Part 2: Deciding on the eligibility criteria

Inquiry into the Strategic Tourism Assets Protection Programme.

Time line showing events from the 14 May to the 28 of May.

2.1
In this Part, we describe:

Background to the Strategic Tourism Assets Protection Programme

A response to Covid-19 and its effect on the tourism sector

2.2
In April 2020, the Minister of Tourism asked Tourism New Zealand to develop strategies for "the future of tourism".

2.3
Tourism New Zealand prepared a Cabinet paper, dated 12 May 2020, outlining a tourism model that would "enrich New Zealand and the well-being of New Zealanders". Because responding to Covid-19 posed serious and immediate challenges, work on preserving the "wheua" of the tourism sector was separated from work to maximise the value of international visitors.

2.4
The Cabinet paper proposed protecting significant tourism assets that offered significant economic benefits to the regions they were in ("spill-over" benefits). This proposal became the basis for STAPP. Officials cautioned that any funding should not tie labour to jobs that might not exist in the future or interfere with investment signals that might otherwise help to grow tourism.

2.5
In early May 2020, Treasury officials advised the Minister of Finance that a support package for the tourism sector could be included in the second wave of the Covid-19 Response and Recovery Fund. The support package could help tourism businesses that were strategically important to the tourism sector and its recovery and contributed to their region's economic development. At this time, the Ministry had developed indicative criteria for supporting the tourism sector.

2.6
The Treasury advised the Minister of Finance on several matters that needed to be considered:

  • An approach to target specific tourism businesses could increase the risk of legal challenge to any scheme due to the discretion of decision-makers to determine whether a business met the eligibility criteria.
  • Any scheme to support the tourism sector would risk both under- and over-investing.
  • Tourism makes a significant contribution to the economy, including the economies of key South Island regions and the Māori economy. About 16% of working-age Māori worked in the tourism sector, and there was a risk that iwi balance sheets could be disproportionately affected by the impact of Covid-19 due to their focus on tourism.

2.7
The Treasury and the Ministry were concerned that Tourism New Zealand's proposal did not prioritise getting money to affected businesses and did not adequately consider longer-term trade-offs.

2.8
The Treasury instead recommended producing another report for Cabinet about the approach to the tourism sector recovery package and funding. This would allow the Treasury and the Ministry to work on risks and issues with Tourism New Zealand. This was expected on 1 June 2020.

The Tourism Sector Recovery Fund

2.9
On 13 May 2020, Cabinet formally agreed to establish a $400 million tagged contingency "Tourism Sector Recovery Fund".4 Cabinet gave the Tourism Recovery Ministers responsibility for overseeing tourism recovery.

2.10
Cabinet directed the Ministry to prepare implementation advice with the Treasury, Department of Conservation, Department of Internal Affairs, Tourism New Zealand, New Zealand Trade and Enterprise, Ministry of Transport, Ministry for the Environment, Ministry for Social Development, and the Ministry of Foreign Affairs and Trade.

2.11
The Minister of Tourism had recommended in the Cabinet paper that New Zealand Māori Tourism (an incorporated society) should also be involved in this process. However, this recommendation was not in the Cabinet minutes.

2.12
Cabinet agreed that if there was a risk of losing a strategic tourism asset before the 1 June 2020 report back date, the Ministry and the Treasury could provide advice to the Tourism Recovery Ministers.

2.13
On 14 May 2020, the Minister of Tourism announced the $400 million Tourism Recovery Fund and the establishment of STAPP to protect strategic tourism assets. STAPP was not expected to save every job – rather, its aim was to ensure that the wheua of the tourism industry would survive and form a more sustainable tourism sector in the future.

2.14
The priority of the Ministry and the Tourism Recovery Ministers was to fund strategic tourism assets as quickly as possible. The main objectives for STAPP were that it should:

  • be implemented quickly and be administratively simple;
  • minimise the economic impact of Covid-19 on key tourism businesses and the regions these businesses are in;
  • include short-term liquidity and solvency support where it was clear that other solutions were not enough; and
  • support the tourism sector to become more productive, sustainable, and inclusive.

