market value of the land. It was not until the date of settlement for the property acquisition, 15 June 2016, that TfNSW engaged an independent valuer to assess the market value of 4–6 Grand Avenue.

On 24 October 2016, the independent valuer provided a draft of its formal valuation report to TfNSW. On 23 November 2016, TfNSW received the final formal valuation report.

TfNSW's failure to obtain an independent professional valuation prior to the acquisition breached its own policies and does not support the requirements of the Act that market value guide compensation. The absence of independent valuation prior to purchase exposed TfNSW to the risk that the price it paid exceeded market value.

TfNSW instructed the independent valuer to exclude consideration of environmental contamination

When TfNSW commissioned an independent valuation of 4–6 Grand Avenue, it instructed the valuer to:

• Conduct a market valuation on an ‘as is’ basis – with market value based on the methodology described in the Act. This approach valued the site at $25.0 million.
• Conduct a second market valuation, made on a speculative development basis – with market value based on the financial value of the vendor's intended use of the site which, in this case, involved leasing the site for industrial use. This approach valued the site at $52.0 million. TfNSW advised us that this valuation retrospectively supported the purchase price.
• Disregard any known or unknown site contamination for both valuations.

The site is affected by significant environmental contamination and this was known at the time of the acquisition. Accordingly, the instruction to disregard any contamination resulted in a valuation that overstated the value of the site by excluding the cost of environmental remediation.

TfNSW staff did not have formal approval when they made an offer of $53.5 million to Grand 4 Investments

On 21 April 2016, TfNSW offered Grand 4 Investments $53.5 million for the site, with TfNSW assuming responsibility and liability for remediation.

The Technical Director Project Property Services, who was acting as lead negotiator, was not guided by acquisition terms or funding limits. There was no negotiation strategy in place, nor any documented or agreed funding limits, terms or conditions to support the offer made. Neither TfNSW's Finance and Investment Committee (FIC), nor any other appropriately delegated person, had authorised terms or funding limits for the acquisition. The absence of an independent professional valuation during the negotiation exacerbated these gaps in acquisition and negotiation plans.

In the absence of approved funding for the PLR project, the Acting Deputy Secretary who approved the acquisition did not have delegation to do so

On 29 April 2016, the Acting Deputy Secretary, Infrastructure and Services, approved the acquisition. The Acting Deputy Secretary did not have delegation to approve the acquisition because it was conducted in advance of an approved business case and associated funding for the PLR. As such, any property acquisitions for the PLR required specific funding approval from FIC.

TfNSW accepted responsibility for the environmental remediation, but did not assess the environmental contamination risks or seek independent expert advice

TfNSW was aware of contamination issues affecting the land and had access to considerable information about the environmental conditions, such as site environmental audit reports and information on the NSW EPA's contaminated land register. However, TfNSW did not seek to inform itself of the implications of this, including the likely costs for remediation. When TfNSW changed its position from not being willing to accept the risks and costs of contamination, to acquiring the site unconditionally and accepting the costs associated with contamination, it did so without any specific information about what these costs could be. There is no documented or clear basis for this decision.

The acquisition was also not supported by a comprehensive and up-to-date risk management plan. A risk management plan could have identified risks that impacted on value for money and may have supported clearer and more robust decision-making around issues such as probity management and contamination risks.

The cost of remediation has been significant, which diminishes the value of the land at the time of acquisition

At the time of this report, TfNSW has entered into contracts worth $106.9 million for environmental remediation of the site, ground improvement works and other remediation-related consultant costs, such as EPA site auditors. Out of the total forecast cost of $106.9 million, TfNSW has incurred $105.9 million to date, with the majority spent on remediation.

Briefings omitted key information to inform prudent decision-making, and there is no evidence that decision-makers queried gaps in the advice they received

At the time of the acquisition, TfNSW's FIC was responsible for making decisions on funding allocations at a whole of program level within TfNSW. FIC was also responsible for approving ‘High Risk/High Value’ variations to program budgets. FIC comprised the Secretary and Deputy Secretaries of TfNSW.

Exhibit 6 on page 33 contains a description of TfNSW’s investment decision thresholds.

On 16 May 2016, FIC considered an out-of-session request to approve the release of $53.5 million for the purchase of 4–6 Grand Avenue.

