Victorian Auditor-General’s report
14 March 2012

Melbourne Markets Redevelopment
Audit summary
The Melbourne Wholesale Fruit and Vegetable Market incorporating the National Flower Centre is an important part of the state’s economic infrastructure, with an annual turnover in excess of $1.6 billion. 
The market is being relocated from its current site in Footscray Road to a new site in Epping. The intention is to establish the new market within a modern, innovative and efficient fresh produce trading and distribution precinct. This is one of the largest infrastructure projects undertaken in Victoria in recent years. 
The new market has three main components required for its effective operation:
·	a trading floor, where produce is displayed, bought and sold
·	warehousing and cool storage used to store and distribute produce
·	fit-out of leasehold areas to facilitate the business needs of each lessee. 
In purchasing the site for the market, the government acquired additional land to develop a market precinct. 
Conclusions
The initial project planning and governance arrangements for the relocation were sound. However poor project implementation has adversely affected the project. 
Poor stakeholder management has:
·	significantly delayed the relocation of the market—it was originally planned to move in 2008, however, an operational market is still at least two years away
·	resulted in significant cost increases—the expected cost to government is more than double the $230 million included in the 2004 business case
·	had an adverse impact on tenant investment in this industry. 
Issues relevant to the tenants’ decision to relocate to Epping have not been resolved and they are still not committed to the move. As a result, the relocation is not assured. 
Management of market tenants contributed to a number of adverse events during the first five years of the project. The subsequent decision to abandon the proposed Partnerships Victoria procurement approach and enter into a memorandum of understanding (MOU) with the market community to deliver significant parts of the project was made without proper assessment of the options and associated risks.
Failure to update governance arrangements and project management plans and to produce detailed project financials following these changes contributed to poor outcomes. 
Significant shortcomings in the procurement of the trading floor mean that the process was not demonstrably fair and the evaluation process did not assure that the price to be paid to the successful tenderer represented the best value-for-money.
Findings
Achievement of project objectives
The project was set a number of redevelopment and operational objectives. Given delays in the project, only three of the redevelopment objectives can be assessed at this time. There has been a failure to meet each of these project objectives: 
·	Redevelop the market into an innovative modern facility by 2008—changes to scope and project delivery methods have delayed the move to a more efficient market. A fully operational market is at least two years away, and if delivered as proposed will be six years later than originally planned.
·	Ensure buy-in by market participants—the responsible agencies have not adequately addressed the needs of the market community or managed their expectations. Tenants have not been provided with the financial and other information they need to make a fully informed decision on whether to move. 
·	Ensure the state’s investment in the new market provides value for money, is sustainable and delivered within budget—at the end of 2011 the projected cost of the market relocation was around double the $300 million budget set in the business case, and now includes warehousing that was not in the original scope of the project. Further, the tender process for the trading floor failed to demonstrably deliver value-for-money.
Decision to abandon the Partnerships Victoria arrangement
The Department of Primary Industries’ (DPI) decision to significantly change the project delivery model in 2007, to one that relied on a $2 company established by some members of the market community to deliver significant parts of a billion dollar project, created significant risks. Particularly as:
·	there was some doubt whether the company fairly represented the views and interests of the whole market community 
·	the market community did not have the skills or resources required to manage the delivery of its part of the project or to find, negotiate and enter into appropriate contractual arrangements with suitable private sector companies to construct warehousing and develop the market precinct.
Change management
The business case, initial governance arrangements and project planning were sound. However, a number of significant changes made during the project adversely affected the achievement of its objectives. These changes included:
·	three different project delivery methods involving different parties delivering parts of the project and owning and operating the market
·	a significant change in the design of the trading floor after the successful tenderer had been announced. 
Transferring administrative responsibility from DPI to the Department of Business and Innovation (DBI) in 2009 caused some delays in progressing key elements of the project, although the change has seen an improvement in the overall management of the project.
