Response to request for inquiry into awarding a management contract for a hotel in Niue

7 September 2016

On 18 April 2016, the Auditor-General received a request to look into various matters about the awarding of a management contract for a hotel in Niue. Our response is set out below.

7 September 2016

Andrew Little MP

Leader of the Opposition

Private Bag 18 041

Wellington 6160

Dear Mr Little

REQUEST TO INQUIRE INTO THE AWARDING OF A MANAGEMENT CONTRACT FOR A NIUE HOTEL

This letter responds to your request of 18 April 2016 for my Office to look into various matters about the awarding of a management contract for the hotel on Niue. The information you subsequently provided to my Office on 27 July and 2 September has been considered as part of preparing this response.

There is one hotel on Niue. It was formerly owned by Matavai Resort Limited. It is now owned by Matavai Niue Limited, operated by Scenic Hotel Group, and called the Scenic Matavai Resort. In this letter, we use the term “the resort” to refer to the hotel on Niue.

1. Your request

The specific issues you raised were:

1. whether the tender for a hotel operation to brand and operate the resort followed due process and whether all potential and actual conflicts of interest were declared;

2. who knew about links between political donations and the tenderer, and what influence, if any, the donations may have had on the tendering decisions;

3. why the resort was prioritised for $7.5 million of development funding and whether that funding fitted within the funding criteria;

4. how the $7.5 million funding will be spent and where most of the benefits will accrue; and

5. to what extent the Niuean people will ultimately benefit from this funding.

2. My mandate in Niue

The issues that you raised present a complex set of circumstances in terms of my jurisdiction in Niue to inquire into an entity’s use of resources. I therefore obtained legal advice about my mandate in these circumstances.

As Auditor-General, I can inquire into the international development assistance provided to Niue by the Ministry of Foreign Affairs and Trade (the Ministry), and I audit the Niue Government’s financial statements.

I do not have the mandate to inquire into Matavai Niue Limited or the trust that owns its shares, the Niue Tourism Property Trust.1

As the auditor of the Niue Government, my audit mandate is derived from the Constitution of Niue and various Acts and Regulations of Niue. This means that I audit:

• the Niue Government’s financial statements;

• all other Niuean public funds or accounts;

• the accounts of all Niuean departments and offices of executive government; and

• other Niuean public or statutory authorities or bodies as provided by law.

The Niue Tourism Property Trust and Matavai Niue Limited are not public entities under New Zealand’s Public Audit Act 2001 (the Public Audit Act) or under Niuean law, nor can they be considered to administer public funds under the Public Audit Act. Therefore, I do not have authority under New Zealand or Niuean law to audit (under section 15 of the Public Audit Act) the Niue Tourism Property Trust or Matavai Niue Limited unless those entities ask me to and I consider that the entities meet the conditions outlined in section 19 of the Public Audit Act.

Section 19 of the Public Audit Act enables the Auditor-General to enter into an arrangement to be the auditor of an entity that is not a public entity. I can enter into such an arrangement at the request of that entity where I consider that the entity has a public purpose.

Audit New Zealand (an operating arm of my Office that carries out annual audits) previously audited the Niue Tourism Property Trust’s and Matavai Niue Limited’s consolidated financial statements on my behalf under a section 19 arrangement. The last audit under this arrangement was for the financial year ended 30 June 2013. On 28 September 2013, we issued a qualified audit opinion on the consolidated financial statements of the Niue Tourism Property Trust because we found there were inadequate systems and controls over accommodation, bar, and restaurant revenue.

The trustees of the Niue Tourism Property Trust and the directors of Matavai Niue Limited decided to appoint a different auditor for subsequent financial periods. KPMG was appointed as the auditor for the accounting period ended 30 June 2014 and the next four accounting periods.

We have not audited the Niue Tourism Property Trust or Matavai Niue Limited since 2013.

Under the Public Audit Act, I am the auditor of the Ministry and I have the power, under section 18 of that Act, to inquire into the Ministry’s use of public resources. This includes funding for international development assistance.

I do not have a mandate under Niuean law that is equivalent to my mandate under section 18 of the Public Audit Act to inquire into any matter concerning a Niuean public entity’s use of its resources. This means that I am not able to inquire into the Niue Tourism Property Trust or Matavai Niue Limited.

Because of this legal complexity, we cannot answer all of your questions fully. When looking into the issues you raised, we relied on information obtained through my work as the auditor of the Niue Government, information held by the Ministry, and publicly available information. This means we do not have all the information that may exist on this matter. However, we have decided to share the information that we do have, and our views where appropriate.

3. Summary of our conclusions

From the available information, we have concluded the following:

1. Whether the tender for a hotel operation to brand and operate the resort followed due process and whether all potential and actual conflicts of interest were declared.