2.15
The criteria and application processes for STAPP were developed under urgency for the Tourism Recovery Ministers. A registration of interest webpage launched on 15 May 2020 and accepted expressions of interest until 4 June 2020. The intent of this was to gauge interest in STAPP and use the responses to shape its design. However, STAPP criteria were decided before the registration of interest webpage closed.

Developing the criteria for the Strategic Tourism Assets Protection Programme

Eligibility criteria needed to be developed

2.16
On 18 May 2020, the Ministry advised the Minister of Tourism on eligibility criteria for STAPP. To ensure that funds would be available to protect New Zealand's strategic tourism assets and mitigate the risk of over-investment, a series of "eligibility gates" were proposed. If an asset met all eligibility gates, the funding offered would be the minimum viable intervention for the minimum period.

2.17
The Ministry also noted that advice from other agencies, and feedback from the registration of interest process, indicated that the proposed criteria needed refining.

2.18
Ministry officials proposed developing further assessment criteria, such as whether the asset was iconic, critical to the region's tourism, or could not be easily substituted.

2.19
The Ministry told us that, at this stage, it understood that Ministers were looking to fund between 10 and 50 strategically important tourism assets. The eligibility criteria and application process were designed with this number in mind. The Ministry noted the key risks were that:

  • the number of regionally or nationally significant tourism assets was unknown; and
  • the amount of minimum viable funding needed for tourism businesses and the length of time that funding would be needed was also uncertain.

2.20
At that stage, it was intended that scheduled aviation services, central government-owned or funded assets, generic assets that could be repurposed (for example, accommodation), and assets with majority overseas ownership would not be eligible for STAPP funding.

Deciding the criteria and scale of STAPP

2.21
On 28 May 2020, Ministry officials briefed the Tourism Recovery Ministers Group about the objectives and proposed criteria for STAPP. Consistent with some other Covid-19 programmes that we have seen, STAPP would involve a "high-trust" approach. We discuss the implications of this in paragraphs 2.40-2.47.

2.22
The Ministry intended to work with other agencies to identify strategically significant tourism assets. These included assets that had notable environmental, historic, or cultural value, and were popular with domestic and international tourists.

2.23
Tourism businesses applying for STAPP funding would need to demonstrate that support was needed to safeguard the tourism asset and that alternative options for support had been exhausted. Proposed criteria for assessing alternative options for support included whether:

  • other forms of government subsidy (such as the wage subsidy scheme) had been used;
  • there was likely to be a market response;
  • there were existing support mechanisms to keep the asset functional in the short, medium, and long term; and
  • the tourism business had alternative support options, such as a parent company that could provide funding.

Figure 2
Eligibility criteria for the Strategic Tourism Assets Protection Programme

Figure 2: Eligibility criteria for the Strategic Tourism Assets Protection Programme

Source: Office of the Auditor-General

2.24
At this stage, the number of assets STAPP would fund was not confirmed. The Ministry proposed three options:

  • Option A (the Ministry's preferred option): Fund about 30 tourism assets that were nationally and internationally well-known and identified as benefitting the local economy.
  • Option B: Fund up to 100 tourism assets and include some assets that were less well known. This could create debate over whether they were in fact strategic assets. There was also a risk that a tourism business that did not receive funding, while its competitor did, could ask for funding for equity and/or competitive neutrality reasons.
  • Option C: Fund up to 1000 assets. Ministry officials said this could create debate about which tourism businesses should qualify for STAPP funding. It would also require a lot of administrative work.

2.25
The Tourism Recovery Ministers told us that developing STAPP was an iterative process and, as work progressed, the definition of what a strategic tourism asset was expanded.

2.26
Ministry officials presented options for grants and loans, including suspensory loans and conditional loans. At that stage, early feedback from the STAPP registration of interest process was that grants, loans, wage support, and support for government compliance costs would be useful.

