Part 5: The sale process

Inquiry into the sale of Paraparaumu Aerodrome by the Ministry of Transport.

5.1
In this Part we report on the sale process itself. Our discussion covers 7 distinct aspects or phases:

Establishing the objectives for the sale

5.2
Once the consultation process had been completed, and the Secretary for Transport’s approval to proceed had been obtained, Ministry officials turned their mind to the sale itself and how this would best be achieved. Officials told us they were under a directive by the Secretary to complete the sale by 30 June 1995. The Minister had also made it clear that he expected the sale to be conducted on an arm’s-length basis, without political influence.

5.3
We found an internal memorandum, prepared in February 1995, on the sale of Paraparaumu and one other aerodrome. The Ministry staff we interviewed agreed that (subject to the Public Works Act and Treaty considerations also being addressed) it summarised the Ministry’s thinking about what needed to be done–

The Ministry has a key objective to find a buyer for these aerodromes and thus terminate Ministry ownership.

The Ministry wishes to do this with the minimum of adverse public or political reaction.

There are two important considerations relating to the sale process which have implications for the way the sales are perceived. These are:

The need for the continued operation of the aerodromes.
The need to maximise the returns from the sale.

It is recognised that these two considerations are to some extent mutually exclusive as the highest returns may be associated with a conversion of some or all of the land to some other purpose. The Ministry will need to balance these two factors in evaluating the tenders to try and minimise the likelihood of any closure or significant capital gain being achieved by the eventual purchasers in the short term. This will be a combination of assessing the intentions of the purchaser and the tender price in relationship to the realisable value of the land or a combination of the aerodrome business and realisable value of any surplus land. (Emphasis in original.)

5.4
We were told of considerable debate in the Ministry about how to ensure that the twin objects of continued use and price maximisation could be met. A number of options were canvassed. They included:

writing a buy-back or offer-back clause into the sale and purchase contract, to be invoked if an aerodrome turned out not to be commercially viable under new ownership; and
placing a caveat on the title, restricting use of the land to aviation purposes.

5.5
There was also discussion of the long-term lease option which had been advanced by the Department of Lands in 1988.

5.6
The consultant, who prepared the internal memorandum, told us that he had favoured placing a caveat on the title. However, Ministry officials did not agree, and it was decided (with Ministers’ agreement) not to include any binding conditions or other form of restriction on use. There was pressure on government departments at the time to maximise revenue from asset sales, and it was considered that conditions or restrictions would unduly affect that objective.

5.7
The commercial adviser had a different perspective from the Ministry about the sale objectives. He told us that, as far as he was concerned, the whole basis of undertaking the sale was to maximise the Crown’s return, and that the desirability of the aerodrome remaining operational was only a political response to pressure from recreational users.

5.8
It is clear to us that the Government’s objective was to be removed from the ownership and operation of the aerodrome. It did not want the Crown to be in a position where it may have to resume ownership or operational responsibility in future. Nor did it want the sale to be encumbered or conditional in any way. Ministry officials told us that they understood Ministers wanted a solution that would give the best likelihood that there would be continued operation of the aerodrome as long as it proved commercially viable. But there would not, and (in their view) could not, be any guarantee that the aerodrome would remain open forever.

5.9
This left the Ministry in the position of implementing the Government’s decision to sell the aerodrome to those who had a demonstrated interest in, or commitment to, keeping it operational for the foreseeable future, but without any legal obligation to do so. The Minister of Transport approved this course of action.

Valuation of aerodrome assets

5.10
Valuation was clearly a critical part of the exercise. The Ministry was aware that some land at Paraparaumu could be surplus to aerodrome operations. It had decided to leave the judgement about this to the purchaser. But it was also aware that there was a significant difference between the aerodrome’s value as an operational aviation facility (because of its marginal commercial viability) and the value of the land for other purposes – most notably industrial or residential subdivision.

5.11
The Ministry decided to value the aerodrome as a going concern, in a way that both maximised the sale proceeds for the Crown and minimised the incentives on the purchaser to recoup the sale price through windfall profits on the sale of surplus land.