There was a standard procurement process, involving expressions of interest and request for proposal stages, with reasoned and documented analysis for the selection of Scenic Hotel Group as the hotel operator for the resort. The procurement process was administered by Horwath HTL Limited (Horwath HTL), and the selection of Scenic Hotel Group as the operator for the resort was consistent with the advice Horwath HTL provided to Matavai Niue Limited.

Horwath HTL’s advice to Matavai Niue Limited noted that the Managing Director of Scenic Hotel Group had visited the resort in 2013 and that, as of 13 May 2014, a site visit had been arranged for the other short-listed respondent to the request for proposal. Scenic Hotel Group has told us that its visit took place in mid-2013. This was about six months before the request for expressions of interest for an operator of the resort was issued. Both Scenic Hotel Group and Matavai Niue Limited told us that the visit was unrelated to the later procurement process.

On 28 June 2013, a Ministry email recommended that information already provided to Scenic Hotel Group be made available to other operators in the procurement process to ensure that no company had a significant advantage or disadvantage over others. The available information indicates that a confidential Information Memorandum was provided to three shortlisted hotel operators (including to Scenic Hotel Group on 11 April 2014) after the expression of interest stage of the procurement process. This appears to include detailed actual and budget financial information, other key performance information, and other important information about the resort. We have not seen any evidence about the effect, if any, of those circumstances on the procurement process run by Horwath HTL.

Scenic Hotel Group was identified as the preferred tenderer from May 2014, after which there was an ongoing negotiation of contractual terms.

The procurement process required potential hotel operators not to “approach, directly or indirectly lobby or attempt to influence or provide any form of incentive to” any of the parties involved, including the New Zealand and Niue Governments. It also required potential hotel operators to “disclose any real or potential conflicts of interest”. We found no evidence in the available information of conflicts of interest being disclosed during the procurement process. But that information may exist.

2. Who knew about links between political donations and the tenderer, and what influence, if any, the donations may have had over the tendering decisions.

I do not have the mandate to inquire into political donations in these circumstances.

3. Why the resort was prioritised for $7.5 million of development funding and whether that funding fitted within the funding criteria.

The information from the Ministry shows that investment in expanding the resort was intended to make the resort more effective in attracting customers while supporting tourism growth in Niue. An informed and structured process was followed to invest New Zealand international development assistance funding in expanding the resort.

The further investment in the resort was consistent with New Zealand’s priorities for investing New Zealand’s international development funding in Niue and with the strategy for economic growth in Niue.

4. How the $7.5 million funding will be spent and where most of the benefits will accrue.

The information from the Ministry shows that expanding the resort was envisaged at the time of the procurement of a hotel operator. It also shows that there has been consideration of the benefits from further investment in the resort as part of a business case process. The business case to expand the resort identified financial benefits to the resort, private tourism operators, other service providers in Niue, and the Niue Government.

5. To what extent the Niuean people will ultimately benefit from this funding.

The benefit to the Niuean people from the subsequent investment in the resort will ultimately depend on the success of the resort and of the tourist industry in Niue.

4. How we looked into the issues you raised

We looked into the issues that you raised by:

• reviewing information from our auditing of the Niue Government’s accounts;

• obtaining and reviewing publicly available information about New Zealand’s international development assistance, the Niue Tourism Property Trust, and Matavai Niue Limited; and

• requesting and analysing information from the Ministry about its role in the procurement of a hotel company for the resort, its role in the decision of the New Zealand Government to invest further in the resort, and how it has monitored funds provided to the Niue Tourism Property Trust and Matavai Niue Limited (including any reporting it has received from them).

Where the Ministry provided us with information that it had released under the Official Information Act 1982, we received full copies of those documents with no information redacted.

The information from the Ministry included documents from the private consultancy firm Horwath HTL, which administered the process for procuring a hotel company for the resort on behalf of Matavai Niue Limited. The specific documents included the:

• expression of interest request (including selection criteria);

• request for proposals; and

• expression of interest and request for proposals assessment documents.

We also received a copy of the business case for subsequent investment in the resort from the Ministry. The business case was prepared for Matavai Niue Limited by a Wellington-based consultancy firm.

We did not look at the process that resulted in the appointment of Horwath HTL by Matavai Niue Limited.

5. Background about Niue arrangements

Before responding more fully to each of the issues you raised, we would like to set out some background information about the Niue Tourism Property Trust and Matavai Niue Limited, and New Zealand’s international development assistance to Niue.

Niue Tourism Property Trust and Matavai Niue Limited

During the financial year ended 30 June 2011, the Niue Government set up the Niue Tourism Property Trust in consultation with the New Zealand Government. The trust deed was signed by the Niue Government and the New Zealand Government. The trust deed is governed by the laws of Niue.

The trustees are appointed by the New Zealand Minister of Foreign Affairs in agreement with the Premier of Niue. The current trustees are Ross Ardern (New Zealand High Commissioner to Niue), Mark Blumsky (past New Zealand High Commissioner to Niue), and a senior Ministry official.

