Part 3: Discussions between the Government and SkyCity in 2009 and 2010

3.1
In this Part, we:

• explain what the reference to “the SkyCity angle” meant in August 2009;
• describe the discussions between the Government and SkyCity between August 2009 and March 2010;
• summarise the consideration being given to procedural questions during this time; and
• provide our comments on what took place during this period.

What was “the SkyCity angle” in August 2009?

3.2
The Prime Minister told us that his handwritten reference to “the SkyCity angle” on the Ministry of Tourism briefing paper on 24 August 2009 referred to his broad awareness that SkyCity had some development plans at that time.

3.3
Ministry officials were aware that SkyCity had expressed an interest in extending its existing convention centre across Federal Street or developing a new centre on land it owned in Hobson Street. This awareness arose from communications between Auckland-based Ministry officials and SkyCity during April and May 2009.

3.4
SkyCity executives told us that they had been working for some months on conceptual plans for extending their existing convention centre or building a new one, and met with officials on 12 May 2009 to tell them about their plans. After the May meeting, SkyCity provided officials with conceptual drawings of what an expanded convention centre might look like.

3.5
The Prime Minister’s diary includes a meeting with SkyCity’s Chief Executive on 14 May 2009, which was one of a series of meetings that day with Auckland business leaders. SkyCity confirmed that this meeting took place. Neither participant can recall the discussion, and think that it was probably just an opportunity for them to meet rather than for any particular purpose.

3.6
The Prime Minister received a note from officials on 17 June 2009 updating him on the feasibility study process. The note refers to interest from the private sector in the international convention centre, including from SkyCity.

3.7
On 22 July 2009, SkyCity executives had dinner with the Prime Minister’s Chief of Staff in Wellington. SkyCity’s executives told us that they discussed their development plans with the Chief of Staff, who suggested they follow up with options in writing. SkyCity did not follow up in writing at that time.

Initial discussions between the Government and SkyCity

August to October 2009

3.8
After the Prime Minister/Minister of Tourism annotated the Ministry of Tourism briefing paper on 24 August 2009, a Ministry official met with SkyCity on 28 August 2009 about its convention centre development plans. They also discussed the feasibility study findings and the option of a larger convention centre noted in the study.

3.9
SkyCity executives arranged other meetings in Wellington in September 2009. On 3 September 2009, they met the Prime Minister’s Chief of Staff and Deputy Chief of Staff, and the Department of the Prime Minister and Cabinet’s (DPMC’s) Chief Executive to go over SkyCity’s development plans.

3.10
SkyCity told us that, at that time, it was of the view that an extended or stand-alone convention centre project would require some government funding support because it would be a major strategic infrastructure project. SkyCity thought it might be attractive to the Government as a public-private partnership (PPP), and was preparing its proposal with a view to approaching the Government as a funding partner. However, it was not ready to be explicit about a request for government funding.

3.11
SkyCity also told us that it signalled at these meetings that its further investment on the scale required would depend on legislative changes being made to the Gambling Act 2003 and an extension to its casino licence.

3.12
SkyCity met with a senior official from the Ministry of Tourism on 23 September 2009, who told them that he had passed on information to the Prime Minister/Minister of Tourism and the Associate Minister of Tourism about the possibility of a gambling licence extension as a condition of SkyCity bearing the cost of an international convention centre.

3.13
On 29 September 2009, Auckland-based Ministry officials made a written request to SkyCity for information about its expansion proposal. They asked to receive the information by 30 October 2009 (later extended to 13 November), and made it clear that the Government was under no obligation to progress SkyCity’s option.

3.14
SkyCity also met with the Minister of Finance (Hon Bill English) on 15 October 2009 to discuss its convention centre options. SkyCity initiated the meeting. SkyCity told us that the Minister of Finance told them that the Government had no money to fund the building of an international convention centre.

