[Report: Inquiry into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre (PDF)]

Deputy Auditor-General’s overview

Phillippa Smith | Deputy Controller and Auditor-General
18 February 2013

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

In June 2012, I announced that this Office would carry out an inquiry into the process that the Ministry of Economic Development (the Ministry) followed leading up to the Government’s decision to negotiate with SKYCITY Entertainment Group Limited (SkyCity) about developing an international convention centre in Auckland. (The Auditor-General has a small shareholding in SkyCity so she has not been involved in this inquiry.)

The inquiry has considered both the adequacy of the process followed and whether anything substantively wrong has taken place. The main question underlying this inquiry was whether the Government’s decision to negotiate with SkyCity had been influenced by inappropriate considerations, such as connections between political and business leaders.

We have seen no evidence to suggest that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations.

However, we found a range of deficiencies in the advice that the Ministry provided and the steps that officials and Ministers took leading up to that decision. The quality of support that was provided fell short of what we would have expected from the lead government agency on commercial and procurement matters.

Why does the process matter?

We are frequently asked to scrutinise how public entities are providing funds to private sector parties through purchasing or grant funding arrangements. A substantial body of rules, principles, and guidelines set out what is recognised as good practice in New Zealand for public sector purchasing and grant funding. Much of our audit and inquiry work in this area is concerned with process, and whether public entities are following established good practice as they carry out their responsibilities.

But compliance with established process is not an end in itself. Procedural principles and guidance on how public funds are spent exist for a reason: the public sector adopts these disciplines to:

• help ensure that decisions are made carefully and for appropriate reasons;
• promote open and fair competition, domestically and internationally; and
• protect against the risk of corruption or inappropriate influence.

The good practice standards help achieve these goals by setting out steps to ensure that the processes followed are transparent and fair to all participants.

Was a good process followed in this case?

There are several reasons why progressing the idea of an international convention centre was always going to be difficult. The development of a centre is potentially economically significant and will have a high public profile. The matters to be negotiated if SkyCity was to be involved were controversial and politically sensitive because of the changes to gambling regulation that could be sought. And the discussions were unusual because they did not fit easily into any established category of procurement activity and so it has been unclear what procedural expectations should apply. The process for reaching a decision on the possibility of an arrangement with SkyCity needed to bring together some testing of the market, commercial negotiation, and difficult policy and political decisions. There is no “off the shelf” process for making such complex decisions.

Given this complexity, we were surprised to find that there was no documented analysis or advice on the process that needed to be followed from a procurement perspective, or any systematic consideration of the relevant principles and obligations that should guide the steps taken. In our view, those involved had a strong focus on the need to manage the difficult relationship between the commercial issues and the policy and political decisions that were needed, but too little focus on the disciplines that should govern commercial decision-making in the public sector.

We comment on these matters in more detail in our summary assessment in Part 1 of this report, and at the end of Parts 3, 4, and 5. For now, two examples illustrate the point.

The overall planning

The first example concerns the lack of overall planning. A specific weakness was that there is no evidence that any consideration was given to whether the Mandatory Rules on Procurement were relevant.

These Rules set out how government departments must carry out major procurements. They are the main way in which New Zealand gives effect to obligations contained in a number of international free trade treaties and have been in place since 2006. The main requirement is that major procurements should be carried out by open tender, unless the situation falls within one of the specified exceptions.

Given that early discussions were considering options like public sector ownership, public private partnerships, and other arrangements that were effectively procurements, we would have expected to see some careful consideration of how the international treaty obligations summarised in the Mandatory Rules might need to shape the overall process.

The evaluation process

The second example relates to the way in which the responses to the Expressions of Interest (EOI) request were evaluated. Although decisions were made on the merits of the different proposals, we do not consider that the evaluation process was transparent or even-handed. The evaluation process lasted for more than a year. The meetings and discussion between the Government representatives and SkyCity were materially different in quantity and kind from those between the Government and the other parties that responded.

Ministers and officials told us that the SkyCity proposal was quite different from the others and needed to be understood in much more detail to establish whether it was commercially and politically viable. The other proposals were more straightforward to assess. Officials therefore engaged in extensive and detailed discussion with SkyCity. The practical effect was that officials worked closely with SkyCity as it put together a detailed proposal from the broad outline that was initially submitted in response to the EOI request. They did so under the auspices of the evaluation process for the EOI, while telling the other parties that decisions had been delayed.

The Government took this approach so that it could fully understand the policy and political consequences of the SkyCity proposal before deciding to proceed to full commercial negotiations, while still maintaining some competitive tension during those discussions by keeping the other responses “live”. However, the result was that SkyCity was treated very differently from the other parties that responded and the evaluation process effectively moved into a different phase with one party. In our view, the steps that were taken were not consistent with good practice principles of transparency and fairness.

If a purchaser wants to maintain competitive tension while it explores one or more responses in more detail, the usual approach is to proceed to a full Request for Proposals (RFP) process. This imposes costs on all those participating in the RFP, but is warranted because of the advantages that flow from the competitive process. If that additional cost and process is not justified, a purchaser can proceed to direct discussions with one party and adopt other mechanisms to manage the value-for-money aspect in the absence of a competitive process. There is a growing amount of guidance available on alternative negotiation techniques to manage price in this type of situation.

Overall comments

Internationally, financially constrained governments are looking for new and creative ways to collaborate with the private sector to achieve their goals. As a result, we should expect more initiatives that test the boundaries of established ways of working – including established procurement procedures.

Process should not stand in the way of such innovation. However, the underlying principles that established processes aim to protect do still need to be respected. New ways of working in the public sector still need to be able to show that public resources are being appropriately managed and spent. We will continue to discuss such developments with relevant officials and update our good practice publications from time to time to reflect latest developments.

I thank the staff of the Ministry who assisted us with this inquiry, and all those who we interviewed or sought information from during this inquiry.

ENDS

[Report: Inquiry into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre (PDF)]

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