The trust deed gives the trustees absolute and uncontrolled power and discretion in managing and investing the trust. The trust deed allows for a trustee to act as a director or an officer of a company in which the Trust holds shares or other interests, or a subsidiary or associated company in which the Trust holds shares or other interests.

The purpose of the Niue Tourism Property Trust is to benefit the Niue Government by contributing to the long-term financial viability and economic development of Niue. It does this by holding and developing property in Niue for tourism in keeping with an arrangement between the governments of Niue and New Zealand.

The Trust will terminate on April 2021, if not before, and the assets of the Trust will vest in the Niue Government at that time. The Trust’s principal asset is its ownership of Matavai Niue Limited.

The first schedule of the trust deed acknowledges the need to have infrastructure in place, particularly tourist accommodation, before the tourist industry can properly develop in Niue.

The trustees appoint the directors of Matavai Niue Limited.

Matavai Niue Limited is a company registered in Niue. The Niue Tourism Property Trust owns 100% of the share capital of Matavai Niue Limited.

Among other requirements, the first schedule of the trust deed required Matavai Niue Limited to refurbish the resort and add new rooms. The trust deed also required the board of directors to immediately begin a search for, and appoint, an international and experienced hotel/resort operator to manage the resort.

The current directors of Matavai Niue Limited are Ian Fitzgerald (Chairman), John Ingram, Toke Talagi (Premier of Niue), and William Wilkinson. One of the directors must be a person nominated by the Niue Government who is acceptable to the trustees. The directors are responsible for appointing the manager of the resort.

Up to July 2013, New Zealand had invested $10.13 million to refurbish the resort. This involved expanding it from 24 to 44 rooms and developing a 10-unit motel complex and adjacent three-bedroom villa. The motel was completed in February 2013 and is 1.5 kilometres from the resort. Next to the motel is a new Matavai Villa, which is to be used as residential accommodation for the general manager of the resort.

The resort is the only hotel on Niue.

Before arrangements were put in place in 2011 as outlined above, the resort had not been financially viable for some years and was not considered to be a going concern. My 25 July 2011 report to the Speaker of the Niue Assembly about my June 2011 visit to Niue noted that:

• the financial statements for the resort for the years 2007 to 2010 had been completed;

• this entity had not been financially viable for some years; and

• the audit reports would be qualified on the basis that the resort was not a going concern.

In mid-2013, Matavai Niue Limited required financial assistance from the New Zealand Government to cover a cash flow shortfall of $500,000.

From 1 December 2014, Scenic Hotel Group has been the operator and manager of the resort. The management agreement is for a period of 10 years, with the option of two additional renewable terms of 10 years. This gives a total possible period of 30 years.

On 16 October 2015, it was announced that the resort would provide purpose-built conference facilities and increase accommodation capacity to 66 resort rooms.

Professional management of the resort by a hotel manager, and expansion of the resort, had been proposed since at least 2011. At that time, the draft Niue Economic and Tourism Development Business Plan included tasks and actions relating to this.

New Zealand’s international development assistance to Niue

The Niue Constitution provides for self-government in free association with New Zealand. Under the Niue Constitution, New Zealand provides necessary economic and administrative assistance and is responsible for Niue's defence and surveillance of its Exclusive Economic Zone.

New Zealand is Niue's largest funder of international development assistance.

New Zealand’s international development assistance to Niue focuses on economic sustainability, mainly through developing the tourism industry and helping the Niue Government to become more self-reliant. In 2015/16, total New Zealand international development assistance for Niue was anticipated to be $22.5 million.

Tourism is the main focus for the private sector in Niue, and the resort is the largest private sector employer.

The Niue Government has a target of growing tourism by 10% each year. This is part of a tourism development strategy designed to equip Niue with the essential infrastructure and management systems needed to market the island as a boutique tourism destination.

New Zealand and Niue have signed a Joint Commitment. Tourism is identified as Niue’s best opportunity for sustainable economic development. The Joint Commitment indicates that the success of the tourism development will be measured against the goal of sustainable growth in tourist numbers.

The Minister and the Ministry have said that annual tourist numbers to Niue and tourism’s contribution to the economy have doubled since 2009, when tourist development became a priority for the aid programme.

Since 2009, New Zealand has invested development aid money to support the development of Niue’s tourism sector. The $7.5 million referred to in your letter is part of this investment.

6. Our response to the issues that you raised

1. Whether the tender for a hotel operation to brand and operate the resort followed due process and whether all potential and actual conflicts of interest were declared.

The available information indicates that there was a standard procurement process with reasoned and documented analysis for the selection of Scenic Hotel Group as the hotel operator for the resort. The process involved an expression of interest stage (December 2013 to February 2014), a request for proposal stage (April 2014 to June 2014), and a negotiation stage (June 2014 to October 2014).

In our view, the documented analysis available to us indicates that Matavai Niue Limited made an informed decision to select Scenic Hotel Group.