November to December 2009

3.15
On 4 November 2009, the Prime Minister and his Chief of Staff attended a dinner in Auckland with SkyCity Board members and executives. SkyCity told us that it had prepared a presentation for the dinner on convention centre options it was considering at that time and, at the dinner, discussed its plans for extending its existing facility. This was its preferred option at that time, although its second option was a bigger investment in a new convention centre. Its third option was to do both.

3.16
The Prime Minister told us that, at the dinner, he suggested that SkyCity think more broadly than simply expanding its existing conference facilities – in short, to “think outside the box” and come up with a larger world-class stand-alone centre. SkyCity has confirmed the same understanding of the meeting.

3.17
On 12 November 2009, a Ministry official emailed the Department of the Prime Minister and Cabinet (DPMC) summarising where the process with SkyCity had got to. This summary noted that officials had been expecting SkyCity to provide a design proposal on 13 November and had organised for a panel of experts from New Zealand and Australia to meet on 19 November 2009. This meeting was to hear a presentation from SkyCity and consider its design proposal from the perspective of urban design and industry users of the facility. The summary said that the intention had been to report the panel’s feedback to the Prime Minister before Christmas 2009, either with a recommendation to progress negotiations with SkyCity or to seek expressions of interest as part of an open process.

3.18
However, after the 4 November dinner meeting between the Prime Minister and SkyCity, SkyCity was now preparing designs for a 5000-seat centre (larger than it had previously planned), to be supplied directly to the Prime Minister’s office. The panel meeting planned for 19 November 2009 was deferred until further notice. The 12 November summary also indicated that the Treasury had advised that Ministry officials should seek advice from the Office of the Auditor-General to determine the probity of the current process with SkyCity.⁸

3.19
At this time, SkyCity was clear that it would seek regulatory changes from the Government and that its second option would depend on a range of legislative changes. SkyCity told us that the Prime Minister asked SkyCity to further consider what it sought from the Government, given that the Government had no funding to commit to the project and, therefore, a PPP was not a funding option.

3.20
SkyCity’s Board considered its position after the 4 November dinner with the Prime Minister. The Chairperson of the Board wrote to the Prime Minister on 23 December 2009, stating SkyCity’s support for an international convention centre and identifying broad areas in which regulatory reform could be of value to it in return for SkyCity contributing to the cost of a convention centre. SkyCity said it expected to be able to present the Prime Minister with a full proposal by February 2010.

Interactions in early 2010

3.21
In early 2010, responsibility for the international convention centre discussions transferred from the Ministry of Tourism to the Ministry’s major events team. The main Auckland-based officials remained the same.

3.22
This change meant that the Minister for Economic Development, Hon Gerry Brownlee, became the Minister with primary responsibility for the international convention centre project.

3.23
Given the global financial crisis, the Government at that time had a particularly strong focus on the need to generate new economic activity in New Zealand. Mr Brownlee told us that the convention centre project was seen as part of the Government’s broader objective to attract major business events to New Zealand, and fitted better with the broader portfolio of economic development than with tourism.

3.24
SkyCity met with Mr Brownlee on 19 February 2010, had further meetings on 11 and 26 March 2010 with the Prime Minister’s Chief of Staff, and with Mr Brownlee’s Senior Advisor on 11 March 2010. SkyCity did not provide the detailed proposal for an expanded or a new convention centre despite having been invited by both officials and the Prime Minister to do so. SkyCity told us that its delay in providing the detail was a timing issue, in that it took longer than planned to prepare its proposal.

3.25
SkyCity told us that it was clear from a meeting with the Prime Minister’s Chief of Staff on 11 March 2010 that the Government expected SkyCity to fully fund the convention centre, and the Chief of Staff asked SkyCity for details of the regulatory relief it would seek in return.

3.26
At another meeting also on 11 March 2010, Mr Brownlee’s Senior Advisor told SkyCity that the Government intended to run an EOI process. We explain in Part 4 that officials had been working to prepare an EOI process after discussions with Ministers on 1 March 2010.

