Fresh calls for inquiry into Ayers Rock Resort purchase
Appearances by bureaucrats before parliamentary committees are normally mealy-mouthed affairs. Answers are given and advice is tendered in the most dispassionate terms, no matter how politically hot the subject area.
There are exceptions, though, and few as dramatic as that of Friday, November 22, 2013, when the new CEO of the Indigenous Land Corporation, Michael Dillon, fronted the Senate Finance and Public Administration Legislation Committee.
He was there to talk about the corporation’s purchase of the Ayers Rock Resort three years earlier, for $317 million, $200 million of which was borrowed money. The acquisition had proved to be a disaster, a financial albatross likely to hang around the neck of the corporation for decades to come.
Dillon, just three months into his job as CEO, did not mince his words. The decision to buy the resort, he said right at the outset, raised “fundamental questions about the quality of public administration and corporate governance, and in particular what happens when major decisions go wrong.”
It was not just the apparently inflated price that troubled him, but the whole way the corporation had gone about the process of acquiring the resort.
“How the previous board of the ILC made this decision, to my mind, is inexplicable and perhaps even inexcusable,” Dillon said.
They had been warned of the risks, he said, by a due diligence report into the proposed acquisition, by several board members who were “essentially, apparently, sidelined”, and in letters from the two relevant ministers, indigenous affairs minister Jenny Macklin and finance minister Penny Wong.
“These letters were amongst the strongest – in fact were indeed the strongest – letters I have ever seen from a minister to a statutory corporation in my 30 years of public sector experience,” said Dillon.
The reply from the ILC board chairperson, Shirley McPherson, to the ministerial concerns, was “desultory, paltry … as paltry as a bandicoot’s breakfast. It was pathetic,” said Dillon.
“The response that was provided was essentially, ‘This deal is too good for us to put on hold’ … What happened was the ILC [board] made the decision to acquire the very next day.”
The board had every right to do that. Once appointed by government, they are largely independent. Still, there are processes they must follow, and Dillon argued that those processes were suspect.
He was pushing for a public inquiry.
Almost two years later, he and his board – purged of those members who drove the Ayers Rock Resort purchase – are still pushing for one. And the deal looks worse than ever.
By the ILC’s latest accounting, the property it bought for $317 million in October 2010 is now worth almost $100 million less than that. It is on the books at $225 million.
The ILC currently owes about $215 million and that debt will soon have to be refinanced. Advice to the board is that about $140 million will likely be secured at commercial rates of about 4 per cent, but much of the rest – probably about $45 million – will have to come from “non-traditional” sources at much higher rates.
To make matters worse, the predictions for cash flow from the property made by Grant Samuel, the firm that carried out the due diligence before the purchase, have proved wildly optimistic.
Despite the fact occupancy and revenue had been declining for at least five years before the ILC bought the resort, Grant Samuel forecast both to rise steeply. They did not.
As Dillon told another senate committee, the difference, up to May this year, between the forecast and the actual results, was $87 million.
A ‘special fund’
The ILC came into being in 1995, following the Native Title Act (1993). As the preamble to the act says, because many Aboriginal and Torres Strait Islander people would be unable to assert native title rights, “a special fund needs to be established to assist them to acquire land”. That special fund is the Land Fund.
During the next 10 years, about $120 million a year was added to the fund, after which time it was to be self-funding. Its assets are now about $2 billion, from which comes an annual budget of some $50 million, about $15 million of which goes to administration and $35 million of which is available for addressing its core function of helping indigenous people dispossessed of their land.
The ILC is now facing the prospect of up to $20 million of that budget being eaten up by repayments of the principal and interest for the next 15 or 20 years.
It may be a bit less than that. During the past year or so, the resort has begun operating more profitably. This year it may be able to meet about 80 per cent of the interest costs.
Still, the Ayers Rock Resort purchase remains a disaster. In November 2013, ILC chairperson Dawn Casey described it to Fairfax Media as “perhaps the largest single evaporation of public monies in the indigenous policy domain, ever”.
And at that time the book value of the resort was $25 million more than it is today.
To understand the context of what has now become a war between current and former board members and current and former federal governments, one has to look all the way back to 2007.
In the dying days of the Howard government, then indigenous affairs minister Mal Brough reappointed the seven-member ILC board for four more years. This meant it would stay in place beyond the first term of the incoming Labor government.
Within a year, the board began considering the purchase of the resort, which property giant GPT was looking to unload. The original asking price was $270 million.
The first hurdle was funding the purchase. The board proposed dipping into the Land Fund. Labor’s indigenous affairs minister Jenny Macklin had the power to refuse that – while the board has always had a free hand in spending the earnings of the Land Fund, the principal has been inviolate – and she did.
Eventually the deal was funded with vendor finance, and the price increased. The board narrowly approved the deal – several members were strongly opposed – in October 2010.
In 2011, at the expiry of the terms of that board, the Labor government appointed a new one. Three members were replaced and two others reappointed for just two years. The new chairperson was Dawn Casey.
“When I came to chair I had an independent review done by Deloitte of the overall governance of the organisations,” she says.
“They found unanswered questions around the acquisition of Ayers Rock, as did several board members. We took this to Jenny Macklin and she suggested we do a more detailed investigation.”
Consultancy firm McGrathNicol was appointed to specifically investigate the Ayers Rock purchase. That report also found concerns. To cite just one, it found the firm that did the due diligence, Grant Samuel, was appointed without the normal selection processes.
When Dillon, at one of his many committee appearances, told senators that the firm had received $6 million for its work “on a success fee” basis, even Liberal members were surprised.