The procurement was managed by Horwath HTL for Matavai Niue Limited. According to its website, Horwath HTL is “a New Zealand professional firm providing specialist consulting services to public sector stakeholders and private sector clients in the hotel, tourism and leisure industry across New Zealand and the South Pacific Islands”. It is a member of Crowe Horwath International.

Development of the evaluation criteria was part of Horwath HTL’s work. The expression of interest stage of the procurement process used the following evaluation criteria:

• the operator has capability to maximise the resort’s profitability;

• the operator has a strong reputable brand in New Zealand (because New Zealand is the main source of Niue visitors and resort guests);

• the operator will support Niue’s economic growth objectives – (i) provide employment opportunities for locals, (ii) train locals to be senior managers at the resort, (iii) support local tourism business/suppliers, (iv) assist in destination marketing of Niue, and (v) provide authentic Niue experience at the resort; and

• the operator will run a financially self-sufficient resort with an acceptable return on investment that minimises Matavai Niue Limited’s operational and investment risks.

The Ministry provided some oversight of the procurement process, given the New Zealand Government’s interest in the ongoing management and sustainability of the resort. This oversight was through a senior Ministry official who was a director of Matavai Niue Limited at the time (he resigned his directorship in August 2015), a trustee of the Niue Tourism Property Trust, and a member of the Matavai Resort Management Tender Steering Committee.

In our view, the Ministry’s provision of oversight was understandable given the financial history of the resort and the use of New Zealand Government funds.

The procurement process resulted in Horwath HTL recommending that Scenic Hotel Group be selected as the operator of the resort and that negotiations begin with Scenic Hotel Group about the content of a Hotel Management Agreement.

The following bullet points set out the process in chronological order:

• An undated and unsigned resolution of the directors of Matavai Niue Limited suggests that they resolved to engage Horwath HTL to provide advice on hotel management options and to tender for a hotel management company.

• A request for expressions of interest for an operator of the resort was issued on 20 December 2013. It included the selection criteria. Expressions of interest closed on 14 February 2014. Four parties submitted an expression of interest. Horwath HTL provided its assessment of the submissions to a senior Ministry official on 19 February 2014. Horwath HTL determined that the submission from Scenic Hotel Group best complied with the requirements.

• Horwath HTL issued a request for proposal in April 2014. The request noted that Matavai Niue Limited understood that the New Zealand Government was considering providing further funding for a significant expansion of the resort. The request for proposal closed on 2 May 2014. Two operators, including Scenic Hotel Group, submitted responses. Horwath HTL provided advice to the Chairman of Matavai Niue Limited on 13 May 2014. The advice included Horwath HTL’s assessment of each of the two responses to the request for proposal. Scenic Hotel Group was identified as the preferred operator. Scenic Hotel Group told us that, at this time, it did not know that it was the preferred tenderer.

• Horwath HTL’s advice to Matavai Niue Limited also noted that the Managing Director of Scenic Hotel Group had visited the resort in 2013 and that, as of 13 May 2014, a site visit had been arranged for the other short-listed respondent to the request for proposal. Scenic Hotel Group has told us that its visit took place in mid-2013. This was about six months before the request for expressions of interest for an operator of the resort was issued. Both Scenic Hotel Group and Matavai Niue Limited told us that the visit was unrelated to the later procurement process. On 28 June 2013, a Ministry email recommended that information already provided to Scenic Hotel Group be made available to other operators in the procurement process to ensure that no company had a significant advantage or disadvantage over others. The available information indicates that a confidential Information Memorandum was provided to three shortlisted hotel operators (including to Scenic Hotel Group on 11 April 2014) after the expression of interest stage of the procurement process. This appears to include detailed actual and budget financial information, other key performance information, and other important information about the resort. We have not seen any evidence about the effect, if any, of those circumstances on the procurement process run by Horwath HTL.

• An Australian law firm began to provide negotiation support and advice to Matavai Niue Limited about a Hotel Management Agreement from June 2014. Scenic Hotel Group told us that the Australian law firm first made contact with Scenic Hotel Group on 15 July 2014. The Australian law firm concluded on 19 August 2014 that the enhancements now contained in the Hotel Management Agreement made “a very competitive management offering”.

• Horwath HTL sent the Chairman of Matavai Niue Limited a report on 22 September 2014 confirming Scenic Hotel Group as the preferred operator for the reasons identified in May 2014.

• The Chairman of Matavai Niue Limited emailed board members on 6 October 2014 with a discussion paper summarising the process to identify a hotel operator. This paper recommended that Matavai Niue Limited enter into a Hotel Management Agreement with Scenic Hotel Group. The Matavai Niue Limited board met on 8 October 2014 to consider appointing Scenic Hotel Group as the operator of the resort.