Discussions about procedural questions

3.27
In August 2009, the feasibility study and associated advice from officials had recommended that the next steps be the preparation of a full business case and project plan. This recommendation was based on the assumption that the Government would fund much of the capital cost of a new international convention centre and possibly own it. These were normal and appropriate procedural steps in those circumstances.

3.28
We saw no evidence that officials considered the procedural consequences once the Prime Minister told them to find out about SkyCity’s plans first. The only discussion of procedural issues that we saw during this period related to a 3 November 2009 meeting between Ministry officials and a Treasury official to discuss the types of funding options, including PPP arrangements, that might be available to develop a convention centre. At that time, although the officials did not know precisely what sort of arrangement SkyCity might be interested in, SkyCity had told them it was interested in PPPs and had commissioned some expert advice on this.

3.29
The Treasury official provided some initial and general comments, which were also recorded in an email dated 4 November 2009, on the understanding that a PPP of some sort was contemplated in which the Government would fund some or all of the construction of a convention centre on land owned by SkyCity. SkyCity would build and operate the centre.

3.30
The Treasury official noted that an important part of the standard PPP process was a market tender, which provided assurance that the taxpayer was receiving value for money. Without such a process, there would be questions about value for money and probity. If the Government wished to pursue a direct PPP arrangement with SkyCity it would need to satisfy itself (and the Office of the Auditor-General) that due process and probity were applied. In particular, the Government would need to be sure that this was the only viable option. This would require, at a minimum, an open and transparent assessment of other options. Overall, the Treasury comments suggested that officials should think about other, more conventional, procurement approaches.

3.31
We saw no evidence of the Ministry following up on these comments and giving further consideration to the Government’s procedural options and obligations at this point. The Ministry did not provide any written advice to Ministers on this issue. The Treasury’s comments were referred to in a 12 November 2009 email from a Ministry official to DPMC and included in a private DPMC briefing note to the Prime Minister on 3 December 2009. This is the only documented advice after the Treasury’s comments.

Our comments on the initial discussions with SkyCity

3.32
We have no concern that the Government took steps to find out whether SkyCity’s development plans might be relevant to the discussions about an international convention centre. Nor is it unusual for a company like SkyCity to approach government officials and Ministers to explore whether there might be government interest in, and support for, its development ideas. Government and private business interests are free to talk to each other. It was sensible for both parties to explore whether they had a common interest. Our investigation confirmed that the discussions between August 2009 and March 2010 remained high level and preliminary in nature.

3.33
However, we do 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. By November 2009, officials had been ready to give more detailed consideration to a formal proposal from SkyCity and possibly to recommend to Ministers that negotiations progress (see paragraph 3.17). This did not happen because SkyCity did not provide a proposal during this period.

3.34
In our view, officials involved at that time should have been ready to give advice to Ministers on procedural options if SkyCity had attempted to progress to discussions of a firm proposal. Even if the Government provided little or no up-front funding, SkyCity had made clear that it would need regulatory reform to create an enhanced revenue stream for the project to be viable. It was apparent that any further discussion would effectively be a commercial negotiation about an exchange of value to achieve the desired outcome. Therefore, we considered what principles and obligations would apply.

Summary of the relevant principles and procedural obligations

3.35
The main sources of guidance on these matters are:

• the Mandatory Rules for Procurement by Departments (the Mandatory Rules),⁹ which are a set of procedural requirements that reflect the commitments made in several international free trade agreements that Cabinet requires all government departments to apply;
• the good practice guides and other reports we have published on funding arrangements and procurement;¹⁰
• advice and guidance provided by the Ministry, which is the Government’s lead agency on procurement, recently summarised in Mastering procurement: A structured approach to strategic procurement.¹¹

3.36
The Mandatory Rules are the only binding rules with any legal status. They are also the most prescriptive and state that they must prevail if there is any conflict between the sources of guidance. The Mandatory Rules apply to all forms of procurement by government departments, including purchases, leasing, build-operate-transfer contracts, concessions contracts, and PPPs. They require that any contracts above a specified value must be put to tender unless an exception applies. Value must be calculated for the total duration of the contract and include all kinds of remuneration, including options, premiums, fees, interest, and revenue streams.