The briefing note considered by FIC, recommending the release of these funds, was signed by the then Deputy Secretary, Finance and Investment. This briefing note:

• included a high-level description of the property, the price being offered and the fact that the Strategic Business Case for the PLR had not been completed
• stated that TfNSW was forecasting a capital underspend of $258 million for the financial year with likely further deterioration
• remarked that ‘TfNSW will need to undertake remediation works to obtain a Site Audit Statement’ and that the request for funding did not include remediation, fencing or operating expenditure.

This briefing note followed a business paper submitted on 29 April 2016 by the Acting Deputy Secretary, Infrastructure and Services. The business paper sought release of funding of $80.2 million for the ‘purchase and remediation of a site at Camellia to be used as a stabling facility for the Project.’ The $80.2 million comprised $53.5 million for property acquisition and $26.7 million for remediation and other costs. However, the briefing note ultimately considered by FIC replaced this business paper, and did not include the request for $26.7 million. FIC's consideration of remediation and operation costs for the site was postponed pending approval of the PLR business case in 2016–17.

Both the 29 April 2016 business paper and the briefing considered by FIC on 16 May 2016 were silent on a number of important matters that were relevant for FIC to consider, including:

• explanation of the 40 per cent increase in purchase price between November 2015 and May 2016 - from $38.15 million to $53.5 million
• an evidence-based estimate of costs required to remediate the site as TfNSW had changed its earlier position and were accepting all responsibilities and liabilities for environmental contamination
• advice that an independent valuation had not been obtained
• advice that TfNSW did not follow its own internal procedures (such as having updated due diligence checklists)
• advice that Grand 4 Investments were applying pressure to finalise the transaction rapidly, including context with respect to Grand 4 Investment's comment regarding a ‘highly political circumstance’.

On 16 May 2016, FIC members were emailed to request their out-of-session consideration for the release of $53.5 million for the purchase of 4–6 Grand Avenue. FIC members were provided less than two hours to vote on the proposal and they approved the release of funding that day. Four (of six) FIC members voted to approve the proposal. The Secretary and Deputy Secretary, Freight Strategy and Planning did not vote.

There is no evidence that FIC members queried the quality of advice they were provided when they made the decision to fund the acquisition, nor that they considered the balance of opportunities and risks of the acquisition.

TfNSW did not keep complete or comprehensive records of negotiations or decisions, reducing transparency of the process and outcomes

Email records indicate frequent interactions between TfNSW officers and Grand 4 Investments staff between 6 April and 21 April 2016.

In our assessment, TfNSW’s records did not contain sufficient information on participants in meetings and discussions, nor on negotiation terms agreed or discussed – including price and conditions. Also, TfNSW's documentation refers to phone calls with Grand 4 Investments, but matters or details discussed in these calls were not documented.

There is also limited documentation of discussions and direction with senior leaders and central areas within TfNSW (including the Project Director and the Finance area) informing and authorising the negotiations.

The probity management controls and assurances in place for the acquisition were inadequate given the probity risk profile of the transaction

The purchase was a high-risk, high-value acquisition undertaken without some of the standard project controls and in an environment of volatile property market conditions. Specific risk factors that are relevant include:

• a high value transaction where market testing is difficult
• a transaction undertaken in a short timeframe, under significant pressure.

TfNSW should have obtained independent specialist probity advice or assurance. It did not.

Officers advised that they complied with TfNSW expectations regarding probity management. However, TfNSW did not have any probity policies to inform these expectations beyond a conflict of interest policy. TfNSW's records include only one conflict of interest declaration, despite more officers being involved with the acquisition including in dealings with the landowner. TfNSW's lead negotiator did not complete a conflict of interest declaration.

TfNSW's probity and record keeping practices for this transaction were insufficient in addressing the risks of potential misconduct or corruption. The insufficient probity practices and gaps in documentation mean that we are unable to exclude the possibility of misconduct or maladministration.

TfNSW did not appropriately respond to risks of corruption, misconduct or maladministration when they were brought to the agency’s attention

Following media enquiries in February 2019, TfNSW became aware of the potential for probity or integrity issues with the transaction.