• The Chairman of Matavai Niue Limited emailed the trustees of the Niue Tourism Property Trust on 13 October 2014 seeking agreement for Matavai Niue Limited to enter into a Hotel Management Agreement with Scenic Hotel Group.

• The appointment of Scenic Hotel Group as the operator of the resort was announced in a press release on 21 October 2014.

Attachment 1 provides more details of the main steps in the procurement process.

The Request for Expressions of Interest: Matavai Resort Niue Island – Operator Search document required respondents not to contact any person at Matavai Niue Limited, at the Niue Tourism Property Trust, or in the New Zealand or Niue Governments without express authorisation from Horwath HTL’s contact person. This included that the respondents must not:

… approach, directly or indirectly lobby, attempt to influence or provide any form of incentive to, any representative of [Matavai Niue Limited], Niue Tourism Property Trust, Horwath HTL or the New Zealand or Niue Government concerning any aspects of this [expression of interest] process. Any Respondent who either directly or indirectly makes any such approach may be disqualified.

Matavai Niue Limited told us that these requirements also applied to the Request for Proposal stage of the procurement process.

Respondents were also required to “disclose any real or potential conflicts of interest”.

We found no evidence in the available information of conflicts of interest being disclosed during the procurement process. But that information may exist.

Our view

From the available information, our view is that there was a standard procurement process, involving expression of interest and request for proposal stages, with reasoned and documented analysis for the selection of Scenic Hotel Group as the hotel operator for the resort. Horwath HTL administered the procurement process, and the selection of Scenic Hotel Group as the operator for the resort was consistent with the advice Horwath HTL provided to Matavai Niue Limited. Scenic Hotel Group was identified as the preferred tenderer from May 2014, after which there was an ongoing negotiation of contractual terms.

The procurement process required potential hotel operators not to “approach, directly or indirectly lobby or attempt to influence or provide any form of incentive to” any of the parties involved, including the New Zealand and Niue Governments. It also required potential hotel operators to “disclose any real or potential conflicts of interest”. We found no evidence in the available information of conflicts of interest being disclosed during the procurement process. But that information may exist.

2. Who knew about links between political donations and the tenderer, and what influence, if any, the donations may have had over the tendering decisions.

I do not have the mandate to inquire into political donations in these circumstances.

3. Why the resort was prioritised for $7.5 million of development funding and whether that funding fitted within the funding criteria.

The $7.5 million investment you have referred to is consistent with the history of New Zealand investing in tourism in Niue and with the strategy for economic development in Niue through tourism we described earlier in this letter.

The possibility of further New Zealand Government investment in expanding the resort was mentioned in Horwath HTL’s April 2014 document titled Matavai Niue Island Operator Search Process Request for Proposals and Information Memorandum.

That document noted that:

[Matavai Niue Limited] understands that the New Zealand Government is considering providing funding for a further significant expansion of the Resort which would entail building up to a further 20 rooms at the Resort…. [Matavai Niue Limited] is interested in operator feedback on the proposed expansion.… The expansion at the Resort could include a spa, expanding / upgrading the kitchen and restaurant, revamping the entrance / reception / office areas, upgrading the water and wastewater infrastructure, possibly installing solar panels, expanding / refurbishing the swimming pools and landscaping at the Resort.

Horwath HTL’s analysis of the short-listed respondents’ proposals, including Scenic Hotel Group’s proposal, involved analysing each respondent’s financial projections for a 54-room and a 74-room resort.

The investment in a subsequent expansion of the resort was subject to a business case process from July 2014 to October 2015. Attachment 2 sets out our understanding and documentation of the main steps in the business case process.

The business case process followed the New Zealand Treasury’s Better Business Cases framework. The business case included analysis about the:

• strategic case for the investment (is there a compelling case for change?);

• economic case for the investment (does the preferred option optimise value for money?);

• commercial case for the investment (is the proposal commercially viable?);

• financial case for the investment (is the proposal affordable within the available funding?); and

• management case for the investment (is the proposal achievable and can it be successfully delivered?).

The economic analysis in the business case showed that the preferred expansion option would require $10.2 million of capital investment. It was proposed that the expansion would be funded by $7.5 million from a 2014/15 Vote Official Development Assistance expense transfer. (The Ministry told us that the funding was subsequently proposed and approved from the 2015/16 Vote Official Development Assistance Pacific Transformation Fund.) The balance of $2.7 million was to be negotiated with the Niue Government and funded from the New Zealand Aid Programme bilateral funds for Niue 2015-18.

The Ministry told us that, as of 22 August 2016:

• the funds for the expansion were held by the Niue Tourism Property Trust in a trust account, and had begun to be drawn down;

• Matavai Niue Limited has run a tender to appoint a construction company, and the Ministry had no involvement in appointing the construction company; and

• construction work on expanding the resort started in June 2016.