5.12
The Ministry contracted EY to prepare a valuation for the sale. The valuer (a partner of EY) had previously prepared valuations of the aerodrome for other purposes – including for the establishment board of AHL in 1992.

5.13
The 1992 valuation had been prepared on a “discounted cashflow” basis, which allowed for future income and business cost assumptions and cashflow projections to be taken into account over a 15-year period. That valuation showed that the aerodrome was unlikely to be profitable over that period.

5.14
The Ministry and EY agreed that a different valuation approach was needed for the purpose of the sale. The approach was recorded as follows in an internal memorandum:

E&Y will complete a “market value for existing use valuation” plus a “NRV” (net realisable value) valuation. This will give us an indication of the aerodrome’s business value and its alternative use value (taking into account closing costs eg lease termination) … except that E&Y will attempt to derive a value for the surplus land based on the 1989 Landcorp proposals ...

5.15
The valuation approach was further refined through draft valuations prepared by EY. The final valuation assessed the value of Paraparaumu Aerodrome as a going concern at $1.6 million. This included a net cashflow valuation of the core aerodrome assets, together with the net realisable value of land that may be surplus to operational requirements (identified from the 1989 Landcorp proposal to rationalise the aerodrome business, and valued at just over $700,000). The going concern valuation compared with a net realisable value for all of the aerodrome land (were it to cease operating) of $3.5 million.

5.16
We reproduce the valuation in Appendix 3.

5.17
A Ministry official, in an internal memorandum dated 4 April 1995, commented on the valuation as follows –

The key issue to arise out of [the Paraparaumu and one other] valuations is that the going concern valuations are less than the alternative use valuations in both cases. If we sell at the going concern value, this suggests that the Ministry would not be recovering the full economic value of the aerodromes. Indeed, unless a new owner could increase the value of the airport in its use as an airport, he/she would have incentive to put the aerodromes into their alternative use (of course there would be many practical impediments preventing a new owner moving quickly to close the aerodromes and dispose of the land for alternative use).

In … [Paraparaumu’s] case, the gap is … $1.9 m and it should be noted that the going concern valuation includes the assumption of an amount of surplus land ie the going concern valuation equals the net realisable value of the surplus land plus the net cashflow valuation of the core aerodrome assets.

5.18
Ministry officials and the commercial adviser told us that the approach to valuation of Paraparaumu was no different to that taken in respect of other airports, including the joint venture airports. In preparing the aerodrome for sale, the approach was always the same – to assume that it would remain operational but with greater efficiency and higher service charges fixed on a commercial basis. The income and expenditure scenario developed in the 1995 valuation seemed to them more closely to reflect the actual position of the aerodrome at the time. But it also assumed a significant increase in revenue from landing charges. That assumption was based on a comparison with new charges which had already been instituted on a cost-related basis at other airports.

Governance arrangements for the sale

5.19
The Ministry also contracted EY as commercial adviser and to manage the sale process. Both the partner responsible for this aspect (the commercial adviser) and EY had unique and extensive experience in the matters with which the Ministry was dealing – including the corporatisation and/or disposal of ports and airports. Indeed, EY had been working continuously on such matters for the Ministry for some years on a retainer basis. In the case of the Paraparaumu sale and one other, however, there was a specific consultancy agreement.

5.20
The commercial adviser ceased to be a partner of EY during the period of the sale. However, with the Ministry’s agreement, he continued to act as the representative of EY.

5.21
The Ministry also used the services of a national law firm for legal advice. Ministry officials told us that they used the law firm and EY because the sale was to be on a commercial basis. The expertise of Ministry officials lay mostly in policy development and implementation. They relied on the firms’ involvement to ensure that the necessary commercial discipline and “best practice” were used.