In response to these enquiries, TfNSW’s Workplace Investigations section identified several potential fraud and corruption risks. Subsequently, TfNSW staff considered whether to conduct an Internal Audit or misconduct investigation. The Director of Audit and Risk noted that an Internal Audit would be unlikely to detect wrongdoing unless the audit included a ‘deep dive’ component. TfNSW commissioned an internal audit in connection with the transaction in 2019. That internal audit did not contain a 'deep dive' component that would respond to the identified fraud and corruption risks.

The then Deputy Secretary, Infrastructure and Place, made the decision to conduct the internal audit on the basis ‘that an internal audit was the most appropriate initial course to identify whether the decision to purchase the land at 6 Grand Avenue, Camellia had been made in accordance with [the] requirements of policy.’ He stated:

I believed that until an internal audit had been conducted, an investigation could not be appropriately directed to a task or tasks. There was no allegation of misconduct.

The internal audit identified a high-risk deficiency in the control framework for commercial land acquisitions that exposed TfNSW to an increased risk of fraudulent activity and high probability of financial loss.

Notwithstanding the internal audit findings, TfNSW has not conducted any other investigation or review to assess whether those risks were realised in the acquisition of 4–6 Grand Avenue. It would have been reasonable, having regard to queries made to the Department and the internal audit findings, for TfNSW to conduct an independent investigation to identify whether these risks eventuated and whether they were systemic across the land acquisition function within the agency.

At the time of the transaction, TfNSW property acquisition policy framework was not sufficiently risk focussed and did not provide clarity on when staff should apply prescribed guidance

At the time of the acquisition, TfNSW had property acquisition policies and procedures in place. Each of these were broadly sound in their content and intent. However, in many respects they lack specificity on how or when to apply guidance, and when risk levels should elevate the importance of recommended guidance.

In the case of the acquisition of 4–6 Grand Avenue, key aspects of these policies and procedures were not followed, including in connection with due diligence about the site being acquired, and in connection with the requirement to obtain an independent specialist valuation prior to completing any acquisition.

TfNSW's key guidance was principles based and relied on agency staff using their experience and expertise to apply guidance according to the circumstances of an individual transaction. This guidance was not duly applied in this acquisition. In addition, there was no quality or control assurance to identify when TfNSW officers did not apply important policies or processes.

TfNSW's policies and procedures are more focussed on acquiring land to meet project needs and timeframes, and less on assuring value for money and managing risks

TfNSW’s primary focus in undertaking a property acquisition is to achieve vacant possession of the land in a timeframe that meets the need of the relevant project and in compliance with the Land Acquisition (Just Terms Compensation) Act 1991. There is much less specific focus on the need to meet the requirements of the NSW Government financial management framework as outlined in the Government Sector Finance Act 2018.

Principles and requirements from the Government Sector Finance Act 2018 relevant to this transaction include sound financial risk management, transparency and accountability, as well as the efficient, effective and economical use of government resources. TfNSW’s Land Acquisition Practice Note does not refer to these principles and requirements, and TfNSW’s briefing notes seeking approval for the acquisition did not document how value for money was obtained.

TfNSW’s land acquisition policies require clarification on the interaction between the two pieces of legislation, to reinforce the importance of demonstrating value for money while achieving project outcomes.

Many of the gaps in policy and procedure guidance noted throughout this report remain gaps in TfNSW guidance at the time of this audit

The TfNSW policies, procedures and guidance associated with property acquisitions consist of a wide range of guidance notes, guidelines, standards, practice notes, templates, checklists, fact sheets, brochures, explanatory notes and other documents. In total there are 75 separate documents, some developed by TfNSW and others developed by NSW Government agencies such as NSW Procurement. It is difficult for agency staff to efficiently search these documents for guidance in specific circumstances.

The majority of these documents are substantially unchanged from 2016, with only minor updates.

In December 2019, the NSW Government abolished Roads and Maritime Services (RMS) as a separate statutory entity and integrated legacy RMS functions into TfNSW. Both predecessor agencies had their own property acquisition guidance.

Currently, most land acquisitions within TfNSW are managed in accordance with legacy RMS guidance. Our assessment of the RMS guidance indicates that it provides more comprehensive advice and direction, including guidance on how to manage specific circumstances. It also includes the requirement for ‘annual compliance monitoring of acquisition matters’, with limited direction on how this monitoring should be directed or undertaken. Our audit did not seek to examine how effectively the RMS legacy guidance is applied because it was not used for the acquisition of 4–6 Grand Avenue.