Our view

The information from the Ministry shows that investment in expanding the resort was intended to make the resort more effective in attracting customers while supporting tourism growth in Niue. An informed and structured process was followed to invest New Zealand international development assistance funding in expanding the resort. The further investment in the resort was consistent with New Zealand’s priorities for investing New Zealand’s international development funding in Niue and with the strategy for economic growth in Niue.

4. How the $7.5 million funding will be spent and where most of the benefits will accrue.

The business case envisaged that expanding the resort would include upgrading the core water, wastewater, and power supply infrastructure, and building a conference/function centre and a day spa facility. Spending on cyclone shutters and strengthening the main decks was also proposed. All of these are broadly consistent with the possible expansion options identified in the request for proposal document described above.

The business case recognised the wider contribution of the resort to tourism in Niue. It notes that the resort has “an essential part to play in driving” tourism growth in Niue.

The business case identified three types of financial benefits resulting from expanding the resort:

• the resort’s net earnings;

• the earnings of private tourism operators and other service providers; and

• taxes collected by the Niue Government.

The specifics of those financial benefits are commercially sensitive, and we do not consider it in the public interest to detail those here. But we can confirm that the terms proposed by Scenic Hotel Group involved it receiving a lower gross operating fee on a percentage basis if the resort was expanded by 20 or more rooms.

As noted earlier, the extent to which a hotel operator will support Niue’s economic growth objectives was one of the evaluation criteria used in the procurement process.2 The available evidence shows that consideration was given to this criterion during the selection of the hotel operator.

The evidence also shows that consideration was given to the potential financial return to each of the short-listed hotel operators and their management fees, under different expanded resort scenarios, as part of the procurement process.

Our view

The information available from the Ministry shows that expanding the resort was envisaged at the time of the procurement of a hotel operator and that there has been consideration of the benefits from further investment in the resort as part of a business case process. The business case identified financial benefits to the resort, private tourism operators, other service providers in Niue, and the Niue Government from expanding the resort.

5. To what extent the Niuean people will ultimately benefit from this funding.

The business case identified the following main benefits for the people of Niue from further investment in the resort:

• availability of a more suitable venue on Niue for functions and events;

• greater volumes of customers for local restaurant owners;

• greater volumes of customers for tours and trips operated by other Niue tourism operators;

• increased departure taxes for the Niue Government;

• increased tax revenues for the Niue Government;

• larger numbers of people on the island requiring services and food; and

• maintenance of Niue as a safe, secure, and desirable destination.

The available information indicates that, between 2009 and 2014, visitor arrivals to Niue went from 3993 to 7661 each year and that, between 2010 and 2014, visitor spending increased from about $3 million to $5.7 million.

The specifics of the commercial performance of the resort since Scenic Hotel Group has operated it are commercially sensitive, and we do not consider it in the public interest to detail those here.

Our view

From the available information, our view is that the benefit to the Niuean people from the subsequent investment in the resort will ultimately depend on the success of the resort and of the tourist industry in Niue.

In conclusion

We have found, from the available information, that there was a standard procurement process, with reasoned and documented analysis for the selection of Scenic Hotel Group as the hotel operator for the resort and for the subsequent investment of New Zealand international development assistance funds in expanding the resort.

Because of the level of interest in the issues that you raised, we have decided to publish this letter on the Office of the Auditor-General’s website so that the information is also available to the public and Parliament.

Yours sincerely,

Lyn Provost

Controller and Auditor-General

ATTACHMENT 1: Main steps in the procurement process

Horwath HTL Limited engaged to manage the procurement process by Matavai Niue Limited

• An undated and unsigned resolution of the directors of Matavai Niue Limited suggests that they resolved to engage Horwath HTL to “provide the Board with advice on management options and to undertake a tender for a hotel management company”.

• Draft terms of reference for Horwath HTL’s hotel management company tender process advisory services were developed. We do not have a copy of the final terms of reference.

• A tender process governance plan was produced, and a Matavai Resort Management Tender Steering Committee was formed to oversee the tender process. The plan noted that Horwath HTL was responsible for “Overall day to day management of the tender Process” and for “updating the Steering Committee on progress of the project”.

• 19 July 2013 – The Ministry wrote to the directors of Matavai Niue Limited stating that “MFAT notes and are pleased that you’ve started the process to determine the long term management requirements of the Resort, and to initiate the process to implement the long term management requirements. We are pleased to support this work and to work with Horwath HTL Ltd and [Matavai Niue Limited] on this exercise. MFAT is of the view that a robust and competitive process is required given the use of New Zealand taxpayer funding to support the Resort.”

• The Ministry was to provide Matavai Niue Limited with a grant to pay for the costs of engaging Horwath HTL to manage the procurement process.

• 4 September 2013 - The Managing Director of Scenic Hotel Group had contact with Horwath HTL noting that the “Scenic Hotel Group would like to put it[s]self forward to be considered for the management contract of the Hotel in Niue”, noting that he would be away for a period of about one and a half months and providing alternative Scenic Hotel Group contacts during that period. The Managing Director also noted that he had “a few ideas in regards to the detail of the management contract but will wait to see if we get to the short list before discussing”. Horwath HTL informed the Ministry of this contact.

