Part 5: Decision-making

Inquiry into the Strategic Tourism Assets Protection Programme.

Timeline showing events from 9 July to 24 July.

5.1
In this Part, we discuss the:

four meetings to decide on the direction of STAPP;
limited assurance about funding decisions; and
recording of the rationale for why decisions were made.

Deciding the Strategic Tourism Assets Protection Programme's direction

5.2
When STAPP was designed, Covid-19's impact on the tourism sector was uncertain. Ministry officials initially thought that STAPP would apply to up to 50 tourism businesses that held the most strategic tourism assets.

5.3
By the time the Tourism Recovery Ministers made decisions about STAPP in July 2020, the Government had removed most of the significant restrictions on domestic movement. Although the international borders remained closed, domestic tourism in some parts of New Zealand had rebounded faster than expected.

5.4
In the interim, other forms of government support had been implemented.¹⁸ Because of this changed environment, Ministry and Treasury officials recommended, on 16 July 2020, ceasing STAPP and considering alternative forms of support. The Tourism Recovery Ministers did not accept this advice and asked Ministry officials to present alternative solutions. However, it is not clear from the meeting minutes why the Tourism Recovery Ministers chose the option that they did. One Minister told us that the situation was "very fluid" and they were trying to work out what the most effective intervention would be.

5.5
Between 9 and 22 July, the Tourism Recovery Ministers met four times to discuss STAPP applications. Because the context they were working in had changed, this also led to discussions about STAPP's overall approach and whether it should end. We describe this below.

9 July 2020

5.6
Ministry officials provided the Tourism Recovery Ministers with their assessments of the tourism businesses applying for STAPP funding and information about the regional distribution of these businesses.

5.7
Ministry officials recommended that the Tourism Recovery Ministers approve the top 53 tourism businesses (those that had scored more than 22 points out of 30 from the Ministry's assessment process). Officials noted that there were tourism businesses that ranked 54 or lower that made a significant contribution to their region and might be strategically important. However, consistent with earlier advice, officials considered that there would be greater risk of public scrutiny of applicants (and presumably of the underlying application evidence) if lower-ranked tourism businesses were funded.

5.8
Several issues were raised in this meeting:

Some parent companies might benefit from multiple successful STAPP applications. For example, a list of tourism assets and their parent companies showed two parent companies had requested funding of $31.2 million and $32.8 million respectively for their subsidiary tourism business. Several tourism businesses applying for STAPP funding were owned by large firms that had made profits in the last few years and so should have had commercial borrowing options available to them. It is unclear whether a specific decision was made about the role of parent company resources.
Ministry officials were unable to determine whether the tourism asset would fail without Crown intervention. Officials also could not confirm whether applicants had in fact exhausted alternative sources of funding.

5.9
The Tourism Recovery Ministers did not consider that they had enough information on individual tourism assets to decide whether STAPP support was appropriate.

5.10
More generally, the Tourism Recovery Ministers asked whether STAPP was the most appropriate mechanism for supporting the tourism sector. They asked Ministry officials to develop alternative options to STAPP, such as funding a smaller number of tourism assets with more emphasis on its regional importance. It was unusual for the Tourism Recovery Ministers to question, at such a late stage, the fundamental parameters of STAPP and a key funding criterion as part of their decision-making process.

16 July 2020

5.11
On 16 July 2020, Ministry officials briefed the Tourism Recovery Ministers about what had changed in the economic context since STAPP was established and recommended that work on STAPP should stop.¹⁹

5.12
The short-term outlook had changed due to strong domestic tourism and government measures, such as extending the wage subsidy scheme, business support schemes, and Department of Conservation concessions.

5.13
The longer-term effects of Covid-19 on the tourism sector were less clear. Officials advised that postponing STAPP would preserve Crown funds while allowing officials to develop alternative options.

5.14
Ministry officials proposed an option of funding 10 or fewer tourism businesses that had strategic tourism assets in regions experiencing the most severe economic downturn due to Covid-19 or those most affected by the loss of international visitors, such as Southland and the West Coast. Ministry officials warned that imposing new criteria part way through the process would create other issues.

5.15
Another option was to support a small number of tourism businesses through semi-commercial loans. This would mitigate Crown risk by requiring the private sector to share the risk that the business might not survive until international tourism resumed.

5.16
Any of these options would have resulted in a lower level of investment than originally planned. This could have allowed public money to be invested differently in tourism recovery.

5.17
The Tourism Recovery Ministers could not decide how to proceed and asked Ministry officials to prepare further advice without specifying what sort of additional information or advice they would find helpful.

22 July 2020

5.18
On 22 July 2020, the Tourism Recovery Ministers were asked to decide:

the number of applicants to support;
which funding mechanism to use; and
whether to support inbound tourism businesses.

5.19
Ministry officials recommended that the Tourism Recovery Ministers support the top 53 tourism businesses that most closely aligned with the original STAPP design.