TfNSW advised that an integrated suite of property acquisition policies is in development and will be finalised this year. TfNSW further advised that, at the time of this audit, two acquisitions are being carried out under the existing TfNSW policies.

By December 2021, the Minister for Transport and Roads should:

1. take necessary steps to ensure that the deficiencies identified in this audit are not systemically diminishing Transport for NSW's effective and ethical stewardship of public resources.

By December 2021, Transport for NSW should:

2. ensure that an independent investigation is conducted to identify whether the acquisition of4–6 Grand Avenue was affected by maladministration, fraudulent activity or misconduct

3. ensure its policies and procedures for land acquisitions include the following:

• an assessment of risk for each acquisition
• the requirement for property specific acquisition plans to be established and approved by the Project Director for all medium risk or high value property acquisitions (and the responsible Deputy Secretary for all high-risk property acquisitions), which include:
  • an approved business case
  • the options analysis for possible properties to define why the property is preferred
  • a negotiation strategy
  • a risk management plan for risks associated with the acquisition
• the requirement for independent, and appropriately scoped, valuation to be obtained and utilised to establish a compensation amount for all acquisitions
• the requirement for a due diligence report to be prepared that supports executive consideration of all proposals for approval of land acquisition offers, and terms and conditions
• the requirement for submissions for approval for acquisitions of land to clearly disclose all anticipated costs (including the costs to remediate and manage contamination)required to be incurred to allow a site to support the intended use
• guidance in the commissioning and instructing of valuers for valuations to support acquisitions
• guidance on the minimum requirements for due diligence reports
• specific probity requirements and procedures for land acquisitions, including any increased procedures for high-risk acquisitions. This should include guidance on when to utilise probity advisers and/or auditors

4. establish a controls assurance process to ensure compliance with key policies and procedures for high-risk or high-value land acquisitions

5. design its land acquisition policy framework to be comprehensive and accessible

6. provide clarity on the interaction between the Land Acquisition (Just Terms Compensation) Act 1991 and the Government Sector Finance Act 2018 and reinforce the importance of achieving value for money from government expenditure while also supporting project outcomes

7. improve accountability and transparency by establishing a consistent process for members of senior committees to make, and record, queries when considering matters out-of-session.

The Parramatta Light Rail (PLR) is a significant infrastructure project intended to serve Western parts of the Sydney region.

The PLR will connect Westmead to Carlingford via the Parramatta CBD and Camellia with a two-way track spanning 12 kilometres. It is expected to open in 2023. The current route, which was announced in February 2017, will link Parramatta’s CBD and train station to the Westmead Health Precinct, Cumberland Hospital Precinct, the Bankwest Stadium, the Camellia Town Centre, the proposed science and technology museum Powerhouse Parramatta, the private and social housing redevelopment at Telopea, Rosehill Gardens Racecourse and three Western Sydney University campuses.

On 17 November 2020, the Minister for Transport and Roads, the Hon. Andrew Constance, requested the Auditor-General conduct an audit under section 27B(3)(c) of the Public Finance and Audit Act 1983 (PFAA).

The minister requested that the audit focus on whether:

• Transport for NSW conducted an effective process to purchase 4–6 Grand Avenue, Camellia and
• Transport for NSW has effective processes and procedures to identify and acquire the property required to deliver the NSW Government’s major infrastructure projects.

The audit assessed the acquisition against the following criteria:

1. Transport for NSW’s acquisition of the 4–6 Grand Avenue was consistent with the objectives for the Parramatta Light Rail project.
2. Transport for NSW’s acquisition of the 4–6 Grand Avenue was consistent with the requirements of the Land Acquisition (Just Terms Compensation) Act 1991.
3. Transport for NSW identified and managed risks relevant to the acquisition of the Camellia property, and considered reasonable alternatives to the purchase:
   1. Sub-criteria: effective governance arrangements to support identification and management of risk.
   2. Sub-criteria: effective processes to support identification and management of risk in the acquisition of complex parcels of land.
4. Transport for NSW had effective probity processes throughout the acquisition of the Camellia property.
5. Transport for NSW had policies, processes and systems in place that supported the effective acquisition of the Camellia property and the demonstration of value for money for government expenditure.