Scenic Hotel Group subsequently invited a Horwath HTL staff member to meet in November 2013. The Horwath HTL staff member was aware of the need for that meeting to be treated sensitively. Horwath HTL informed the Ministry about the invitation.

Horwath HTL managed the procurement process, recommended Scenic Hotel Group, and interacted with Matavai Niue Limited directors during the process.

The expression of interest process

• The Government Electronic Tender Site (GETS) was used to advertise the expression of interest for the Matavai Hotel Operator Search Process, but not for managing the full procurement process. Horwath HTL used its own processes to manage the request for proposal process.

• 20 December 2013 – A request for expressions of interest for an operator of the resort was issued. It included the operator selection criteria. The documentation noted that “This [expression of interest] is not issued by or for the Government of New Zealand or the Government of Niue.” Responses to the request were to be sent to Horwath HTL.

• Horwath HTL contacted 22 parties during the expression of interest process.

• 14 February 2014 – Closing date for expressions of interest from suitable experienced hotel operators to brand and operate the resort on behalf of Matavai Niue Limited. Scenic Hotel Group told us that it submitted its expression of interest on 13 February 2014.

• 19 February 2014 – Horwath HTL wrote to a senior Ministry official in his capacity as a director of Matavai Niue Limited (he resigned his directorship in August 2015). The letter provided an update on the Matavai Hotel Operator Search Process after expressions of interest had closed. It said that 23 parties had accessed the expression of interest information on GETS, that four parties (including Scenic Hotel Group) had submitted expressions of interest, and that Horwath HTL had assessed how each respondent would meet the evaluation criteria and the strengths and weaknesses of each respondent. Horwath HTL considered that the submission that best complied with the requirements was from Scenic Hotel Group.

• 20 February 2014 – The Premier of Niue (a director of Matavai Niue Limited) agreed, by email to a senior Ministry official, to “go with the 3 on the [expressions of interest] shortlist”.

The request for proposal process

• 7 March 2014 – A senior Ministry official emailed the Premier of Niue indicating that “We instructed Horwath HTL to progress to the next step of the operator search process with the three preferred operators.”

• Horwath HTL’s project manager prepared the request for proposal for the hotel operator.

• April 2014 – The request for proposal noted that Matavai Niue Limited understood that the New Zealand Government was considering providing funding for a further significant expansion of the resort, which would entail building up to a further 20 rooms.

• 2 May 2014 – This was the deadline for responses to the request for proposal. Two operators, including Scenic Hotel Group, submitted their responses to the request for proposal. Although three operators had previously been identified as preferred operators by Horwath HTL, one of those operators withdrew from the selection process before the closing of request for proposals.

• 13 May 2014 – Horwath HTL sent a draft letter to Ian Fitzgerald (Chairman of Matavai Niue Limited). This provided a progress report on the Matavai Hotel Operator Search after the request for proposal had closed. Horwath HTL concluded that “A robust contestable process was undertaken, albeit with only 2 operators.” The letter included Horwath HTL’s analysis of the extent to which the two operators met the information requirements, the two operators’ financial projections (including for a 54-room and a 74-room resort), the two operators’ compliance with key commercial terms, and the two operators’ overall performance against each of the key evaluation criteria. Horwath HTL identified Scenic Hotel Group as the preferred operator on the basis of that information. Scenic Hotel Group told us that, at this time, it did not know that it was the preferred tenderer.

Horwath HTL’s advice also noted that the Managing Director of Scenic Hotel Group had visited the resort in 2013 and that, as of 13 May 2014, a site visit had been arranged for the other short-listed respondent to the request for proposal. Scenic Hotel Group has told us that its visit took place in mid-2013. This was about six months before the request for expressions of interest for an operator of the resort was issued. Both Scenic Hotel Group and Matavai Niue Limited told us that the visit was unrelated to the later procurement process. A 28 June 2013 Ministry email recommended that information already provided to Scenic Hotel Group be made available to other operators in the procurement process to ensure that no company had a significant advantage or disadvantage over others. The available information indicates that a confidential Information Memorandum was provided to three shortlisted hotel operators (including to Scenic Hotel Group on 11 April 2014) after the expressions of interest stage of the procurement process. This appears to include detailed actual and budget financial information, other key performance information, and other important information about the resort. We have not seen any evidence about the effect, if any, of those circumstances on the procurement process run by Horwath HTL.

• June 2014 – An Australian law firm began to provide negotiation support and advice to Matavai Niue Limited about a Hotel Management Agreement from June 2014. Scenic Hotel Group told us that the Australian law firm first made contact with Scenic Hotel Group on 15 July 2014.

• 19 August 2014 – The Australian law firm concludes that “The enhancements now contained in the agreement … make this a very competitive management offering.”