ACT senator Zed Seselja, a lawyer and expert in public administration, had the following exchange with Dillon:
Seselja: “So the higher the purchase price, the more the person would receive?”
Seselja: “That’s extraordinary.”
For the benefit of others on the committee, Seselja explained the condition: “It was effectively an incentive for the individual or company to value it at a higher rate because they would get more of a success fee.”
In short, the ILC board believed the McGrathNicol report strengthened the case for a thorough inquiry into the whole deal. There was a problem, however. The investigation was commissioned under the previous Labor government, but the report was not delivered until early 2014, after the election of the Abbott government.
And the incoming minister, Nigel Scullion, was notably hostile to Casey and the new board. He was also strongly supportive of the former CEO, David Galvin, whose services Casey had dispensed with, largely as a result of his strong advocacy of the Ayers Rock purchase.
In opposition, Scullion went after the Casey board from the time it was appointed and began investigating the previous board’s actions.
“I’ve been in the public sector for 40 years and I’ve never seen the likes of it,” says Casey. “It was relentless and very personal. And since he came to power, he just hasn’t engaged with us.”
Given that they had hit a brick wall with the indigenous affairs minister, the ILC board took a different tack. They wrote to the minister for finance, Mathias Cormann, detailing their concerns and requesting an inquiry.
And it looked, briefly, like they had had a win. Cormann wrote back in January this year supporting an inquiry into the actions of the former board. The catch-22 was that he asked Scullion to do it. And Scullion has not done it.
It appeared one of the government’s most senior ministers, the finance minister, had been overruled by one of the more junior ones. Cormann’s office denies this, however. Apparently he has just changed his mind.
“The minister is satisfied that all the claims made by Dr Dawn Casey were fully investigated in a series of different investigations and that no new material was put forward to warrant yet another investigation,” his office said, in response to inquiries from The Saturday Paper.
“Portfolio ministers are responsible for matters that relate to entities in their portfolio.”
With Scullion intent on doing nothing and Cormann unwilling to force the issue, the ILC has gone, during recent months, to the highest authority, Prime Minister Tony Abbott. Repeatedly.
The most recent letter from Casey to Abbott, dated May 27 this year, runs to 38 pages, including attachments. It rebuts Scullion and Cormann’s claims that the purchase had been comprehensively investigated already.
“Only the published McGrathNicol review had access to the source documents” relating to the alleged irregularities, it says.
“Despite the serious public accountability issues and potential breaches of civil and perhaps even criminal law that have been raised, all requests for [a] focused investigation have to date been refused.”
Casey’s letter notes as a “particularly concerning” element of the transaction the fact that “in spite of the strong concerns expressed by certain ILC directors and due diligence advisers that the purchase price was already too high, the former ILC board, without any explanation, agreed late in the process to a $30 million increase in the price … It seems that this sudden increase was linked to provision of vendor financing to allow the transaction to proceed.”
If proven to be true, this “highly detrimental and uncommercial” arrangement, the letter says, would be “at best a breach of the legislative requirement that the ILC board operate in accordance with sound business principles and directors’ duties” under relevant legislation. “At worst it’s a deliberate and potentially illegal ploy to induce an unnecessary and unjustified extra payment of $30 million by the Commonwealth.”
The letter also notes that the ILC has taken advice towards potential legal action against several former directors, and that Scullion has sought access to that advice.
The ILC board has resisted providing it, on the basis it believes Scullion, due to his previous relationships with the former board, “has a direct and unaddressed conflict of interest in these matters”.
Abbott’s response? Nothing.
In the meantime, says Casey, “we’re going through the processes of developing a statement of claim”.
The board’s dilemma is this: should it proceed to court action in the absence of an inquiry, and expose the ILC to even more cost?
“Why should these [ILC] funds be spent on taking up a legal action when it’s the government’s role to do it?”
In any case, time is against the board when it comes to mounting a case.
In mid-October, the ILC board again comes up for reappointment. Casey, Dillon and the others on the current board, agitating for investigation, are living on borrowed time. It looks like the government has adopted a strategy of studied inaction, just waiting them out.
Dawn Casey suspects the government’s agenda is bigger than simple cover-up of the circumstances of the purchase of the Ayers Rock Resort. She thinks the minister has his lamps set on the $2 billion pot of money that is the Land Fund.
“It seems to me that while [Scullion] says the land account will remain intact ... the intent is that the land account will be exposed and its purposes broadened to other than what it was intended to do.”
She notes that Scullion initiated a review into amalgamating the ILC with another indigenous funding body, Indigenous Business Australia. While that has come to nothing, it signals intent to mess with the operations of the fund.
In response to the perceived threat, the ILC has taken various steps to try to better secure the fund from interference, even drafting its own bill to amend the current legislation governing the land account, which would include new measures for the selection of board members, to make it less vulnerable to political interference. The government is dead set against it; Labor supports it with some amendment, the Greens support it.
“This current board hold very strongly the view that it’s our role to maintain the integrity of what the fund was set up to do 20 years ago,” she says. “To that end, we have also sought to have the fund transferred to the administration of the Future Fund. The government has refused to allow that to happen.”
She cites Deloitte analysis showing that had the Land Fund operated in the same way as the Future Fund, it would have increased by $400 million-plus.
“The evidence is that it would return an extra $10-$20 million a year for Indigenous people. Why would the government not do that?”
Make your own judgement. But the political reality is that it’s not likely to happen under this government, or under this board. Any more than we will get to the bottom of the extraordinarily bad deal over the Ayers Rock Resort. The sad reality is that Indigenous Australia looks to have been dudded by politics. Again.
This article was first published in the print edition of The Saturday Paper on Aug 1, 2015 as "Ayers and disgraces". Subscribe here.