Part 1: Introduction

Inquiry into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre.

Background to the inquiry

On 19 May 2010, the Ministry of Economic Development (the Ministry)2 sought expressions of interest (EOI), on behalf of the Government, for proposals to build an international convention centre.

On 12 June 2011, the Government announced that it was negotiating with SKYCITY Entertainment Group Limited (SkyCity), whose proposal it had selected as the best option.

Metiria Turei MP wrote to the Auditor-General on 24 April 2012, raising concerns about the fairness and adequacy of the process used to decide on SkyCity’s proposal as the preferred option. Ms Turei was concerned that the EOI process did not comply with good procurement practice, and that SkyCity had an advantage in that process based on earlier contact with the Prime Minister. She also questioned whether all appropriate costs had been considered when choosing SkyCity’s proposal, and referred to the economic costs of gambling harm that could result from increased gaming opportunities.

The underlying question was whether the decision to negotiate with SkyCity was made for good reason, or had been influenced by inappropriate matters or connections between business and political leaders. We gathered initial information from the Ministry to enable us to make a preliminary assessment of what had been done, but that work left us with questions about the process that had been followed. We regarded the significance of the negotiations and the nature of the concerns as justifying further careful review.

The Deputy Auditor-General, Phillippa Smith, decided on 13 June 2012 that an inquiry into the EOI process was warranted to provide the New Zealand public with assurance about what had taken place. Appendix 1 sets out the terms of reference for the inquiry.

On 29 June 2012, Hon David Cunliffe MP asked us to include the extent of central government funding of the convention centre proposal as part of our inquiry. We have done so.

How we carried out this inquiry

In carrying out this inquiry, we met with:

  • officials from the Ministry who were closely involved in the convention centre process;
  • the Prime Minister, Rt Hon John Key, who is also the Minister of Tourism,3 his Chief of Staff, and his then Deputy Chief of Staff;
  • Hon Gerry Brownlee, the Minister for Economic Development in 2010 until late February 2011, and one of his advisors;
  • Hon David Carter, Acting Minister for Economic Development from late February 2011 until the new Cabinet was sworn in after the 2011 general election;
  • representatives of the industry body representing convention centres and related industries, Conventions & Incentives New Zealand (CINZ);
  • the Chief Executive of Auckland Council and the Mayor of Auckland’s Chief of Staff;
  • executives from SkyCity; and
  • three of the four other organisations that expressed interest in providing an international convention centre. (The other organisation commented by phone and in writing.)

We also reviewed Ministry information and files now held by the Ministry of Business, Innovation and Employment.

We sought comments on drafts or extracts of this report from the Ministry of Business, Innovation and Employment; Rt Hon John Key and his Chief of Staff; Hon Gerry Brownlee and his advisor; Hon David Carter; some individuals who had been involved as officials but no longer worked for the Ministry: and SkyCity.

Summary of our conclusions

Decisions were based on appropriate information

Overall, we were looking to establish whether decisions had been made for appropriate reasons. We have seen no evidence to suggest that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations.

The quality of the process followed

However, we found a range of deficiencies in the advice provided and steps taken leading up to that decision. These procedural problems reflect some of the challenges of applying general procurement expectations to complex matters requiring political and policy decisions. In our view, better planning at the outset would have helped to identify and manage the risks.

The good practice advice that our Office has published identifies basic principles that help ensure that public funds are spent wisely and well: accountability, openness, value for money, lawfulness, fairness, and integrity. We expect public sector organisations to be able to demonstrate how their work meets those basic principles. We set out practical information and advice on recognised good practices, but do not attempt to formulate procedural rules. We acknowledge that there are many ways of meeting these basic principles and that new situations will be likely to require new approaches. However, there are additional and stricter rules that apply to central government.

We considered carefully how we should assess the steps taken during the project to develop an international convention centre: what standards or expectations were appropriate? In particular, we considered the extent to which procurement rules and guidance were relevant. We decided that, for the purposes of this inquiry, the project had three distinct stages, with different principles governing each stage.

The early feasibility and exploratory work

Stage one was the early work looking at the feasibility of such a centre, and the initial exploratory discussions between central government and SkyCity. These included preparations to assess a firm proposal that was expected from SkyCity. We discuss these events, up to March 2010, in Parts 2 and 3 of this report. We assessed what was done against the high-level principles governing how central government should consider supporting private sector business initiatives and committing financial support towards a particular outcome, and the overall rules governing procurement by government departments.

We concluded that the feasibility and exploratory work in the first stage was carried out reasonably. However, by the time it was expected that SkyCity would put a firm proposal to the Government for support, officials should have been working to understand and advise on the procedural obligations and principles that would need to govern the next steps. We found no evidence that officials were doing so at this stage.

The EOI process

Stage two began with the Government’s decision in March 2010 to explore the market through a formal and competitive process with a request for expressions of interest. We discuss, in Parts 4 and 5 of this report, how we assessed the steps taken to prepare the EOI document and to evaluate the responses. We based our assessment on established good practice principles for procurement approaches of this kind. Our assessment took account of the fact that this was an early and exploratory process rather than a full tender for detailed proposals.

Overall, we regard the EOI process in stage two as having been poorly planned and executed. Insufficient attention was given to planning and management of the process as a whole, so that risks were not adequately addressed and managed.

We understand the challenge that officials faced during this process and are satisfied that they worked in good faith to provide a careful and genuine evaluation of the options. However, we do not consider that the approach adopted was appropriate. The result was that one submitter was treated differently from the others during the evaluation process.

Commercial negotiations

Stage three is still continuing. It is the process of commercial negotiation with SkyCity to see whether agreement can be reached on terms for developing an international convention centre. We have assessed this stage against the normal principles governing how the public sector engages in commercial negotiations, and have not identified any matters of concern. We provide our assessment of this work in Part 6 and briefly discuss other related issues, including direct and indirect costs, in Part 7.

Overall, it is obvious that SkyCity’s gambling facilities could give it a unique means of funding the capital costs of a convention centre, which could avoid the need for substantial central government funding. During this inquiry, we have not heard any comment to suggest that other submitters did not understand the reasons why the Government might prefer the SkyCity proposal. The Government is entitled to decide, as it has, to negotiate directly with SkyCity for a concessions-based agreement. The Government will be accountable in the usual way to Parliament and the public for those policy choices.

2: On 1 July 2012, the Ministry of Economic Development became part of the Ministry of Business, Innovation and Employment. References to “the Ministry” in this report are to the Ministry of Economic Development.

3: Generally, we refer to Rt Hon John Key as Prime Minister rather than referring to both titles. However, we refer to him as Prime Minister/Minister of Tourism in relation to events that are specific to his responsibilities as Minister of Tourism.

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