5.22
On the face of it, the governance arrangements were straightforward. EY was to manage the sale process, including the receipt and evaluation of tenders and negotiation with a preferred tenderer. Upon completion of negotiations, EY would make a recommendation to the Secretary for Transport on the preferred purchaser, the sale price, and any other conditions. Officials of the Ministry were responsible for settling the sale specifications (including evaluation criteria) and preparing the tender documentation. The external legal advisers were available to provide legal advice both to EY and to officials.

5.23
In practice, the arrangements were more fluid. The commercial adviser worked closely with Ministry officials throughout the process. As far as everyone was concerned, it was a joint project – with Ministry officials responsible for policy matters and ensuring that Ministers’ political objectives were met, and the external advisers responsible for ensuring that the process was lawful and had the necessary commercial discipline. There was a project group that met on at least 3 occasions, attended each time by Ministry officials, the consultant, and the commercial adviser – and on one occasion also by the external legal advisers. The consultant prepared notes of the meetings.

5.24
We were unable to ascertain whether the project group was intended to have any formal status in the sale process. The notes of its meetings suggested to us that it had decision-making and oversight roles in respect of the process. One Ministry official described it as a group that the commercial adviser used to keep the Ministry informed and report back on his work, but also as one to which he was accountable. Another official described the group as an element of the shared process, employing both commercial and public sector disciplines, working towards a common objective. The commercial adviser had a similar understanding.

5.25
As we shall see, the project group in fact played a key role in decision making.

Design of the sale process

5.26
EY’s consultancy proposal for the Paraparaumu (and one other) sale identified 4 phases to the process:

preparation of an Information Memorandum;
selection of tenderers and receipt of indicative bids;
negotiation of final sale and purchase agreement; and
settlement and transfer.

5.27
We were told that this was a standard process for asset sales at the time.

Conditions of sale

5.28
Cabinet had directed that the aerodromes be sold – by negotiation with user groups and/or other local groups, or by restricted tender involving user groups and/or other local groups.

5.29
It had also invited the Minister to report back on the use to which potential purchasers proposed to put the aerodrome.

5.30
Several parties were known, at that time, to be interested in purchasing Paraparaumu Aerodrome. They included the Kapiti Coast District Council, Wellington International Airport Limited, and a group known as the Paraparaumu Airfield Users Group. However, once the sale decision was publicised, several other individuals and companies approached the Ministry expressing interest. The Ministry told those parties that they would be informed when it was in a position to call for tenders. It continued to keep them informed of its sale intentions, and of the Treaty consultation that took place between May 1993 and the end of 1994.

Eligibility

5.31
Once it was in a position to proceed, the Ministry decided to use the “restricted tender” option rather than direct negotiation with users. However, it needed at this point to turn its mind to the question of eligibility, given that Cabinet had directed that the tender process be restricted to “user groups and/or other local groups”.

5.32
We were told that there was considerable discussion about how to address the “user group” requirement. It was considered inappropriate to broaden eligibility to include any group with a local connection. Accordingly, officials settled on an approach which would limit eligibility to those who had some connection with, or interest or experience in, the aerodrome or the aviation industry – in other words, current aerodrome users, nearby international airports, and local authorities.

5.33
We were told that this was the first time the term “aerodrome user” had been used as an eligibility criterion for sale of an asset. It was not given a precise definition. But Ministry officials regarded it as a term that had been in common use, for some time, to describe not only aircraft operators but also tenants of airport land. They thought the term should include any person who had some real connection with the aerodrome – whether or not for aviation purposes. Using the term broadly in this manner was seen as consistent with the objectives of both maximising sale proceeds and ensuring as far as possible that the aerodrome remained operational after sale. A broad definition would also avoid the Ministry finding itself in a situation where it had to make arbitrary judgments about who was or was not a “user” in a narrower sense.

5.34
The Ministry was aware of concerns in the community about the possibility of a “development-led” bid. Those concerns were expressed by the local authority and in telephone calls and letters to the Ministry and the Minister. The Ministry was confident that the “user” criterion would be adequate to address any concerns about eligibility.

