Share Investor: convention centre viability

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Thursday, February 21, 2013

NZ HERALD: Sky City and Herald answer back

SkyCity got special treatment in its pitch to build the international convention centre - but nothing which will get in the way of a formal deal being struck.

An investigation by the Office of the Auditor-General found the casino's promise to cover the $350 million cost of building the convention centre gave it a clear advantage over any other interested party.

It means the casino and executives can get back to negotiating over the casino's list of changes to the Gambling Act which it wants to trade for building the centre next to its Auckland headquarters. The casino has said it wants 300 more pokies, extra table games and an early extension to its exclusive licence.

While the report revealed SkyCity was treated "very differently" to other bidders, Prime Minister John Key said it "utterly refuted" allegations his Government had struck a "cosy deal" with SkyCity. He blamed officials for "a few procedural matters" but said there was "nothing of substance that would have changed any of the outcomes".

The process problems identified by Deputy Auditor-General Phillippa Smith emerged in the report from the time the Prime Minister - also Tourism Minister - became personally involved. In August 2009, Mr Key told officials to halt a scoping project on a convention centre proposal to "close off the SkyCity angle". He later explained he had a "broad awareness" SkyCity had development plans.

Mr Key's understanding of the casino's desire for development followed a meeting between himself and SkyCity executives although neither Mr Key or the casino "can recall the discussion" on May 14, 2009. There was also a later meeting between the casino and the Prime Minister's chief of staff Wayne Eagleson on June 17, 2009, at which development was discussed.

After the PM halted the scoping project, SkyCity met the PM's senior advisers in September 2009 who said they wanted changes to the Gambling Act which had previously stymied the casino's expansion plans by limiting the number of pokies and other games allowed.

Then Mr Key was briefed on options for the convention centre at a dinner with SkyCity board members and executives on November 4, 2009. He urged them to "think outside the box".

As the casino and Beehive moved closer together, Treasury began raising concerns about "process and probity".

Ms Smith said: "We have concerns about the apparent readiness of officials to support those discussions developing into more substantive negotiations without preparing to give advice on the Government's procedural obligations and options."

Warnings about process were conveyed to Mr Key in a briefing note on November 12, 2009.

In 2010, the Government began calling for an expression of interest from groups wanting the contract. At a meeting with officials, Mr Key said the SkyCity deal was "a good proposal".

However Ms Smith said the process "fell short of good practice in a number of respects". That included the fact ministers and officials continued to have contact with SkyCity to discuss its proposal.

Ms Smith said these meetings were "not appropriate" as it provided SkyCity with information other bidders did not receive. She also said the casino had the advantage in knowing the Government didn't plan on putting any money into the project, allowing it to shape its offer.

In September 2010, the casino put forward a list of changes to the law it wanted. It also said it wanted the Government to buy land from TVNZ to accommodate a large design for the centre.

SkyCity was announced as the preferred bidder in June 2011 with Mr Key promising changes to the Gambling Act would only come after a public submissions.

Greens co-leader Metiria Turei, who sparked the inquiry with a complaint, said the report was "hugely damning" and showed "the relationship with SkyCity was so cosy that the other proposers didn't stand a chance".

Labour leader David Shearer said: "This has had John Key's fingerprints all over it and it was a shonky deal and John Key is donkey-deep in it."

Project's boost to jobs, GDP in question

John Key announced SkyCity's selection as preferred bidder with the promise of 800 jobs on completion and 1000 jobs on construction.

The numbers contrasted with a government feasibility study which put construction jobs at 150 a year for five years - a total of 750. The number of people to be employed in the centre was also lower - between 318 and 479 jobs against 500 fulltime equivalents.

There is also question about the value of the deal to New Zealand, the Prime Minister initially saying it would increase GDP by $49 million. The Auditor-General's report stated a $72 million increase while Economic Development Minister Steven Joyce was last night saying $100 million.

The casino was refusing to comment yesterday as chief executive Nigel Morrison toured Australia with the company's half-year results. In a statement, he said he was looking forward to starting negotiations towards investing the $350 million "provided acceptable returns can be delivered on the total project".

Mr Morrison is known to have become frustrated with delays on the project, the $350 million saved for Auckland's centre recently spent in Australia, supported by both South Australia's Labor Government and Liberal opposition.

Alan Trotter, chief executive of Conventions NZ, said it had cleared the path for the deal to be struck. He said the report also revealed the Prime Minister's ability to strike deals which was to be admired. "There is no such deal as the perfect deal but it's a very pragmatic deal. The key element here is to start construction."

He said conventions of the size the centre would handle needed five to seven years' notice and marketing should begin the moment building started. The centre promised much for New Zealand and the inquiry had sent out ripples of uncertainty. "The Greens have a lot to answer for."

-David Fisher

How events unfolded

May 2009: Key meets SkyCity CEO. Key says changes to the Gambling Act did not come up.

July 2009: Ministry of Tourism and City Council complete convention centre feasibility study. Key briefed on findings and officials recommend developing business case. Officials later told of proposal being developed by SkyCity. Key tells officials to cease work and await SkyCity proposal.

September 2009: SkyCity, Ministry of Economic Development officials and Key's chief of staff discuss Gambling Act changes.

November 2009: Key has dinner with SkyCity board, discussing convention centre and possible changes to the Gambling Act.