3.37
We concluded that the Mandatory Rules were relevant to the early discussions about an international convention centre. At this stage, the possible options included construction of a publicly owned centre, some kind of PPP, a concession-based arrangement such as that being suggested by SkyCity, or some combination of these. All of these options involve some kind of contract and exchange of value between government and a private sector party to procure an outcome. They all fall within the broad definitions of procurement and value covered by the Mandatory Rules.

3.38
The core of the Mandatory Rules is the requirement that procurement is conducted by way of an open tendering procedure unless an exception applies. The exceptions are set out in the appendices to the rules and are reasonably narrow. The most relevant exception is where there is an absence of competition for technical reasons and there is, effectively, only one possible supplier. When departments rely on an exception and do not use open tendering procedures, the Mandatory Rules require the department to prepare a written report providing specific justification for the approach and contract. This is intended to ensure that departures from the requirement to tender are justified and transparent.

3.39
The advice in the good practice guidance we and the Ministry have produced is to similar effect, although it is not as strict in its application. The general advice is that, for purchases of any kind, market-based processes are a well-established way of meeting the relevant principles – particularly value for money, openness, and fairness. If those processes are not used, and a direct approach to a single provider is being considered, then the expectation is that the public sector agency will find other ways to be assured that it is meeting these principles. The agency should also document the reasons for that decision, so that it can explain why the process chosen was more appropriate in the circumstances.

3.40
For example, the Mastering procurement guide that the Ministry has published discusses when competitive and direct approaches to the market and potential suppliers will be appropriate. It explains that, although both are possible, an open and competitive process is the preferred approach for government. High-value, high-risk, complex, or unique goods and services are likely to suit a multi-stage process, with an open invitation for interested suppliers to respond followed by shortlisted suppliers submitting full tenders. However, special circumstances might mean that it is better to go directly to a specific supplier.

3.41
Page 16 of the guide gives the examples of “highly complex specification, or only one source and this can be verified, or only one supplier has the capacity to deliver on time and this can be verified”. The overall advice is that the agency must be able to:

• demonstrate that price is consistent with market rates; and
• justify the decision not to use the open, competitive process.

What should officials have been considering?

3.42
In our view, the Ministry should have been considering these procedural matters when it was preparing to assess a proposal from SkyCity and support any further discussions. It needed to be ready to provide advice to Ministers on the general principles that needed to underpin the process, the relevance of the Mandatory Rules, the limited exceptions in those rules, and the procedural steps that the Government would need to follow if it was considering proceeding to direct negotiations with SkyCity.

3.43
As already noted, we found no evidence that the Ministry was considering procedural matters at this stage or providing advice to Ministers on options and risks for next steps. A Treasury official raised concerns about procedural and probity questions if matters were to proceed to a PPP, but the Ministry did not pursue those concerns. The Ministry is responsible for administering the Mandatory Rules and providing advice on procurement matters; we are surprised that it did not follow up in any formal way.

3.44
However, the matter became moot because SkyCity did not produce a proposal at this time. Instead, the Minister directed officials to proceed to an EOI process as part of a broader discussion of economic development possibilities.

8: We have no record of any contact with Ministry officials on this topic at that time.

9: Endorsed by Cabinet on 18 April 2006, and available at www.business.govt.nz. The rules are administered by the Ministry.

10: See, in particular, Public sector purchases, grants, and gifts: Managing funding arrangements with external parties and Procurement guidance for public entities, both June 2008.

11: March 2011, available at www.business.govt.nz.