Evaluation criteria

5.35
The internal memorandum prepared in February 1995 (see paragraph 5.3) also contained a useful summary of how the Ministry would take account of a prospective purchaser’s operational intentions. It said–

In the process of evaluating the tenders the matters of the long term commitment to continuing aerodrome services and the commercial ability to operate the business can be assessed. Such a process should not have any implications for the tender prices submitted and will give some assurance of the likely intentions of the buyer at the time the aerodrome is sold. The fact that the information was asked for and taken into account in evaluating the tenders should be enough to ensure that the Ministry is seen to have tried to honour the intention that the aerodromes should continue to operate as aerodromes. However it must be stressed that approach will not give the guarantee of some of the earlier mechanisms for the continued operation of the aerodromes. Nevertheless neither does it have the complicating factors of these other mechanisms nor the adverse affects [sic] on tender price.

5.36
The memorandum concluded that the evaluation process should consider:

The commitment to the aerodrome as a facility.
The involvement of other interests with a concern for the provision of the facility – for example, the local authority.
The financial resources of the bidders.
The commercial expertise of the bidders.
The intentions of the bidders with respect to aerodrome development.
The price in relation to the possible alternatives for the use of all or part of the land.

5.37
The Information Memorandum prepared for interested parties, as a basis of their tenders, contained, under the heading “Policy Objectives”, the following–

The Government in 1991 directed the Ministry of Transport (Ministry) to devolve its operation of six aerodromes, consistent with the intended restructuring of the Ministry into a policy department without operational responsibilities. While continued Government ownership is not considered necessary, the importance of Paraparaumu Aerodrome to the aviation industry and the local community is recognised.

It is the Government’s intention that Paraparaumu Aerodrome should be sold to parties who will continue operating the facility for as long as it remains commercially viable. For this reason, the Government has restricted the sales process to only those parties expected to have the objective of continuing the aerodrome business.

For the above reason, and to enable the new owners of Paraparaumu Aerodrome to make their own decisions about the future operational requirements, the aerodrome is being sold as a “going concern” business with all aerodrome land and Ministry assets in one “parcel”.

However, recognising that an amount of land at Paraparaumu aerodrome may be considered to be surplus to future requirements, tenders for the operational areas and any lesser area of land than the total amount described in this Memorandum, will be considered without prejudice.

The Ministry reserves the right to select any tender, not necessarily the highest. The likelihood of a tenderer successfully continuing the aerodrome after sale will be considered as part of the evaluation of tenders.

5.38
We reproduce a longer extract from the Memorandum, dealing with the conditions of and framework for the sale, in Appendix 4.

5.39
We asked Ministry officials and the commercial adviser about the statement that the Ministry reserved the right to select any tender, and that the likelihood of a tenderer successfully continuing the aerodrome after sale would be “considered” as part of the evaluation. We had expected to find a clear statement of the criteria that the Ministry and EY would use in evaluating tenders. Ministry officials told us that the Information Memorandum contained the criteria, i.e. that both commitment and capability to operate the aerodrome were matters about which tenderers would need to satisfy the Ministry before any further consideration could be given to a tender on the basis of price.

5.40
We do not agree that a reference to certain matters being “considered” amounts to a formal statement of evaluation criteria. Nevertheless, it was clear from each tender that tenderers understood not only that price would be a major factor, but also that capability and intention to continue operating the aerodrome were major considerations for the Government.

What happened

5.41
The Ministry advertised for expressions of interest from eligible bidders on 24 January 1995. EY also wrote to the parties that had previously expressed interest, seeking formal registration. A number of parties expressed interest.

5.42
The Information Memorandum was sent to interested parties on 17 February 1995. EY received 3 tenders by the due date of 21 April 1995. They were from Kapiti Avion Holdings (KAH), Kapiti Regional Airport Limited (KRAL), and a third tenderer. Submission of bids followed a process of “due diligence” conducted by prospective tenderers. The District Council and Wellington International Airport Limited decided not to tender.