5.20
Another option was to support all eligible applicants except for aviation and accommodation providers (the Minister of Tourism's preference was to exclude these sectors) and three tourism assets.²⁰ However, Ministry officials advised that choosing to fund all eligible applicants would attract scrutiny of how strategic those assets were when considered against the assessment criteria.

5.21
Ministry officials recommended that, if the Tourism Recovery Ministers could not decide on an approach, they should formally close STAPP and inform applicants.

5.22
For funding options, Ministry officials advised that funding could be provided through concessional loans charged at 3% interest each year, which would be waived in full if the loan was repaid within the year. A loan term of two years, with quarterly payments, and a five-year repayment period was proposed. The Minister of Tourism asked for a second funding option that was the same as how Discover Waitomo and AJ Hackett Bungy New Zealand were funded (a first-year grant of between $500,000 and $1,000,000 and a concessionary loan in the second year). Ministry officials did not recommend this because of the high administrative costs.

Māori tourism businesses

5.23
On the same day, the Ministry briefed the Tourism Recovery Ministers on support for Māori tourism businesses.

23 July 2020

5.24
New Zealand Māori Tourism briefed the Tourism Recovery Ministers on applications from Māori tourism businesses. It recommended funding the tourism businesses holding the top 20 Māori tourism assets through concessional loans (if that was what Ministers chose to offer). For smaller tourism businesses, New Zealand Māori Tourism proposed options including a 50/50 grant from STAPP and New Zealand Māori Tourism, a combination of grants and concessional loans, loan underwrite, or a mixture of funding from STAPP and the Provincial Growth Fund.

Decisions were made on 24 July 2020

5.25
The Tourism Recovery Ministers rejected Ministry officials' recommendation to fund only top-rated STAPP applications.

5.26
Instead, the Tourism Recovery Ministers agreed to fund all tourism businesses that scored more than 15 points out of 30 and all eligible Māori tourism businesses – 127 tourism businesses in total. It is not clear why the Tourism Recovery Ministers regarded 15 out of 30 as a score to warrant funding. This was not part of any advice provided by Ministry officials (officials used a score of 22 out of 30) or recommended as an approach to selecting businesses to fund.

5.27
The Tourism Recovery Ministers subsequently told us that, when they were presented with the proposal to fund only the top 53 tourism businesses, they noted officials' advice that there were tourism businesses that rated 54 or lower that still made a significant contribution to their region and could be strategically important. These included several high-profile Māori tourism businesses. The Tourism Recovery Ministers told us that they considered it important to fund a significant number of businesses to achieve Cabinet's goal of helping "bridge the gap" before international travel could resume.

5.28
The Tourism Recovery Ministers agreed that local government-owned event facilities were ineligible for STAPP. However, some art galleries, zoos, and museums would be eligible. Although STAPP would not fund generic accommodation providers, three specific accommodation providers that comprised tourist attractions were deemed eligible. The Tourism Recovery Ministers excluded one tourism business that had scored well because they considered that tours could quickly resume when tourism resumed. One Minister told us that the Tourism Recovery Ministers used their knowledge of particular regions and operators when making decisions. However, we saw no analysis to underpin the advice, and the reasoning was not documented.

5.29
Two tourism businesses that had earlier been deemed eligible for STAPP funding were removed from the STAPP process to be considered separately.

5.30
The Tourism Recovery Ministers agreed in principle that tourism businesses could not receive funding from multiple schemes for the same thing. Therefore, tourism businesses that received Department of Conservation concession funding and/or Wildlife Institutions Relief funding would have to remove those funded components from their STAPP application. On 30 June 2020, the Tourism Recovery Ministers were told by Ministry officials that, due to timing constraints, the impact of the wage subsidy scheme would not be reflected in the recommendations that went to them before they made decisions.²¹ After the decisions were made about which tourism businesses to fund, Ministry officials had to recalculate payments to remove an amount equivalent to the wage subsidy scheme.

5.31
The final decision resulted in more tourism businesses being funded than the Minister of Tourism had publicly signalled and spread lower amounts of funding more widely.

Grant and loan structure

5.32
The Tourism Recovery Ministers agreed to the Minister of Tourism's preferred funding structure: a grant of up to $500,000 in the first year and a loan in the second year. This arrangement lowered the risk of funding decisions. The Ministry and Treasury officials were asked to work closely together on the detail of a loan scheme.

5.33
The Ministry told us that when STAPP started, there had been no decision on who would manage the loans. Options considered included commercial banks or the Inland Revenue Department playing a role. The Treasury advised that having commercial banks manage STAPP was not ideal, partly because of the high administrative costs. For Inland Revenue to manage STAPP, legislative change would be needed. The Tourism Recovery Ministers wanted the Ministry Investment Management and Performance team to manage the loans, but Public Finance Act requirements prevented this.

5.34
The Provincial Development Unit was given responsibility for managing STAPP loans. The Tourism Recovery Ministers decided on a loan term of five years that would be interest free for the first two years and a 3% interest rate after that.

5.35
Tourism businesses had one year to decide whether to accept the loan. Ultimately, grants totalling $62.4 million and loans of $71.9 million were offered.