2.27
Loans could link STAPP to funding agreement conditions on social, economic, cultural, and environmental outcomes that the Government wished to influence.5

2.28
Ministry officials proposed a time frame for the application process. Applications for STAPP funding would begin in early June 2020 and close in early July 2020. Decisions about whether to approve applications would be made in late July 2020. They advised that this time frame would enable them to advise:

  • how the funded assets would ensure the viability of other aspects of the tourism supply chain;
  • how proposed funding would overlap with, and leverage, the Provincial Growth Fund and International Visitor Levy;
  • whether the tourism asset would be viable after receiving STAPP funding; and
  • how an asset would operate with reduced visitor demand if government support was not provided.

2.29
The Tourism Recovery Ministers decided on an 18 June 2020 closing date for STAPP applications.

There were concerns that the intended scale of STAPP was unclear

2.30
Treasury officials briefed the Minister of Finance before the Tourism Recovery Ministers' Group meeting on 28 May without having seen the Ministry's paper.6 Documents from Treasury officials state that the Minister of Tourism asked Ministry officials to provide advice without consulting the Treasury.7

2.31
Treasury officials were concerned that it was unclear whether STAPP aimed to support key tourism businesses or key tourism assets. They wanted clarification about whether the aim was to provide substantial support to a few tourism businesses or assets or smaller amounts of support to many more tourism businesses or assets. The Treasury's view was that STAPP would support a smaller number of tourism businesses.

2.32
As part of our work, we asked for documentation showing which of the three options for STAPP (see paragraph 2.24) the Tourism Recovery Ministers had agreed to. However, the Ministry could not locate this documentation.

2.33
The Minister of Tourism's talking points for his oral update to Cabinet on 2 June 2020 highlighted three key criteria for STAPP.8 The Minister said he expected that STAPP would fund about 50 tourism businesses with strategic tourism assets. This suggested that Cabinet had decided to support Option A (see paragraph 2.24).

The application form

2.34
On 4 June 2020, the STAPP application process began, with a closing date of 18 June 2020. Information about the STAPP process was communicated through the Ministry's tourism recovery webpage, which had been set up in May 2020, and through tourism industry channels. Those who had submitted a registration of interest were notified and invited to apply.

2.35
When the application process began, the wage subsidy scheme (which had started on 27 March 2020) was due to end on 9 June 2020. After the STAPP criteria had been advertised, and the application process began, the wage subsidy scheme was extended.

2.36
Tourism businesses applying for STAPP funding had to complete a self-assessment of the three main criteria9 by answering tick-box questions. Businesses had to state that there was a need to protect the tourism asset and that they had exhausted all other avenues of support (including government and private support). There was no explanatory guidance about what steps tourism businesses might have reasonably been expected to take before they could say they had exhausted all other means of financial support.

2.37
One section of the application form allowed the tourism business to describe its business and why they believed it was regionally or nationally strategically important. Other questions were about visitor numbers, changes to full-time equivalent staff numbers, and how many staff would be retained if they received STAPP funding.

2.38
Tourism businesses were asked about their operations and financial situation before Covid-19 and after Covid-19 entered the country. They were also asked what changes they had made to keep their business operating, the cost of hibernating the business, and the minimum amount of funding needed for the business to operate at a minimum viability level.10 Tourism businesses were asked how much money they were applying for and a breakdown of how it would be spent. One question asked whether funding had been requested from other sources, such as banks or investors. This question could only be answered with a "yes" or "no". There was no set expectation for what should happen if an applicant answered no.

2.39
The only supporting information requested from applicants was two years of profit and loss statements, a goods and services tax (GST) number, and bank account details with third-party verification of those bank details.

Our comments on developing the criteria

A high-trust model

2.40
The Ministry told us it used a high-trust approach to STAPP to be consistent with the Government's approach to other aspects of the Covid-19 response. A high-trust approach also allowed a quick response to a sector needing support.

2.41
In our report on the wage subsidy scheme, we noted that it was not uncommon for governments to adopt high-trust approaches in emergencies.11 However, this can increase the risk of fraud and error because payments might be made to those who are not eligible or who might exploit the process.

2.42
For high-trust approaches to work well, people applying for funding need to understand and identify how the eligibility criteria apply to them. Decision-makers will rely on the accuracy of any statements made and information submitted and on the honesty and integrity of the applicants. However, decision-makers should also consider the types of evidence they might wish to seek at a later stage to verify that eligibility criteria had been met. Applicants need to know what type of information or evidence they might be expected to provide at a later stage.