Consistent with the request from the Minister for Transport and Roads that forms the basis for this performance audit, the scope of the audit was limited to the single transaction, being the acquisition of 4–6 Grand Avenue, Camellia and the processes and procedures that were in place at this time.

TfNSW did not use an acquisition plan when purchasing the site

TfNSW did not prepare a dedicated Acquisition Plan for 4–6 Grand Avenue at any point between first considering engagement in the Expression of Interest process in early 2015 and completion of the acquisition in June 2016.

Amongst the templates and tools available to support TfNSW property acquisitions is an ‘Acquisition Plan’ to guide the acquisition of a specific property. The Acquisition Plan's purpose is ‘to outline a practical plan for … acquiring the property’ and defines risks, due diligence requirements and an acquisition schedule and cost model. The Acquisition Plan is not a mandatory tool to be used for all acquisitions.

A land acquisition is essentially a procurement. The NSW Government Procurement Policy Framework guides agencies to complete rigorous planning, including in connection with:

• a proposed method for approach to market
• a risk management plan
• a description of how ‘value for money’ will be assured, especially when conducting direct negotiations
• a plan for how probity will be maintained
• an estimated cost for the acquisition.

In an environment of market volatility, TfNSW should rely on good planning when acquiring property.

The acquisition was not supported by a sound or comprehensive risk management plan

TfNSW’s risk management policy requires that major initiatives are supported by the identification and management of risks, and that risk management documentation is maintained and up-to-date through the conduct of the initiative.

TfNSW repeatedly used two summary ‘risk and mitigation’ documents in briefings to decision-makers that were disproportionately focussed on project risks relating to stakeholder management, timely decision-making and benefits management. These documents had a limited focus on risks relating to environmental contamination, value for money or probity. In both cases, environmental contamination was noted as a risk, with the mitigation being to ensure that the landowner addressed the cost of remediation. Ultimately, this was not the approach taken in the 4–6 Grand Avenue acquisition as TfNSW accepted all responsibilities and liabilities associated with remediating the contaminated site.

Neither risk document identified the risk of not achieving value for money or managing probity appropriately. There was no operational risk management plan to guide the management of risks associated with the acquisition.

It appears that TfNSW focussed on project delivery at the expense of good governance and value for money considerations. Risks that impacted on project delivery schedules were the matters that received close attention.

The acquisition was not supported by external professional expertise beyond a legal adviser

The only external professional advice or support obtained as part of this acquisition was a legal adviser who TfNSW commissioned to draft the Deed of Acquisition, Compensation and Release.

In other major property acquisitions undertaken by government that we have considered, it is common for project teams to seek support in the form of:

• commercial advice
• property strategy and transaction advice
• valuation support (which TfNSW did not obtain until after the acquisition was complete, as discussed earlier in this report)
• professional negotiation support where negotiations are lengthy, complex or challenging
• legal advice
• advisers in particular domains (such as environmental risk).

The use of contractors and consultants should always be well-justified and cost-effective, and will not be necessary nor valuable in all cases. That said, in instances where acquisitions are high-risk or high-value, and where there are small (albeit experienced) teams driving a complex acquisition such as this, proper risk mitigation should be guided by external expertise to provide an additional or alternative opinion on key decisions in a transaction.

At the time of making an offer of $53.5 million to Grand 4 Investments, neither FIC nor any other appropriately delegated person had authorised terms or funding limits for the acquisition

As the acquisition was being undertaken in advance of the approved business case and associated funding for the PLR, any property acquisitions required specific funding approval from FIC.

In March 2015, FIC provided authorisation for TfNSW to submit offers in the Expression of Interest process up to a limit of $30.0 million, with a risk management plan that advised of an intention to not accept responsibility for the existing contamination of the property. As noted earlier, TfNSW was ultimately unsuccessful in its attempts to acquire 4–6 Grand Avenue through the Expression of Interest process and on 25 September 2015 Akzo Nobel sold the site to Grand 4 Investments.

In March 2016, TfNSW approached CBRE, the agent that managed the 2015 EOI process, to organise a meeting with Grand 4 Investments.

On 1 April 2016, TfNSW met with Grand 4 Investments to discuss the possibility of acquiring the site through agreement.