5.43
KAH was a partnership of 4 individuals who described themselves as follows–

The members of the partnership are airport users, who want to influence the future of the aerodrome for the benefit of all users and the community.
The partners are businesspeople. Ownership of the aerodrome is a viable commercial proposition, if operated properly and effectively.
As residents of the Kapiti Coast and owners of the aerodrome, the partners have an opportunity to redefine the aerodrome, to maximise its use and the benefits from it for the community.

5.44
One of the former partners of KAH told us that the partners had at first encouraged the District Council to invest in the aerodrome. They formed KAH after the Council decided not to become involved. They submitted what is known as a “relative” bid – that is to say, it was for “$100,000 above the next highest tender bid (as disclosed to KAH) to a maximum of $3,110,000”.

5.45
KRAL was a company that had been incorporated by “four current major operators based at Paraparaumu Aerodrome”. The shareholders included a flying school and air charter business based at the aerodrome, a local aero club, and a gliding club. KRAL’s bid was for $700,000.

5.46
The third tenderer also represented aviation interests and put in a bid for $1,100,000. However, this tenderer did not proceed beyond submitting an initial bid.

Initial consideration of tenders

5.47
The commercial adviser produced handwritten notes of his financial analysis of the tenders. He told us that the essential criterion he looked for in the tenders was a cash offer that reflected the market valuation. He also examined the tenderers’ business plans for operating the aerodrome (in terms of both their operational intentions and their financial projections) and their management capability.

5.48
The project group met on 26 April 1995. Present were the commercial adviser, the consultant, and a Ministry official. We were told that the group satisfied itself that all 3 tenderers met the eligibility criteria of being “users” of the aerodrome, and that each had the capability and intention of operating it as a going concern. The commercial adviser told us that he had reservations about the financial forecasting used in the KRAL tender, including the robustness of its revenue assumptions. But those reservations were not such as to cause him to advise the Ministry to decline to consider the bid. That left the project group in the position where the only factor distinguishing the 3 tenders was price.

5.49
The project group decided that none of the 3 tenders were acceptable. The consultant’s note of the meeting recorded as follows –

None of the bids at an acceptable level.

Agreed that E&Y go back to all three and indicate that we do not think their bid took into account the value of the surplus land. They can either come back with a revised bid or we can take their bid as being for the operational areas only without the surplus land.

Check with [legal advisers] if the form of [KAH’s] bid is valid.

5.50
On 28 April 1995 the Ministry received written legal advice that the KAH bid –

is not, in our opinion, a legally valid tender and that you would be unwise to proceed to sell the Aerodrome to the tenderer on the basis of the tender. [Emphasis added]

5.51
Subsequent oral advice was recorded in a fax to EY by the Ministry in the following terms –

I have discussed [the opinion with the legal adviser] and it seems that it is necessary for you to go back to [KAH] (urgently) and advise him we have received legal advice suggesting that his bid may be invalid because of its “relative” nature. To ensure that there can be no question as to validity of the bid, [KAH] should recast it as a specific offer price. Of course, we would still retain the right to negotiate over that price if we were not happy with it. [Emphasis added.]

5.52
We took it from these contrasting statements that the Ministry was keen to consider a bid from KAH if it could. The initial legal advice was that the tender did not conform to the requirements of the Information Memorandum and that the Ministry would be unwise to consider it. However, the subsequent oral advice was less certain.

Revised tenders sought

5.53
In any event, the commercial adviser told us, he contacted all 3 tenderers as agreed by the project group. In each case, he told the tenderers that a number of bids had been received, but that none of them had put sufficient value on aerodrome land that may be surplus to operational requirements. He invited them to resubmit their tenders (in the case of KAH, with a specific price).

5.54
Representatives of KRAL produced for us 2 handwritten notes of their contact with the commercial adviser. The first was a note of a telephone call from the commercial adviser to one representative on 27 April. The second was a note of a meeting with the commercial adviser, attended by 2 representatives. The commercial adviser produced an entry from his diary which indicated that the meeting took place on Monday 1 May 1995.