2.43
For STAPP, tourism businesses applying for funding had to self-assess against the criteria. The application process relied largely on non-statutory self-declarations and supporting information. Ministry officials told us that, because of pressures to establish STAPP quickly, they decided to require the minimum amount of information needed to check against the key criteria. However, this should not preclude building in adequate checks later to verify whether the key criteria had actually been met. In our view, thinking about validating and monitoring information should have occurred as part of STAPP's design. Instead, monitoring and assurance arrangements were developed months later.

2.44
When public organisations develop and implement crisis-support initiatives that approve payments based on "high-trust", they should ensure that criteria are sufficiently clear and complete so applicant information can be adequately verified.12

Consideration of Māori tourism when developing criteria

2.45
When funding options for the tourism sector were being considered, the Treasury advised the Minister of Finance about the disproportionate impact the loss of international tourists would have on Māori tourism. When developing the criteria for STAPP, Cabinet directed the Ministry to consult with other organisations including Te Puni Kōkiri. The initial Cabinet paper noted Māori tourism's place in the tourism market, and the potential for the downturn in tourism to impact Māori communities that are disproportionately reliant on tourism businesses. However, we did not see evidence of New Zealand Māori Tourism or Te Puni Kōkiri being involved in STAPP's design.

2.46
Such consideration came later. In July 2020, the Tourism Response Ministers told us they factored into their decision-making advice from the Ministry that Māori tourism businesses were significantly and disproportionately affected by Covid-19 and loss of international visitors.

2.47
Given the disproportionate impact of Covid-19 on Māori tourism businesses, we expected more work done on how to best support Māori tourism when developing STAPP criteria for funding. The unique cultural experience that some Māori tourism businesses provide was not specifically considered when developing the criteria, and cultural aspects in assessing whether a tourism business was strategically important did not contribute to the overall score or weighting in the assessment process.

Need for clear criteria

2.48
Clear criteria and assurance processes create trust and confidence. This is because people feel that they have been dealt with fairly and transparently. The high-trust approach that STAPP used meant tourism businesses only had to provide the minimum amount of information to support their application. For that reason, it is even more important to have sufficiently clear criteria so verification can be carried out later to ensure that the criteria had in fact been met.

2.49
In our view, there were aspects of STAPP's design that were not clear. This created uncertainty when the Tourism Recovery Ministers had to make decisions about which tourism businesses were eligible for STAPP funding. We discuss these aspects below and in Part 5.

2.50
The STAPP criteria involved objective and subjective assessments. Factors like visitor numbers and change in revenue can be quantified and objectively assessed. Other factors – such as whether visitation numbers would drop if the tourism asset was gone – were more speculative and, therefore, harder to review for accuracy. The limited documentation explaining the reasoning for some assessment decisions also made this particularly difficult.

2.51
Criteria should be clear and provide sufficient guidance so applicants can accurately self-assess and make a judgement about whether they meet the criteria. We identified three policy considerations that could have been decided earlier or explained more clearly. These are discussed in paragraphs 2.54-2.72.

2.52
An important part of STAPP's financial assessment process was the financial viability of the tourism business before Covid-19. Officials told us that they focused on whether the tourism business had been viable for at least two years before Covid-19. With hindsight, it would have been beneficial to have explained this more clearly to applicants in the criteria or in the questions in the application form.

2.53
It was not clear to us whether an explicit decision had been made regarding the financial benefits of funding hibernation costs during the tourism downturn over keeping businesses open. When STAPP was first discussed in May 2020, funding for hibernation was contemplated. As time went on, the emphasis changed to keeping tourism businesses operating at minimum viability level. Whether supporting tourism businesses to hibernate or operate at a minimum viability level, there are implications for funding and how applicants pitch their applications. However, we could not see that an explicit decision was made about the preferred outcome.

What did "exhausted all other avenues of support" mean?

2.54
One of the key criteria for being eligible for STAPP funding was that applicants had to have "exhausted all other avenues of support". Applicants ticked a box to say that they had exhausted all other avenues of support and answer a "yes/no" question about whether funding had been requested from other sources (such as banks or investors).