On 15 April 2016, Grand 4 Investments advised TfNSW that it expected $75.0 million for the site.

On 21 April 2016, TfNSW offered Grand 4 Investments $53.5 million for the site, with TfNSW assuming responsibility and liability for remediation.

The Technical Director Project Property Services, who was acting as lead negotiator for TfNSW, was not aware of the acquisition terms or funding limits. On 18 April 2016, three days prior to issuing the letter to the landowner offering $53.5 million (exclusive of GST) for the property, the Technical Director Project Property Services wrote to the PLR Project Director:

Do we have approval to make an offer in excess of the current FIC approval? If not do you need another BN (briefing note)? and who would be approving?

The PLR Project Director's response to this email did not provide a clear approval path, instead noting:

I take it that we have to proceed with the CA (compulsory acquisition) now?

On 28 April 2016, after issuing the offer, the Technical Director Project Property Services sought the following approvals. These approvals were the first formal engagements with delegates or oversight committees since the 2015 approval to participate in the EOI process:

• On 28 April 2016, the Technical Director Property Project Services submitted a briefing note to the delegated Acting Deputy Secretary, Infrastructure and Services seeking approval to acquire 4–6 Grand Avenue for $53.5 million (exclusive of GST) and requesting approval for the Project Director to sign the Deed and Contract of Acquisition. On 29 April 2016, the Acting Deputy Secretary approved the briefing note.
• On 29 April 2016, the Acting Deputy Secretary Infrastructure and Services submitted a business paper to FIC seeking release of funding of $80.2 million for the ‘purchase and remediation of a site at Camellia to be used as a stabling facility for the Project’. The $80.2 million comprised $53.5 million for property acquisition and $26.7 million for remediation and other costs.

On 13 May 2016, the Deputy Secretary Finance and Investment submitted a briefing note to FIC regarding the 29 April 2016 business paper. FIC's consideration of the acquisition was based on this briefing note, which recommended that FIC approve the request of $53.5 million for the purchase of the property. The briefing note did not include the request for $26.7 million as there was no immediate need to operate and remediate the land.

Briefings to delegates for approval of the acquisition did not contain important information

In addition to the briefing notes described above, the following were provided to delegated officials during the attempts to acquire the 4–6 Grand Avenue site during 2016:

• Briefing to the Minister for Transport and Infrastructure dated 19 April 2016 seeking approval to acquire the 4–6 Grand Avenue site by compulsory acquisition.
• Briefing to the Executive Director of Finance dated 4 May 2016 seeking approval for payment of the initial ten per cent payment under the Deed and Contract for Sales, and allocation of funds to pay the residual 90 per cent of the agreed amount for the acquisition of the 4–6 Grand Avenue site.

All briefing notes to decision-makers for the 4–6 Grand Avenue acquisition were silent on a number of important matters, including:

• an explanation of the rationale and/or evidence for the 40 per cent increase in purchase consideration between November 2015 and May 2016
• an explanation of the rationale for the change in approach to remediation from it being the vendor’s responsibility in 2015 as part of the Expression of Interest process, to it being accepted as TfNSW’s responsibility as part of the acquisition in 2016
• an estimate of potential cost required to remediate the site. This is important as it provides greater clarity on the true cost of the acquisition of the property, being the acquisition cost and the costs to remediate it to a state where it can be used as a stabling and maintenance depot
• advice that an independent valuation of the property had not been obtained, inconsistent with TfNSW policy or procedures
• an estimate of the alternative costs that may be associated with a compulsory acquisition, which may have been less than the price TfNSW paid for the site
• advice that Grand 4 Investments were applying pressure to finalise the transaction rapidly, including context with respect to Grand 4 Investment's comment regarding a ‘highly political circumstance’.

The inclusion of the above information would have helped to ensure diligent and professional decision-making and may have assisted in managing some of the risks that have emerged since the acquisition.

By considering the proposal out-of-session, and with insufficient information, FIC failed to conduct prudent and reasonable due diligence for the acquisition

At the time of the acquisition, TfNSW's FIC was the most senior governance committee within TfNSW responsible for making decisions on funding allocations at a whole of program level within TfNSW. FIC was also responsible for approving ‘high-risk/high-value’ variations to program budgets. FIC comprised the Secretary and Deputy Secretaries of TfNSW.

