16 July 2017

Treasurer sparks free market concerns over Domain Central $6 million revamp

Image: QIC Domain Central site at Garbutt 
The Queensland Treasurer announced in an official press release that works on a revamp of over 1100m2 of the Domain Central shopping centre car park at Garbutt will create 110 jobs for the City as two new buildings are constructed.

Treasurer Curtis Pitt is being accused of deliberately misrepresenting his directions to the government-owned investment company to the Townsville people as a “vote of confidence” by the global investments entity in the Townsville real estate market.

The $6 million investment by the Queensland Investment Corporation (QIC) subsidiary QIC Properties Pty Ltd (QICP) will accommodate six new retailers.

The retail shopping centre has existing leases in place with national retail brands such as JB Hi Fi, Harvey Norman, Freedom, Nick Scalli, Snooze, Trade Secret and various retailers.

A new convenience supermarket run by IGA will anchor the new development. The project is expected to create employment for approximately 60 people during construction and 50 jobs in an ongoing capacity.

The commercial investment is a welcome relief for Townsville City Council (TCC) and the Labor state government who have come under pressure to arrest the impact of a sustained unemployment rate of over 10 percent, where local businesses have fallen victim to catastrophic bankruptcy, prompted 1000's of residents to leave the city.

Leaders in the North Queensland city have been caught off guard by the depth of the decline in employment opportunities for local workers and business traders.

The Rudd government’s resource rent tax and a crash in global commodity prices contributed to the mining downturn and large industrial employers such as Clive Palmer's Queensland Nickel refineries were faced with increased tax liabilities and declining export revenues.

Local leadership and media narrative

In addition to this investment, the TCC has also approved an application for development of further buildings by QICP on the Duckworth Street site car park area. However, the details of the second project are yet to be released. The portfolio manager for QIC, Charles Occhino, would not disclose which brands would be moving into the shopping precinct.

State Labor MP Scott Stewart commented to Rachel Riley from the Townsville Bulletin that "the best thing about this project is that it's a local business that's involved with building this project."

As the Townsville Bulletin article minimised the entity as QIC, an acronym for Queensland Investment Corporation, no attempt was made by News Ltd's flagship North Queensland paper to inform the readers that QIC is owned by the State government. No comment was sort from an opposition point of view. A fact of interest to the community of Townsville that the Treasurer's official press release had disclosed.

Was this a simple case of mistaken omission or was the acronym left undefined to accentuate the message of the incumbent political interests?

Mayor Cr. Jenny Hill also commented to the Townsville Bulletin reporter that "Projects like these are vital for our community and we're thrilled to see local builders, workers and business owners taking advantage of the opportunities being created through this development", she said.

Domain Central was originally developed in 2007 by local development company Lancini Developments with approximately 1800 car parks included in the plans.

Public disclosure of the sale could not be verified as any media release or local news coverage at the time of the sale could be referenced from inquiries. However, Mr. Pitt said in his press release formally announcing the QIC revamp that "it was acquired by QIC in July 2015."

Is QIC being used for political ends by the Treasurer?

In the Queensland Treasurer's official press release about the significant development, "the new investment was a great vote of confidence in the Townsville region," he said. This is all about Queensland investing in Queensland, and it's great to see the Townsville community being supported by this QIC investment," the Treasurer was quoted.

Image: Queensland Treasurer The Hon. Mr. Curtis Pitt

QIC's Statement of Corporate Intent (SoCI) defines the cost to income ratio (CTIR) as an indication of favourable or unfavourable performance. A lower rate is more favourable. From 2007 to 2015, the CTIR dropped from 88 percent to 74 percent, the SoCI stated.

A review of the SoCI identified two specific real estate assets were erased in the report (understood to be politically or market sensitive). In reference to these investments, it reported the CTIR dropped to 71% for the 2014 to 2015 financial year.

However, QIC forecast that the CTIR will increase to 78% in the 2015-2016 financial year due to a "significant investment".

The QIC property business has been vertically integrated into its Global Real Estate (GRE) business model even though its fee recovery model is vastly different to its core investments business model.
The QIC report said it "does significantly impact QIC's Cost to Income Ratio. By excluding its property management entity, QIC's cost to income would drop to below 70% in the 2015-2016 budget."

The question for the Treasurer Mr. Pitt is; what are the property assets that have been erased? Is Domain Central included in the erased accounts?

If so, why did the Treasurer represent to the Townsville community that the acquisition of a significant asset was a QIC vote of confidence in the City when the Treasurer himself could have directed the GOC to make the investment?

QIC Properties Accountability

The QICP 2016 annual financial statement reported that the company is managed by four non-executive directors. The independently audited report said, "no income is received by any directors".
However, the same report also declared "the company may purchase or provide goods and services to/from entities related to key management personal related entities."

The terms and conditions of transactions that occur between management service entities "were no more favourable than these available or similar transactions to non-related entities on an arm's length basis," the report declared.

The company’s other related parties expenses were declared at $83.7 million in 2016, $20 million more than the company's 2015 financial statement, for property management and other fees.
The purchase of goods and services by the GOC entity was declared as zero or not applicable. However, the state of Queensland purchased $1,015,000 in goods and services through the QICP entity, the company reported.

The company also discloses that "there are no fixed terms for the repayment of loans between related entities and the company and is interest-free. Outstanding balances are unsecured and are repayable in cash." The corporate entity's report went on and said, "All other transactions are made on normal commercial terms and conditions and at market rates".