The changes to the project scope and delivery created risks that were not well managed. Specifically: 
·	the business case, governance arrangements and the project implementation plan were not updated on a timely basis to reflect changes to scope, delivery strategies and the roles of government agencies and private sector organisations
·	the state government assumed responsibility for the provision of warehousing in April 2009, however, DBI is still developing a business case and plan for the warehousing 
·	detailed project financials were essential to the management of the project, however, at the end of 2011 the scope of the works and financial information was still not sufficiently developed to enable DBI to commence negotiations with tenants on market leases and assess the financial viability of the project.
Risk workshops were held, a register identifying project risks was maintained and high‑level risk plans were developed. However, a detailed risk management plan was not prepared and for most of the project DBI, DPI and Major Projects Victoria (MPV) did not actively monitor and manage project risks. DBI addressed this issue in 2011.
Stakeholder management
Stakeholder management has not been effective. Although the business case identified relevant stakeholders, recognised the importance of stakeholder management, and DPI initially set in place good stakeholder management processes, poor outcomes occurred. These included:
·	an alliance of market participants opposing the relocation of the market
·	a group of tenants starting legal action against the Melbourne Markets Authority (MMA) and placing caveats on land at Footscray to stop the government from using the market land for another purpose or selling it 
·	some tenants threatening to establish rival markets. 
Market tenants operate in an environment of intense competition, where transactions occur quickly and are heavily dependent on price. What is important to them in the relocation is their ability to continue their business at the new site and make a profit. 
DPI planned to provide tenants with the information they needed to make an informed decision on the move and to start negotiations with tenants in late 2006. However, this did not happen. 
Uncertainty around tenure, and not being provided with relevant cost and other information, has led to tenant resistance to the market relocation. At the end of 2011, this information had still not been provided to them. 
Tenants have not been told how their warehousing needs will be met at the new market and the likely cost of the warehousing. This has also delayed the move to Epping and this delay has added to the cost of the relocation. Although construction of the trading floor is expected to be completed in 2013, the new market cannot operate until construction of the warehousing is completed in 2014–15.
Trading floor procurement
A number of probity matters in relation to the trading floor procurement cast doubt on the fairness of the procurement process. MPV’s practices showed:
·	an inadequate understanding of the importance of demonstrating probity in public sector procurement
·	a poor understanding of the identification and management of conflicts of interest
·	a lack of commitment to transparency.
While these factors may not have changed the outcome of the tender, the conduct of the procurement means that MPV cannot provide sufficient assurance that the process was fair. Furthermore, the tender only attracted one fully costed, adequately supported, reasonably priced tender that met MPV’s contractual requirements. Along with poorly considered decisions made during the procurement process, this is likely to result in the government paying more for the trading floor than they should.
Recommendations
Number	Recommendation	Page	
1.	The Department of Business and Innovation and the Department of Primary Industries should implement appropriate project management policies and procedures so that:
·	the options and risks associated with proposed changes to project scope, size, delivery methods and administrative arrangements are critically assessed and documented prior to actioning them
·	once changed, governance arrangements, business cases and project implementation and management plans are appropriately updated in a timely manner.	20	
2.	The Department of Treasury and Finance should provide more definitive guidance on better practice project management in its Investment Lifecycle Guidelines.	20	
3.	The Department of Business and Innovation should:
·	immediately provide further information to tenants, including finalisation of allocation of new space at the new market, to provide certainty and allow investment decisions to be made
·	implement a clear and robust engagement strategy for the remainder of the project.	29	
4.	Major Projects Victoria should:
·	revise its procurement policy and operating procedures to align with contemporary better practice in public sector purchasing
·	provide regular probity training for all staff involved in procurement activities.	44	
5.	The Department of Treasury and Finance should:
·	require agencies to obtain related interest declarations from project staff for each procurement project on which they work
·	develop processes to assess the quality of service of probity practitioners.	44	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Business and Innovation, the Department of Primary Industries, the Melbourne Market Authority, the Department of Premier and Cabinet and the Department of Treasury and Finance with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix A.