Exhibit 5 provides a summary of key events relating the approval of the acquisition.

TfNSW’s processes require completion of due diligence in any property acquisition

TfNSW’s Land Acquisition Practice Note (4TP-SD-071/2.0) states that due diligence is essential to understand the property being acquired, including to confirm its suitability for the project, as well as to inform the acquisition. It further suggests (although does not mandate) that a Land Purchase/Site Report and Due Diligence Checklist ‘should be completed prior to entering any formal acquisition agreement’.

The accompanying Property Acquisition Due Diligence Guide Note advises that:

Legal, physical and investigative due diligence should start once the parties have settled terms in principle and normally after a term-sheet has been signed. Subsequently more detailed asset and structural enquiries and reports should be undertaken, but it should be remembered that many (sic) individual reports will take time to prepare and sufficient period therefore allowed for further investigation or to deal with issues arising.

The Acquisition Due Diligence Checklist is an extensive tool which allows the recording of the conduct of:

• engineering due diligence (including legislation and licenses, maintenance contracts, building surveys, tenancy compliance and relevant regulatory issues)
• environment due diligence (including consideration of heritage issues, contamination of the site, hazardous substances, materials and waste, amenity and relevant legislative requirements)
• financial due diligence (including lease arrangements, charges against the land and tenancies)
• legal due diligence (including consideration of title, encumbrances, licenses, services, surveys and encroachments, access, zoning, notices from authorities, legislation and licenses, insurances, tenancies, planning issues, health and safety matters, taxation, nuisance and relevant court proceedings)
• management due diligence (including advice from authorities such as in connection with flooding risk, maintenance contracts and tenancies).

While not all of these matters are relevant to every acquisition, the majority did have some relevance to 4–6 Grand Avenue.

TfNSW did not complete due diligence checklists and reports for this acquisition

Officers obtained access to a range of materials in connection with the site in their due diligence activities. As part of the Expression of Interest process, TfNSW had access to a ‘data room’ facilitated by the then landowner which contained materials such as title information and various technical reports and site audit statements relating to environmental contamination.

TfNSW provided numerous documents related to the property which may have been obtained and considered as part of a due diligence process. However, there is no evidence that TfNSW exercised complete and comprehensive due diligence to inform the transaction.

In particular, TfNSW did not prepare a Land Purchase/Site Report nor a Due Diligence Checklist for the site acquisition as part of either the Expression of Interest process in 2015 or the acquisition in 2016. TfNSW relied on officers' familiarity with this detail when considering and summarising their understanding in final submissions for approval to acquire.

A key component of the due diligence for 4–6 Grand Avenue should have been a deep understanding of the environmental contamination issues associated with the site. There was an awareness of potential contamination risks in the Camellia region, which was noted in the feasibility study. Since 1989, the site has been registered on the NSW Environment Protection Authority’s contaminated land register. In addition, the then Department of Planning had undertaken its own study into the contamination in the Camellia area in 2015 to inform its precinct planning. This study found:

As a result of its long industrial history, contamination is a key issue for redevelopment of the Precinct. Significant areas of the Precinct are impacted by contaminants such as asbestos, hexavalent chromium and other hazardous substances. A number of properties in the Precinct are under some form of statutory remediation management.

The study noted that 4–6 Grand Avenue was one of the properties under statutory remediation management.

Officers leading the acquisition in 2016 advised that they did not analyse or summarise the various technical contamination and environmental reports to which they had access. We were advised that there was an intention to obtain specialist support to review and summarise the reports and information that was available related to environmental risks and contamination. However, TfNSW did not commission this work until after the acquisition was complete.

The negotiation was not informed by any form of negotiation plan or strategy

The negotiation of the final terms of the acquisition was undertaken via a series of meetings and phone calls between the TfNSW Technical Director Project Property Services and a representative of Grand 4 Investments, commencing with an initial meeting on 1 April 2016 and culminating in an offer letter on 21 April 2016. There were further negotiations on detailed terms after the offer letter was submitted, including in relation to the settlement period, prior to approval of final terms being sought from FIC on 13 May 2016 (and FIC consideration on the 16 May).