2.55
Smaller tourism businesses questioned whether large tourism businesses could provide, or access, financial support for their subsidiary tourism companies. We were advised that some tourism businesses considered applying and self-assessed against this criterion. They ultimately formed the view that, potentially, there were other ways they could access support (such as debt re-financing or borrowing against personal property). On that basis they did not apply because they did not believe they met the requirement of having exhausted all other avenues of support.

2.56
There was no guidance for applicants about the steps they might have reasonably been expected to take before confirming they had exhausted all other avenues of support. In reviewing applications, we saw that some tourism businesses did provide evidence of the steps they had taken to refinance their business. Others referred to banks being "unlikely" to lend. There was a high degree of variability in the information provided with applications. Overall, it appeared to us that the fact that a tourism business determined it needed financial assistance was considered enough to demonstrate that they had "exhausted all other avenues of support".

2.57
Since STAPP was using a high-trust model, officials relied on tourism businesses' unverified statement that they had exhausted all other means for support. The Ministry told us that the two weeks it had to assess applications was not long enough to verify whether a business had exhausted all options for financial support. Officials alerted the Tourism Recovery Ministers that the tight time frames meant that they would not be able to do due diligence on the information provided before decisions were made.

2.58
We saw that the Tourism Recovery Ministers asked officials on 30 June 2020 what measures were in place to ensure that funding was appropriately given. This included wanting to understand how tourism businesses would demonstrate that they had exhausted all other means of financial support. The meeting minutes note that Ministers asked about monitoring and sought to understand what other avenues applicants had explored to seek financial support.

2.59
The Ministry advised the Tourism Recovery Ministers that tourism businesses would declare that they had exhausted all other avenues of financial support in their application, Deloitte would carry out a financial assessment of their finances, and tourism businesses would be required to submit quarterly declarations. Funding would only be made when tourism businesses provided a satisfactory report. The Ministry proposed that random audits could be carried out. However, this did not happen. We discuss STAPP's monitoring arrangements in Part 6.

Role of parent companies

2.60
People wrote to us with concerns that STAPP was funding tourism businesses that had parent companies with a significant asset base. They questioned the ability to refinance using the resources of the parent company.

2.61
Early policy advice to the Tourism Recovery Ministers was that parent company resources could be considered as part of assessing whether a tourism business had exhausted all avenues of support. However, the STAPP application form did not seek any information about whether the business had a parent company. We had expected the Ministry to explicitly determine whether parent company resources should be considered, and if so, what evidence would be needed.

2.62
We asked the Tourism Recovery Ministers what they considered having "exhausted all other avenues of support" meant. We also asked them about the role of parent companies. The Tourism Recovery Ministers noted that tourism businesses had to demonstrate a need for support and that alternative sources of support had to have been exhausted.

2.63
The Tourism Recovery Ministers said that assessment criteria included considering whether there were existing support mechanisms available, such as parent companies. The Tourism Recovery Ministers referred us to meeting minutes from 2 July 2020. The minutes recorded discussion about the role of declarations, noting that these would be renewed on a three-monthly basis, and engaging Deloitte to assess tourism businesses' finances. However, the application and reporting information did not provide information about, or demonstrate the existence of, any market response or ask about parent company support mechanisms. The Ministry did not ask Deloitte to consider the role of parent company support in its analysis.

2.64
We were aware that the Ministry of Transport had set up an essential transport connectivity support scheme at about the same time as STAPP. We were interested to see how that scheme had treated parent company support as part of assessing whether the applicant had exhausted all other avenues of support. The Ministry of Transport explicitly designed the essential transport connectivity support scheme as a scheme of last resort.13

2.65
The Ministry of Transport assessed applications against three key factors:

  • Had other government support been accessed? While other support was being received, essential transport connectivity support would not be given.
  • Applicants had to demonstrate that they had done what they could do to downscale operations, including reducing staff numbers.
  • If the applicant had a shareholder, the Ministry of Transport wanted evidence it had accessed company reserves. Evidence had to be supplied to demonstrate that all other opportunities for funding had been exhausted.