Audit and Risk Management

The report declared that the financial statement is independently audited by the Queensland Audit Office and complies with the federal Corporations legislation.

QIC's Statement of Corporate Intent from 2015-2016 must be consistent with its 2015-2020 Corporate Plan agreed to by the shareholding Ministers in accordance with Chapter 3, Part 7 of the GOC Act.

The GOC Minister sets the guidelines as subordinate legislation for the QIC Corporate Plan. The QIC Board must comply with the Ministers and Treasurers request or directions urgently, the statement prescribed.

Every director and every officer, employees or agents of the GOC is indemnified and held harmless of the Corporation in pursuing their duties in good faith if they comply with the GOC Act.

The board level Audit and Risk Committee is the oversight "line of defence" attended by KPMG and the internal auditors, Deloitte. External auditors KMPG and the Queensland Audit Office are the 3rd line of defence in QIC's enterprise risk management framework.

The QIC enterprise risk management framework has an oversight expectation, a 4th line of defence, consisting of a Board, 11 committees and a 3rd line of defence being executive managers, employees, risk management teams, KPI reports, staff and contractors.

So the Audit and Risk Committee and internal and external auditors are the first and last line of defence for GIC and other State GOCs in managing any threats of unacceptable risks.

Each member of the Audit Committee has an entitlement to rely on QIC management and on external professionals and "may assume the accuracy" of such information is correct unless they are aware of any reasonable grounds to question its accuracy.

Auditors of QIC have unfettered access to the Audit Committee via the committee chairperson.
Although directly unconnected to the Queensland GOC's, an Australian Senate Inquiry in 2015 found that multinational corporations were avoiding tax and the "big four" accounting and auditing firms were advising the corporations on the accounting methods.

Jeffrey Knapp, Lecturer in Accounting at the University of NSW said, "In December 2015, the Parliament introduced new laws so that the significant global multinational corporations must henceforth furnish general purpose accounts to the Australian Tax Office (ATO). In effect, the Parliament had to bypass the Australian Accounting Standards Board (AASB) and the "big four" accounting and audit firms; Ernest & Young (EY), Deloitte, Price Waterhouse Coopers (PwC) and KPMG."

The multinational corporations had switched the accounting practices from "general purpose" to "special purpose" which required compliance with five standards instead of forty.

The QIC financial reports confirm that equity accounting practices are applied. The use of general purpose accounting standards could not be confirmed as the GOC did not provide a definition as to whether the equity method it uses is a general, special method or neither.

Nevertheless, QIC applies accounting practices through the AASB and applies an "equity method" of accounting. Accounting fees of $389,603 were accounted for by GIC in its 2015 financial statement.

Commercial property implications

Stockland Limited, owner of Stockland shopping centre at Aitkenvale and Dexus Limited, owner of Willows Shopping Centre at Kirwan, could not provide a comment about the 100 percent government owned entity investing in real estate assets in the same Townsville marketplace in direct competition with its publically listed businesses.

Townsville City Council also announced recently that it has created a new development corporation.
The move by the local government authority said it is willing to exchange the value of the land it owns at Woodstock, 40 klms west of Townsville, for a shareholding equity stake in the United States private investment consortium led by Boston Energy and Innovation (BEI).


Townsville's commercial property vacancy rates are hovering around 20 percent. Adding additional supply to an already struggling real estate market could present a further unfavourable risk to the commercial leasing market, unfavourably impacting local investors.

So questions about whether the State government provided requests and directions to the QIC Board to acquire the Lancini Development's Domain Central real estate asset in July 2015 remain unanswered and outstanding.

The inconvenient truth for the State government is that the GIC purchased the premium industrial retail site at the very beginning of the Queensland Treasurer and Premier’s scheduled approval of the five year Corporate Plan and Statement of Corporate Intent.

The GOC Act sets the timeframe for shareholding ministers to approve of the Statement of Corporate Intent and Corporate Plan. Approval must be completed within two months of the beginning of the new financial year.

Due to the coincidental timing of the acquisition, it raises serious questions within the commercial real estate market in Townsville about the Treasurer's press release announcing the “vote of confidence” from the GIC which instead finds the GICP management business a costly and unfitting business for its core investment skill set.

Comparable GOC model

The Queensland government has also been called out recently by Federal Energy Minister Josh Frydenberg, accusing the Labor state government of being the blame for discrepancies in Queensland power prices.

"In Queensland, your state-owned generators - and this is a very strong allegation based on the evidence - have been gaming the system," Mr. Frydenburg said to an ABC reporter.

"What they've been doing is holding back their supply and then late into the period into which electricity prices are set, bidding in artificially high prices." the Federal Energy Minister said.

The Australian Energy Regular has confirmed late price bidding has impacted the energy prices in the Australian energy market.

The state-owned power generators such as Stanwell are regulated and managed within the same governance and risk management framework as the GIC.

Here too the State Treasurer and Premier have shareholding powers to direct and request guidelines be adopted by the Board and management of the GOC that could result in positive revenue opportunities contributing to comparable dividends to the government's treasury, and consequently, creating favourable political perceptions on the eve of a State election.

Construction of the Domain Central revamp is expected to be completed by the end of the year and will include a bus transport hub.

Further reading:

Council chambers development exposes false international bank representation







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