On 18 April 2016, three days prior to the TfNSW making an offer to Grand 4 Investments, the Project Director advised the Technical Director Project Property Services that:

I discussed this with the secretary last week who made it clear that a fair and reasonable price would need to be demonstrated.

Beyond this, there was no negotiation plan or specific direction to influence this negotiation.

The NSW Government is aware of the risks associated with direct negotiation with private sector organisations. Both NSW Procurement (a trusted strategic adviser in government) and the Independent Commission Against Corruption (ICAC) note that ‘negotiations carry higher risks, particularly around corruption and demonstrating value for money’. Negotiations can be particularly challenging when the counterparty is highly experienced in commercial negotiation and well resourced, as was the case in this instance.

Negotiation planning and key negotiation controls are recommended in these instances to protect both the agency as well as officers involved. Negotiation plans typically include:

• acceptable prices to pay
• negotiation features that can be offered to achieve more significant outcomes
• when information relevant to the State’s interests may be shared to greatest tactical benefit
• processes to be followed
• approvals to be obtained prior to directly or indirectly agreeing to certain terms
• definition of ‘best alternative’ and ‘minimum acceptable’ positions in the negotiation.

The absence of some of these pre-established positions exposed TfNSW to potential poor decision-making in agreeing the terms and price of the acquisition. Further, a negotiation plan could have included a threshold price and conditions which, if the vendor was unwilling to meet, would trigger a decision to purchase the property through compulsory acquisition.

The negotiation with Grand 4 Investments was undertaken reactively based on positions being put by Grand 4 Investments. As detailed earlier in this chapter, Grand 4 Investments was putting pressure on TfNSW with regard to the negotiation, advising that it would be signing leases for the site imminently, which would likely increase the cost of the acquisition to the State.

TfNSW staff involved in the property acquisition advised us that, due to a projected underspend of capital funding in TfNSW in the 2015–16 financial year, there was internal pressure to finalise the property acquisition before the end of that financial year. The 13 May 2016 briefing note to FIC, which recommended the release of funds for the acquisition of 4–6 Grand Avenue, stated that:

At March 2016, the capital portfolio is forecasting to underspend $258 million against approved revised budget for 2015–16 with further deterioration expected in the year end forecast.

TfNSW made an assessment of a reasonable and defensible amount to pay to guide the final accepted financial position in the negotiation

Parallel with the negotiations, TfNSW officers conducted basic analysis to determine what would represent acceptable value for money in an acquisition. This analysis included drawing on:

• advice received from Knight Frank Valuations, which had been consulted to provide a valuation, but who had declined on the basis of conflict of interest as it was already engaged by Billbergia, (the owner of Grand 4 Investments)
• unsubstantiated commentary in the marketplace regarding other transactions in the Camellia area that were in process
• an estimate of hypothetical development options for the site based on an understanding of Grand 4 Investment’s intentions, in order to reflect compensation on just terms
• estimations of disturbance costs that Grand 4 Investments would incur in the event of an acquisition, including stamp duty, allowance for environmental investigations incurred since acquisition and costs associated with purchase and sale.

TfNSW’s analysis indicated possible values of between $54.3 million and $60.8 million.

This analysis, while not based on robust and independent advice, appears to have informed the negotiation as a basis for determining what would be a reasonable and defensible amount to pay to acquire the property. However, the analysis does not constitute, and is not equivalent to, a formal valuation.

TfNSW changed its approach to the site to accept responsibility for contamination remediation without an accompanying explanation of why this was justified

Risk management planning undertaken in 2015 as part of the EOI process clearly stated that the management approach to the contamination was to make the acquisition conditional to the vendor remediating all contamination.

This changed during the April 2016 negotiation, when TfNSW took on full responsibility for remediation as part of its purchase of the site.

TfNSW has no documentation to explain when or how this change in management approach was determined, nor an assessment of the implications of that change on the management strategy for that risk.

At the time of this report, TfNSW has entered into contracts worth $106.9 million for environmental remediation of the site, ground improvement works and other remediation-related consultant costs, such as EPA site auditors. Out of the total forecast cost of $106.9 million, TfNSW has incurred $105.9 million to date.

These environmental remediation costs significantly diminish the value of the land, relative to what TfNSW paid for it. As such, TfNSW should have considered these costs at the time of acquisition