2.66
We acknowledge that the number of applicants for the essential transport connectivity support scheme was significantly lower than for STAPP. However, the essential transport connectivity support scheme demonstrates that a different approach could have been taken to getting more assurance that all other avenues of support have been exhausted.

2.67
In our view, if exhausting all other avenues of support was an important pre-condition of being eligible for STAPP funding, this should have been clearly explained. More thought should have also been given to asking applicants to provide evidence that the requirement was met (for example, copies of correspondence with the bank or parent company). If this information was not provided with the application, then it should be asked for at a later stage as part of ongoing compliance monitoring.

2.68
The Tourism Recovery Ministers made subsequent decisions in July 2020 to distribute most of the funding through loans rather than grants. This partially lowered the risk of the high-trust approach.

Adequacy of financial information

2.69
Tourism businesses were required to submit profit and loss statements with their applications for STAPP funding. Although profit and loss statements show revenue changes, they do not provide a complete picture of what resources a business has available (for example, what reserves a business has to draw on). Therefore, profit and loss statements could not be used to help assess whether all other avenues of support had been exhausted, including whether a business had its own cash reserves on the balance sheet. Asking for full balance sheet information would have provided better information about a business' ability to operate under the financial implications of Covid-19.

2.70
We asked the Ministry why it chose to only ask tourism businesses for profit and loss statements rather than the full balance sheet. The Ministry told us that it had consulted its Provincial Development Unit and asked what financial information it required for applications. The Provincial Development Unit said that it usually asked for two years of profit and loss statements and balance sheet information. Ministry officials were advised that, because of the time frame for STAPP, there would not be enough time to get up-to-date balance sheet information from applicants. Therefore, Ministry officials decided to base the financial assessment on the most recently available profit and loss statements. Ministry officials said that the Provincial Development Unit had told them that businesses are reluctant to provide balance sheet information or profit and loss statements.

2.71
In our view, the Ministry should have required applicants to provide full balance sheets and evidence that they had exhausted all other avenues of support. This would have provided greater assurance that only tourism businesses that had no alternative options open to them, and met the STAPP criteria, were funded.

2.72
For STAPP, the variable responses to the questions about having exhausted all other funding options, use of profit and loss statements rather than full balance sheet information, and lack of early decisions about whether parent company assets should be considered, means that we cannot say with any certainty that funding was only provided to tourism businesses that had exhausted all other avenues of support. It appears to us that the Tourism Recovery Ministers accepted the risk that STAPP was funding tourism businesses that might not have exhausted all other avenues of support and therefore might not have been eligible.

4: DEV-20-MIN-0080 COVID-19 response: Tourism Sector Recovery Plan. Tagged contingency funding is an amount set aside in the Budget for possible future use, where Cabinet will subsequently agree the funding and ask Parliament to authorise it.

5: Examples included living wage, commitment to helping staff to thrive, maintaining and encouraging community engagement, educating visitors on the importance of protecting the natural environment, and commitment to waste management and reducing carbon emissions.

6: The Treasury was sent the paper the day after the meeting (29 May 2020).

7: Ministry officials subsequently advised the Tourism Recovery Ministers that Cabinet had agreed that the Ministry and the Treasury should deliver joint advice on the parameters of STAPP after consultation with other government agencies. However, the Ministry said that, in order to meet the requested time frames, it had not been able to deliver advice jointly with the Treasury or to consult substantively with other agencies.

8: The Minister's talking points paper, dated 29 May 2020.

9: The three key elements of the criteria were that they were a tourism asset, an asset of strategic importance, and all other avenues of support had been exhausted.

10: Hibernating means to close the business but maintain the underlying assets, with the plan to reopen when tourism resumed.

11: Office of the Auditor-General (2021), Management of the Wage Subsidy Scheme.

12: We make the same point in our report on the wage subsidy scheme. See Office of the Auditor-General (2021), Management of the Wage Subsidy Scheme.

13: The Ministry of Transport implemented the essential transport connectivity support scheme to respond to the effects of Covid-19 on the transport sector.