Appendix 1: Auckland's indoor arena

Procurement route

The Auckland City Council (the Council) decided in April 2004 to proceed with building a 12,000-seat indoor arena (the Arena) in central Auckland that will host major entertainment and sporting events. The Arena is intended to be of iconic design and compete with similar facilities in other cities overseas.

The Arena is a project being built, and that will be operated, under a BOOT contract (build, own, operate, and transfer).

Initially, expressions of interest were sought to build and operate the Arena based on the project being fully funded by the private sector. However, it became apparent during this stage that potential private sector providers would not be prepared to undertake the project without a financial contribution from the Council. The Council therefore undertook its own assessment, which was peer reviewed, and commissioned an external consultant to undertake individual interviews with potential tenderers. The interviews led to an assessment of the financial contribution that would be required from the Council if it were to attract private sector interest in a BOOT contract.

The Council granted a concession to Quay Park Arena Management Limited (QPAM) in May 2004 through the BOOT contract. QPAM has been set up as a special-purpose vehicle owned by the company that will operate the Arena and a private sector financier. QPAM has agreed to build, own, operate, and maintain the Arena for 40 years, when it will transfer ownership of the building and the operating systems to the Council.

Construction is currently in progress. The building will cost $80 million, and the Council has made a prepayment of $68.2 million for the transfer of ownership of the Arena and operating systems. QPAM has invested $11 million.

QPAM will be entitled to all revenue from ticket sales and venue rentals, and the agreement provides for the Council to receive royalties, which the Council will in part use to fund community events at the Arena.

Reasons for procurement decision

The Council officers we interviewed considered that the project would have gone ahead without private financing. However, they gave the following reasons for choosing a partnering approach:

• The Council does not understand and has no experience in operating a major events venue. Under the agreement, the private sector partner, which has the experience and skills to run this type of business, is responsible for operations, and carries the operational risk.
• The private sector partner will be responsible for maintaining the venue.
• The Council will not be required to fund depreciation because the physical asset is not on its balance sheet.

Some important lessons so far

Political commitment

Political commitment is essential to achieving a successful outcome. The Council established a cross-party Arena Working Party of Councillors to ensure that they were properly involved throughout the project. The Working Party oversaw officers’ negotiations with the private sector partner and made recommendations to the Council. Senior officers managing the project also invested considerable effort in ensuring that Councillors were engaged and had the necessary degree of confidence in the project as it progressed.

Internal project management

Political commitment needs to be supported by robust internal project management arrangements. A tight, focused internal project management team was established, with the determination to make the project succeed. A Programme Manager was given responsibility for preparing an in-house project plan – including, for example, Council communications and resource consent applications. A client representative was appointed during the construction phase to look after the Council’s interests via an independent reviewer engineer and independent project manager. In practice, the independent project manager is involved on a regular basis with construction decisions around the allocation of a council contingency and enhancement budget.

Financial advice

The Council recommends seeking strategic banking investment advice at an early stage about the best way to obtain capital funding for this type of project. The advice received will affect the choice of procurement route.

Peer reviews

A number of internal and external peer reviews and independent assurance were sought during the decision-making process, such as peer reviews of the business plan, arena design, technical aspects, operations, financial appraisals, and legal documentation, and probity assurance on each stage of the tender selection process. These reviews provided the Council with confidence that its approach stood up to scrutiny. However, the time required to undertake peer reviews needs to be included in the project plan, and the number of peer reviews should not unreasonably impede project progress.

Relationship management

The Council has put in place ongoing arrangements for managing the relationship with the private sector partner once the building is in use. A Relationship Manager has been appointed who sits alongside the Project Manager at all important meetings with the private sector partner, though that person does not have an official role until the opening of the Arena. Once the venue is opened, the Relationship Manager will take over maintaining the association with the private sector partner from the Project Manager, in addition to carrying out a community liaison role.

Maintenance of the asset

The agreement includes a requirement for the private sector partner to record its operating systems, including asset management arrangements, in facilities Operator Manuals, which are to be independently reviewed. Targets related to asset management service levels, which are to be reported on annually, are also included in the agreement, and the private sector partner is required to maintain a sinking fund for replacements and renewals.

Business failure

Business failure would mean that the Council would have to take over the Arena, using its step-in or termination rights included in the agreement. The Council plans to manage this risk by monitoring the private sector partner’s financial viability. However, this will have to be balanced against the private sector partner’s requirements for commercial confidentiality.

The Council considers that, as a partner, it has a responsibility, within reason, for ensuring the continued financial viability of the private sector partner. To this end, provisions are included in the agreement for payment of rates, and the Council has undertaken not to fund a similar venue that might compete for business with the Arena within the city boundaries during the next 20 years. The agreement also includes provisions on the amount of debt that can be carried by the private sector partner.

The Council’s reputation

The Council recognised early the need to protect its reputation and the community benefits from the public investment of $68.2 million. It also recognised that, whether or not the Council owned the Arena, the public would think that it did. Therefore, the range of events staged at the Arena might affect public perceptions of the Council. This risk is to be managed through the long-term involvement of the Council’s Relationship Manager, and through provisions in the agreement.