March 2010: Cabinet decides to call for "expressions of interest" from other developers. Tender process begins two months later.

May 2011: Process closes. SkyCity, The Edge, Ngati Whatua, Infratil, and ASB Showgrounds respond.

June 2011: SkyCity wins with $350m bid. It requires no state funding but depends on changes to Gambling Act allowing more pokies and other concessions.

June 2012: Deputy Auditor- General Phillippa Smith announces investigation into tendering.

January 2013: Key sees draft report and is "not losing any sleep". The Herald reports SkyCity's plans to increase size of gaming floor.

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Monday, June 13, 2011

Sky City to pay for National Convention Centre

Tuesday, March 15, 2011

Auckland Council in conflict of interest furore over Casino Development

Monday, September 27, 2010

Sky City set to lose National Convention Centre bid

For all intents and purposes the possibility of Sky City Entertainment Group Ltd [SKC.NZX] getting the go ahead from politicians for the right to build and operate a National Convention Centre with the benefit of taxpayer money and all the business that would bring to the SKC gaming floor is pretty much dead and buried.

I have easily come to this conclusion because over the last week Mayoral candidates John Banks and Len Brown have both come out and backed the new Auckland "Supercity" and its bid for a convention centre in and around the Aotea Centre.

The Sky City and council bids are 2 of 5 that are bidding to build the national Convention Centre, at a cost of around $400 million, but politics has taken over sense in the Mayoral race because it wouldn't be seen as "fair" to subsidise a company like SKC for them to build an asset that they would benefit from - after all it is a big bad casino!

The thing is though, any winner in the race to build a convention centre would get the benefit of the taxpayer subsidy so the issue of favouritism would only be one of Council vs private business and this argument was won by private business many decades ago. Private business always does it better.

The only other arguments that remain are which is the best site and what will be the running costs be.

I agree with the NZ Herald that the best convention site would be a central city one, so that rules out the the ASB Showgrounds bid at Greenlane. A Ngati Whatua proposal for Quay Park, alongside the Vector Arena, and an Infratil Ltd [IFT.NZX] bid for the Wynyard Quarter .

The Herald is wrong about picking the council development though.

Sky City is the most appropriate site in terms of its centrality to the city and its amenities.

It is close to all the best hotel rooms, including Sky's almost 1000 rooms and its 3000 carparks, close to the tourist area of the Viaduct harbour, close to the best restaurants in Auckland, central to most public transport routes and motorways and the easiest to develop because of the sites undeveloped nature.

The big plus though will be the ongoing subsidisation by Sky City for the running costs of the convention centre, which will run into many 10s of million per annum. Of course if the council bid wins, these costs will be bourne by the Auckland ratepayer and they are clearly substantial.

Convention Centres do not make money as a standalone businesses and the justification for them being built is that they "bring custom to the city and surrounding businesses". This is the main reason that both Sky City and the council want to build their respective convention centres.

In my opinion then, the best place for a National Convention Centre is at the Sky City Complex. It will cost the taxpayer and ratepayer less initially and the ongoing cost savings would be the biggest advantage. It is also is in the best most central site, that is probably the most recognised man made icon in Auckland from just about every part of the city.

It looks like the Auckland City Council bid is locked and loaded though and that is a missed opportunity that will cost Auckland ratepayers dearly for many more years to come.

Disclosure: I own SKC shares in the Share Investor Portfolio

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Monday, May 24, 2010

Sky City Convention Centre Expansion a Money Loser: Part Two

With news out over the weekend that Sky City Entertainment Group Ltd [SKC.NZ] intends to extend its expansion of its present centre to include a bid for a much larger and far more expensive stand alone "National Convention Centre", should leave SKC shareholders in fear of future profits and indeed the viability of the company in the medium to long-term.

I have fears about the $40 million expansion of the present convention centre and the dubious reasons for spending money on something with little or negative returns.

A new National Convention Centre, if built by Sky City, would be located as a standalone development on Hobson Street by the TVNZ centre.

Estimates of a price tag range from NZ$300-$550 million would clearly need SKC to either draw down on their $1 billion credit-line or go to the market for additional funds from shareholders and/or institutions and would be the biggest single capital expenditure for the company since its flagship Auckland Casino was developed in the mid nineties.

If Sky City borrowed say $400 million at their current rates of financing at around 7.5% per annum the convention centre would have to return a net profit from it of $30 million per annum just to cover financing costs. It simply doesn't stack up if you look at the figures.

In the absense of evidence of any good return on capital expense and ongoing running costs being a massive being a permanent drain, a convention centre built by Sky City just looks like monument building and justification of this sort of cost to shareholders should be put to the vote before anything goes ahead.

Let the local politicians build such a convention centre, if it is needed at all, at least then the ongoing losses would be spread around ratepayers rather than just long suffering SKC shareholders like my good self.

Disclosure I own SKC shares in the Share Investor Portfolio

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c Share Investor 2010

Share Investor

Thursday, February 21, 2013

NZ HERALD: Sky City and Herald answer back

Monday, June 13, 2011

Sky City to pay for National Convention Centre

Tuesday, March 15, 2011

Auckland Council in conflict of interest furore over Casino Development

Monday, September 27, 2010

Sky City set to lose National Convention Centre bid

Monday, May 24, 2010

Sky City Convention Centre Expansion a Money Loser: Part Two

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