Analysis: Close to corruption

LATEST: SkyCity drops bid for taxpayer top-up -- but there's a catch

OPINION

In three weeks, Australia plays Afghanistan in the Cricket World Cup.

The match engenders morbid fascination: How completely will Mitchell Johnson destroy the Afghani line-up?

There is a similar spectacle as SkyCity’s [NZX: SKC] Nigel Morrison takes apart Steven Joyce in the standoff over the proposed National Convention Centre but with a difference.  Unlike Mohammad Nabi’s valiant qualifiers, Mr Joyce’s botulinum-grade arrogance is making the debacle worse.

Mr Joyce genuinely believes his commercial background consolidating provincial radio stations makes him a match for Mr Morrison’s quarter century of experience in the Asian and Australasian gambling industries.  

The SkyCity team is laughing at him the way Kerry Packer laughed at Alan Bond over Channel Nine and Toll Holdings laughed at Michael Cullen over KiwiRail.

Despite having no experience in the procurement and management of half-billion-dollar construction projects, Mr Joyce and the prime minister’s chief of staff, Wayne Eagleson, took it upon themselves to deal directly with SkyCity over the terms of the convention centre contract and the associated regulatory-relief package.

More recently, when SkyCity’s experts calculated it would cost up to $530 million to build the centre to the necessary standard – $128 million more than the $402 million Mr Joyce hoped – the government’s economic development czar decided they were wrong and appointed an alternative team to prove it.

Unfortunately for him, Mr Joyce’s own independent experts calculated the cost would be within $7 million of SkyCity’s estimates.

After SkyCity alerted the market under its continuous disclosure obligations, Mr Joyce took to going through the cost proposals line-by-line.

How many pillars should there be? Could the ceilings be a bit lower?  Do you really need that big window looking out to the Waitakeres?  Is it really necessary to have that much space for the toilets?

Close to corruption
The origins of this fiasco lie in the close private relationship established between John Key and SkyCity in the mid 2000s.  When he became prime minister, Mr Key surprised many when he appointed himself minister of tourism but it was old news to SkyCity. Its executives had advised business partners well before election day that things were looking up because Mr Key had “agreed” to become tourism minister.

This, along with Mr Key’s ill-fated “Jobs Summit,” meant Wellington began seeing convention centres as The Next Big Thing.

Mr Key’s staff and officials rushed around with proposals for bigger and better convention centres in various centres.  With casino monopolies in Auckland and Queenstown, SkyCity was thrilled.

In cabinet papers, the government told itself a big centre “has the potential to deliver considerable economic benefits to New Zealand.”  Ministers did not risk consulting the Treasury on this point.  It was merely “informed” of what was going on.  No cost-benefit analysis was carried out and for very good reason: It was politics and political friendships driving the demand for convention centres, not economics.

The procurement process for the Auckland centre was a farce and as close to corruption as we ever see in New Zealand.

As reported by the Deputy Auditor-General, Mr Eagleson – whose best friend and Las Vegas gambling buddy is Mark Unsworth, SkyCity’s Wellington lobbyist – had been conducting private talks with SkyCity through 2009 and early 2010, including about what regulatory relief SkyCity wanted.

Mr Eagleson argued a procurement process was unnecessary and that the government should just go with SkyCity on the grounds no one else could realistically compete.

He was overruled by ministers and an Expression of Interest (EOI) document was issued, but without clear evaluation criteria.  Unusually, and without further elaboration to those not privy to the prime minister’s private talks with SkyCity, the EOI said that “alternative and creative funding options” would be considered. 

It turned out that private talks with SkyCity continued in parallel to the formal process.  As far as is known, no other bidder was told gambling licences were on the table. The Deputy Auditor-General later slammed the process as flawed: “From the start of the evaluation process, the contact with one proposer was of a wholly different nature from the contact with others. In our view, officials effectively worked with SkyCity for some months, giving detailed feedback and engaging in some preliminary negotiations, while the other proposers were kept on hold and given very little information.” 

When ministers have allowed the Treasury to analyse the proposal, it has expressed concern that “private benefits to SkyCity will exceed public benefit to New Zealanders” and that “the Crown currently lacks adequate leverage in the negotiations.”

Eyesore
Mr Joyce took over the issue in 2011, signing the deal with SkyCity in 2013 and rushing the regulatory-relief legislation through Parliament.  Mr Key announced “construction of the new convention centre will not cost taxpayers or ratepayers a cent.”  As NBR has since revealed, this was, at the very best, a misrepresentation of the deal Mr Joyce had struck.

Now, as both SkyCity and Mr Joyce’s experts agree, the cost of building a convention centre capable of competing with Sydney, Brisbane, Melbourne and Singapore has exceeded the $402 million the contract specifies.  Mr Key rightly worries that if the budget is not increased the centre may be “an eyesore” and unable to attract major conventions against better facilities in the region.

The best option would be for the government to walk and restart the procurement process, this time keeping Mr Eagleson and Mr Unsworth under control and making clear to all bidders that a casino license is available.

The problem is that SkyCity has a guaranteed casino monopoly in Auckland and changing that would create enormous litigation risk.  Beyond that, SkyCity knows too much.  They have been talking privately with Mr Key and Mr Eagleson for many years. Abandoning the project would therefore create unmanageable political risk.  Plus there are long-standing personal friendships to consider.

The blundering Mr Joyce has already conceded all of SkyCity’s negotiating points, agreeing there has been and will be considerable construction-cost inflation, suggesting ratepayers and taxpayers might have to cough up and arguing walking away would cost the Crown $402 million.  To avoid the legal, political, aesthetic and personal risks, the government has no choice but to cough up the additional $130 million.  At least then the white elephant might have a chance of attracting business ahead of its regional competitors.

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