5.36
Not all tourism businesses took the loans offered. Reasons for declining loans include an increase in domestic tourism, the Trans-Tasman bubble, and businesses deciding not to borrow if they did not need to.

There was limited information about why the funding decisions were made

5.37
Although funding was provided to the tourism sector in a timely way, there was not, in our view, clear documentation about the reasons for the decisions. It is hard to be reassured about why the Tourism Recovery Ministers took the approach they did and whether key criteria were met. There are different and related reasons for this. The lack of clarity about the scale and key criteria of STAPP, and the type of information that would be required to demonstrate that criteria were met, contributed to this limited confidence.

Lack of clarity about key criteria delayed decision-making

5.38
In May 2020, officials asked the Tourism Recovery Ministers to select from supporting up to 30 tourism businesses, 100 tourism businesses, or 1000 tourism businesses. We have not seen any documentation about which of the options they chose. However, the Minister of Tourism made a public statement that STAPP would fund about 50 tourism businesses with strategic tourism assets. In July 2020, Ministers were again asked to decide the intended scale/scope of STAPP and were unsure how to proceed.

5.39
Each option carried different risks and required different mitigations. It is important that decision-makers clearly establish how much risk they are willing to tolerate at the outset because this will inform the decisions that they make. We saw a lack of clarity in criteria, which meant there was uncertainty about whether the assessments adequately addressed key criteria.

5.40
STAPP application and assessment processes were initially designed to fund a small number of tourism businesses. The type of application and due diligence processes for a scheme involving a small number of applications, but with higher funding amounts, differs substantially from a scheme funding more applicants with smaller funding amounts. If it had been anticipated that 127 applicants would receive funding, different applications and assessment processes might have been developed. This might also have provided the Tourism Recovery Ministers greater confidence when they had to make decisions. Lack of clarity about other criteria had implications when the Tourism Recovery Ministers had to make decisions in July 2020. They found it hard to differentiate strategic tourism assets from tourism assets more generally, and whether, without Crown support, a tourism asset would be likely to be lost.

5.41
The Tourism Recovery Ministers asked how they could be assured that STAPP was a fund of last and not first resort and what the role of parent companies was when considering whether all avenues of support had been exhausted. At the 9 July 2020 meeting, the Tourism Recovery Ministers questioned the appropriateness of funding assets owned by large businesses that had made profits in the last few years and who should have had commercial borrowing options available to them.

5.42
Ministry officials advised the Tourism Recovery Ministers that parent companies might benefit from multiple successful applications, saying that the aim of STAPP was to keep assets open and that, without government funding, parent companies might make a commercial decision to hibernate assets.²² Despite the concerns, Ministers decided to fund tourism businesses that were subsidiaries of large parent companies. This brings into question how important the "exhausting all other avenues of support" aspect of the criteria was.

The importance of keeping records about decision-making

5.43
There was limited documentation about why the Tourism Recovery Ministers did not go with options recommended by Ministry officials. Although Ministers can make decisions that differ from officials' advice, the reasons for this should be clear to ensure that the public can have confidence in the integrity of the decisions made.

5.44
As we have said in our previous work,²³ public trust and confidence in government depends on transparency and accountability when spending public money. This trust and confidence can be undermined where there is limited documentation supporting Ministers' decisions.

5.45
In this case, the reasons to support some key decisions are not well documented. This has led to concerns about the actions taken. Without those records, those who have made the decisions are not able to adequately explain why funding was provided. This is not acceptable practice, regardless of the circumstances.

5.46
We appreciate the Tourism Recovery Ministers had to make decisions under the extraordinary situation of Covid-19. Many of the steps happened under short time frames. The desire to provide a timely response could have contributed to a lack of records.

5.47
However, good process and record keeping can assist situations where extraordinary steps need to be taken or quick action is required. Rather than an administrative burden, recording the reasons why an action was taken quickly, or why a decision was taken contrary to advice, helps to reinforce those decisions. The public can see why those steps were taken and trust that they were made for good reason.

18: This included wage subsidy scheme extensions, the leave support scheme, the short-term absence scheme, the small business cash flow loan scheme, the business finance guarantee scheme, and the business debt hibernation scheme.

19: Treasury officials also advised the Minister of Finance to endorse ceasing work on STAPP.

20: One tourism asset was the subject of parallel discussions with the Provincial Development Unit, the other two were not eligible for funding.

21: When STAPP was designed, the wage subsidy scheme was due to end in June 2020. By the time STAPP applications were received, the Government had decided to extend the wage subsidy scheme. Subsequently, further extensions and resurgence payments have been implemented.

22: We found this point interesting, as, when setting up the tourism recovery fund, Cabinet was told that the tourism funding package would help firms that can hibernate, pivot, and restart. That means hibernation was clearly always seen as an option, though not the preferred option. See Cabinet paper (May 2020) COVID-19 Response and Recovery Fund Foundational Package, paragraph 11.

23: For example, in our 2018 report Reflecting on our work about information, we quoted the Chief Archivist, who said that "people lose trust in government if there is poor record keeping [and] difficulties accessing information".