5.55
The KRAL representatives’ note of the meeting recorded that they were told the Ministry had received a bid of over $1.4 million, and that it wanted a “clean unconditional deal” and a “serious indication by Friday pm” of whether KRAL intended to make a further bid. It also recorded their advice to the commercial adviser that KRAL was to meet and review the situation.

5.56
A shareholders’ meeting of KRAL took place the following day, 2 May. Its representatives told us that the shareholders accepted that they were being steered in the direction of a bid that took into account the realisable value of surplus land. The notes of the meeting also recorded that KRAL’s solicitors were to be instructed to ask the Ministry formally about the eligibility of the other bidders.

5.57
The commercial adviser received a new bid from KAH on 2 May, for $1.7 million. It was conditional on payments being staggered over a 12-month period and the Ministry giving an indemnity against claims under the Treaty of Waitangi.

5.58
The project group met again on 3 May. The external legal advisers were also present. The consultant’s note of the meeting recorded that –

Firm bid by [KAH] at $1.7m is at an acceptable level. $100,000 above E&Y valuation.

…

It was noted that the price of $1.7m was well below the alternative use valuation of $3.5m. However this valuation cannot be compared with the prices bid as these prices relate to the aerodrome as a going concern. It was not in the Ministry’s brief to call for bids for the land in any form other than as part of an operational aerodrome. It is also recognised that the Ministry is not able to control the future use of the land.

However it was noted that the most likely future owner ([KAH]) would be most unlikely to close the aerodrome and develop the land for the following reasons:

There would be considerable Council and local opposition.

The group has substantial local interests and would not want to get off-side with the community.

The users would cause considerable difficulty through political channels.

Many of the leases are long term which would make a buy out expensive.

The buyer has indicated his intention to involve the users/community in the operation.

It is recommended that negotiations be undertaken with [KAH] with a view to finalising the sale and purchase agreement.

The possibility was raised of accepting the [KRAL] bid for just the operational areas (which they had indicated was an option for them) and selling off the surplus land. The advice was that a sale of considerably more than $1m, due to the costs of selling land for subdivision, would be needed to equate to the [KAH] bid. This would also not be as clean as the current bid and leave the Ministry with land on its books for which a sale might take some time and trouble.

5.59
It was not until Friday 5 May that KRAL wrote to EY with a revised bid. It faxed its letter to EY and the Ministry. The letter noted that, since submitting the original tender, it had become apparent that it had given insufficient weight to the surplus land. It submitted a revised price of $1.5 million – subject to the Ministry, before settlement, effecting separate titles for the land which KRAL had identified as surplus.

5.60
We are perplexed by the timing of these events. KRAL’s note of the meeting with the commercial adviser on Monday 1 May said clearly that a “serious indication” of KRAL’s revised position was needed “by Friday pm”. KRAL’s representatives were both adamant that they met that timetable with the letter dated Friday 5 May, and that they would not have given any indication, before then, of the amount of the revised bid. Their shareholders’ meeting did not take place until the evening of Tuesday 2 May. The commercial adviser’s diary recorded another conversation with the representatives on that day, but neither representative recalled any contact with the commercial adviser from the time of their meeting on Monday 1 May until they submitted their revised bid on Friday 5 May.

5.61
Neither the commercial adviser nor Ministry officials could explain why the project group had met on Wednesday 3 May, and recommended negotiations with KAH as a preferred tenderer, when revised bids from the other 2 tenderers had not been received. In the event, the third tenderer did not submit a revised bid. But KRAL’s revised bid was received 2 days later – in accordance with the timetable agreed with the commercial adviser.

5.62
The commercial adviser and Ministry officials were also unable to explain why the note of the project group meeting did not refer to the amount of a revised bid from KRAL. The consultant, who prepared the note, recalled that there was only one revised bid before the group when it met. He told us that he expected he would have recorded the amount of any other bid, had it been known at the time. Nevertheless, the note does indicate that the commercial adviser was aware that KRAL had concerns about making a bid that reflected the value of surplus land.

