Auckland's mayor supports the convention centre at the heart of a contentious deal between the National Party and SkyCity - a facility the council's research shows would be “break-even” at best.
BUSINESSDESK: Auckland mayor Len Brown supports the convention centre at the heart of a contentious deal between the National Party and SkyCity Entertainment Group - a facility the council’s own research shows would be “break-even” at best.
Under the SkyCity proposal, the casino and hotel operator would pay the full $350 million construction costs for a centre capable of holding 3500 seated delegates or 4500 in an exhibition format.
The payback for SkyCity would be changes to gambling regulations that would allow it to install more gaming machines.
Brokerage Goldman Sachs last month estimated SkyCity would need 350 to 500 extra machines to profit from the deal, generating as much as $46m of revenue in the first full year of operation.
The opposition Labour Party says the deal means legislative change goes to the highest bidder as several other parties made proposals.
“I recognise the need for a convention centre in Auckland because it will play a role in transforming our economy and provide more jobs,” Mr Brown says.
“I am always concerned about the impact of more gambling and if the government proceeds with the proposal I would expect it to include strong measures to mitigate harm.
“The council has no say over the outcome and is not party to the details. However, we will consider them when they are finally released,” he said.
A report for the council and the Ministry of Economic Development in 2009 said the convention centre could generate $17.7m in revenue a year, including $13m directly from conferences.
Costs and overheads could amount to $16.6m.
That would leave net operating cashflow at $684,000 once $706,000 had been put aside for an asset replacement fund.
Overall, there will be an annual increase of $84.5m increase in tourism-related spending.
“Based on the projections, the facility will operate on a breakeven cashflow basis,” the report said.
“This level of cashflow performance is consistent with major Australian venues including Melbourne and Adelaide.”
Goldman Sachs equity analyst Marcus Curley said SkyCity needs 350 to 500 extra pokie machines for the $350m investment to produce an acceptable level of return for shareholders.
“This implies incremental revenue from the gaming expansion of between $37m and $46m in the first full year of operation,” Mr Curley said in his report.
In February, the casino and hotel operator’s first-half profit jumped 17% to $78.8m.
The biggest improvement in Auckland came from slot machines, where gross gaming revenue rose 12% to $197m, while non-gaming sales climbed to $71.9m from $58.5m.
Opposition parties have criticised the deal, saying National needs to reopen the tender process after Prime Minister John Key admitted he encouraged SkyCity to make a pitch for the centre in his role as Minister of Tourism.
In February 2010, Gerry Brownlee, then Minister of Economic Development, shelved a joint plan between council and government to investigate an international conference centre.
Instead, he directed MED to put out a request for high levels of interest, according to cabinet papers released today by Labour, which obtained them under the Official Information Act.
“Although large convention centres can be operated at a profit, international studies show they rarely produce sufficient returns on the cost of capital needed for their construction,” according to a cabinet paper on March 17, 2010.
SkyCity told Mr Key in 2009 that it wanted to build the convention centre. Mr Brownlee met the casino operator in February 2010.
During the tender process, the four other contenders couldn’t match SkyCity’s offer to pay outright for the centre.
Ngati Whatua chief executive Tiwana Tibble told TVNZ its offer was still on the table, but admits it cannot compete with SkyCity’s $350m proposal.
He said putting it out to tender again would be a waste of taxpayer money.
The deal has been welcomed by Tourism New Zealand, which says it would be a major boost for the economy. The centre was highlighted as a top priority in the organisation's 2011-2014 manifesto.
“The national convention centre to be built in Auckland will boost New Zealand’s economy by an estimated $90m annually,” it said on its website.
“It will enable the visitor industry to target a whole new market that can’t be accommodated by existing conference facilities.
“Encouraging a regional network of centres will further boost the important convention and incentive market,” it said.
Shares in SkyCity fell 1% to $3.85 and have gained 11% this year.