5.63
The commercial adviser told us that he was sure that he was aware of the nature of the revised bid when the project group met, and that considerable weight had been placed, in discussion, on the condition that the Crown first meet subdivision costs. He regarded that as unacceptable, because of the uncertain amount of time and expense to the Ministry that would be involved.

5.64
KRAL’s representatives explained to us that they took it from the Information Memorandum (in particular the reference to tenders for all or part of the aerodrome land) that the Ministry did not have a preference about selling the aerodrome as a single block, and would be prepared to produce separate titles if necessary. Their research into the previous ownership history of the land had indicated that realising some of the potentially surplus land would be a complex exercise.

5.65
They acknowledged that they would have made the commercial adviser aware that KRAL saw difficulties in achieving subdivision of surplus aerodrome land, and that the costs associated with those difficulties had been factored into KRAL’s initial bid. They told us that KRAL considered it necessary, in return for an increased tender price, to attach a condition that the Crown would deliver the surplus land in a form which would enable it to be sold and the increased price recouped.

5.66
We think the most likely order of events is as follows.

5.67
When the commercial adviser spoke with a KRAL representative on 27 April, and met with both representatives on 1 May, he learned of KRAL’s concern about the uncertainty in achieving a clean subdivision of surplus land. The representatives indicated that, if there were to be an increased tender price, they were of a mind to prefer that the Crown undertake the subdivision work itself. There may have been a similar discussion between the KRAL representatives and the commercial adviser on 2 May. The commercial adviser reported that information to the project group on 3 May.

5.68
The project group did not know for certain that KRAL would make its revised bid subject to such a condition. Nor did it yet know of the amount of any revised KRAL bid – which explains the speculative nature of the recorded discussion about the relative merits of the KRAL and KAH positions. Nevertheless, the project group decided to proceed on the basis that there was a “firm bid” from KAH which was likely to be the highest offer – particularly if the likely costs to the Crown of having to undertake a subdivision before selling to KRAL, as its representatives had suggested, were taken into account.

5.69
The commercial adviser told us that, until a contract was signed, he would have been willing to negotiate with any party, including KRAL, which came up with a higher bid. He said that asset sale processes were designed deliberately with this flexibility, in order to ensure that the vendor achieved the highest price.

5.70
Whatever the case, it appears that the commercial adviser met with representatives of KAH on Friday 5 May to begin negotiations over its revised bid. Negotiations continued through its solicitors on Monday 8 May, and focused in particular on the terms of payment and the proposed indemnity over Treaty claims. Those conditions were withdrawn, in return for a reduced purchase price of $1,650,000.

5.71
Either on the same day or on the following day, it appears that the commercial adviser telephoned KAH’s solicitors to say that the bid was acceptable.

5.72
We note that by this time it would have been clear that KAH was the highest tenderer.

Challenge to KAH’s eligibility

5.73
KRAL’s solicitors wrote to EY on Wednesday 3 May, expressing concern about KAH’s bid and challenging KAH’s eligibility as “users” of the aerodrome.

5.74
It appears that the question of KAH’s eligibility as a user was raised with its solicitors by telephone on 8 May. They replied in writing on 9 May providing evidence of “use”. They also noted that KAH had been invited to bid and had been accepted as an interested party since July 1993, and that the Information Memorandum had made it clear that the Crown could deal with whomsoever it chose.

5.75
EY referred the matter to the external legal advisers. Their advice acknowledged that the term “user” could be interpreted broadly or narrowly. On a broad definition, a “user” could include persons who leased land or premises on aerodrome land, even if not for aviation purposes. On a narrow definition, the term would be confined to those who made use of the aerodrome for aviation purposes.

5.76
The advice noted that the Ministry had insufficient information from its own records to verify KAH’s eligibility in the narrow sense, and said that the Ministry could determine the matter beyond doubt by making inquiries of KAH’s representatives. However, it went on to say –

We also consider that (notwithstanding the “narrow” view set out above) persons who lease parts of the Aerodrome (such as hangers [sic] etc.) for business or other purposes will also be users of the Aerodrome in the broad sense even though they may not actually use the Aerodrome for the purposes of flying or maintaining aircraft. Accordingly, we consider that lessees will also be “users” in the broad sense.

It is also our view that, provided the Ministry has made reasonable inquiries to confirm the eligibility of the successful tenderer (and the basis upon which it has made that determination is reasonable) then it is unlikely that its assessment of this matter will be able to be challenged successfully unless it can be shown that it was not reasonably possible for the Ministry to form the view that the purchaser was a “user” of the aerodrome.

5.77
EY and the Ministry accepted this advice, and proceeded on the basis that KAH had been eligible to tender.

5.78
Later, on 26 May 1995, the Ministry made written inquiries of Landcorp to confirm the lease holding of one KAH partner at Paraparaumu, and to inquire whether another partner had any association with the aerodrome. These inquiries appear to have been made in response to a threatened injunction to stop the sale.

5.79
We asked why the written inquiries were not made earlier. Ministry officials told us that they were already aware that one partner in KAH owned a company which was a tenant at the aerodrome. Ministry officials, the commercial adviser, and the consultant were all quite clear in their minds that each tenderer, including KAH, met the “user” criterion. The written verification was obtained only to have a full record of the matter.

5.80
On 1 June 1995, KRAL’s solicitors wrote again to the Ministry providing evidence that suggested KAH did not meet eligibility criteria. The Ministry responded in writing on 8 June 1995. It confirmed it was satisfied that the KAH partners were “users”, and that it was not intended to draw a distinction between tenants and operators or other users of the aerodrome.

Recommendation to the Secretary for Transport

5.81
EY made a formal recommendation to the Ministry on 9 May 1995 that it should accept the KAH tender. The recommendation noted that KAH was “committed to maintaining the aerodrome as a commercially viable activity providing the current operational services”. It noted that the agreed price of $1,650,000 exceeded EY’s going concern valuation and was higher than KRAL’s revised bid of $1,500,000, and that KAH proposed to make payment in full by 30 June 1995.

5.82
Officials submitted the recommendation to the Secretary for Transport on 10 May 1995. She approved it the same day.

5.83
The sale and purchase and share transfer agreements were executed on 23 May 1995.

5.84
No one has raised any concerns about the terms and conditions of the agreements, or any other aspect of the documentation.

Alleged conflict of interest

5.85
Some time after the sale had taken place, KRAL commenced judicial review proceedings in the High Court, in a bid to have the result of the sale overturned. Its statement of claim included an allegation that EY had a conflict of interest which ought to have prevented it from acting as the Ministry’s adviser on the sale, because the successful tenderer, KAH, had named EY as its accountants in its tender.

5.86
The allegation was later canvassed in the Transport and Industrial Relations Committee’s report, and was the subject of written correspondence from EY and the commercial adviser, which was appended to the report.

5.87
We are satisfied that the factual circumstances have been fully disclosed:

KAH named EY as its accountants with the intention that it would seek its advice on tax issues;
EY had previously undertaken some work for a KAH partner on an unrelated matter;
EY was not involved in any way in the preparation of KAH’s tender or in subsequent negotiations over the sale;
the commercial adviser was unaware of EY’s prospective involvement with KAH until he noted the reference in the tender document; and
on becoming aware of EY’s prospective involvement, the commercial adviser took steps internally within EY to ensure that no engagement with KAH was accepted while the tender process was ongoing.

5.88
The consultancy agreement between EY and the Ministry contained an undertaking by EY not to act for another party in any matter that may conflict with the interests of the Ministry in respect of the sale project. We were also given a copy of EY’s internal policy on independence and conflicts of interest, as it applied at the time. The policy required immediate disclosure to all those involved, and steps being taken to determine –

… whether it is appropriate to continue to advise either client or to advise both clients to seek independent advice on the matter in question.

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