• 22 September 2014 – Horwath HTL sent a revised version of a draft 28 August 2014 report to Ian Fitzgerald. This followed discussions about the Hotel Management Agreement with Scenic Hotel Group. The report confirmed Scenic Hotel Group as the preferred supplier for the same reasons outlined in the 13 May 2014 letter. Horwath HTL concluded “We consider that a satisfactory result has been achieved on the key commercial terms negotiated with Scenic….”

Matavai Niue Limited selected Scenic Hotel Group

• 6 October 2014 – Ian Fitzgerald emailed board members, noting that there is a special board meeting that week about the hotel operator search. The email included a discussion paper that summarised the process to identify a hotel operator, a recommendation to enter into a Hotel Management Agreement with Scenic Hotel Group, and a progress report from Horwath HTL confirming that it considered “a satisfactory result has been achieved on the key commercial terms negotiated with Scenic”.

• 6 October 2014 – Ian Fitzgerald sent the board of directors a memorandum recommending that the Board of Matavai Niue Limited “seek the necessary approvals” from the Government of Niue, the Government of New Zealand, and the trustees of the Niue Tourism Property Trust.

• 8 October 2014 – A Ministry staff member emailed a person in Parliament, noting that “Tomorrow the Matavai Board is to consider the appointment of a hotel management company to run the Matavai. Scenic Circle are the proposed managers….The Board of Matavai Niue Limited (MNL) agreed to conduct a contestable tender process to put into place a long term hotel management arrangement with a third party hotel chain. Horwath HTL were appointed to run both an Expression of Interest (EOI) and a subsequent Request for Proposal (RFP) process…. It is intended to finalise the [Hotel Management Agreement] by 17th October 2014.” The email also outlined the reasons for selecting Scenic Hotel Group.

• 8 October 2014 – The Matavai Niue Limited board met to consider appointing Scenic Hotel Group as the operator of the resort.

• 13 October 2014 – Ian Fitzgerald emailed the trustees of the Niue Tourism Property Trust, seeking agreement for Matavai Niue Limited to enter into a Hotel Management Agreement with Scenic Hotel Group. A senior Ministry official emailed his approval on 13 October 2014.

• 21 October 2014 – The appointment of Scenic Hotel Group as the operator of the Matavai Resort was announced in a press release.

• 12 November 2014 – A meeting between Scenic Hotel Group representatives and the Minister of Foreign Affairs was scheduled to discuss tourism in Niue and other issues. The Ministry has noted that this meeting did not take place.

• 1 December 2014 – Scenic Hotel Group became the operator and manager of the resort.

ATTACHMENT 2: Main steps in the business case process

• 23 July 2014 – By this date, Matavai Niue Limited had developed an indicative business case for a proposed expansion of the resort.

• 5 May 2015 – A full business case was prepared for the board of Matavai Niue Limited using the New Zealand Treasury’s Better Business Case framework. The business case recommended a preferred option for expansion and sought approval from the Matavai Niue Limited Board and Niue Tourism Property Trust trustees to implement that option. A Wellington consulting firm prepared the business case.

• 2 June 2015 – Ross Ardern (trustee of the Niue Tourism Property Trust) wrote to the Ministry, indicating that the trustees endorse the business case presented by the board of Matavai Niue Limited on 13 May 2015 subject to approval by the Ministry and Niue Government. The proposed start date for the expansion work was October 2015.

• 8 June 2015 – Ian Fitzgerald (Chairman of Matavai Niue Limited) emailed the Niue Tourism Property Trust trustees with an update on funding the expansion of the resort. This included discussions with banks, New Zealand officials, and Scenic Hotel Group.

• A Ministry document noted that the business case had been presented to the trustees of the Niue Tourism Property Trust. The economic analysis in the business case showed that the preferred expansion option would require $10.2 million of capital investment. It was proposed that the expansion would be funded by $7.5 million from a 2014/15 Vote Official Development Assistance expense transfer. (The Ministry told us that the funding was subsequently proposed and approved from the 2015/16 Vote Official Development Assistance Pacific Transformation Fund.) The balance of $2.7 million was to be negotiated with the Niue Government and funded from the New Zealand Aid Programme bilateral funds for Niue 2015-18.

• 7 August 2015 – Ian Fitzgerald wrote to the then trustees of the Niue Tourism Property Trust and confirmed that the $10.2 million budget was enough to deliver the full scope of the approved expansion works.

• 19 September 2015 – Ian Fitzgerald told directors of Matavai Niue Limited that “The Premier has confirmed Minister McCully is now prepared to receive a business case for full expansion.”

• 24 September 2015 – The Ministry provided a briefing to the Minister of Foreign Affairs seeking approval of $10.2 million of funding to expand the resort. The Minister approved that funding on 7 October 2015.

• 15 October 2015 – The Minister announced that New Zealand will invest a further $7.5 million in expanding the resort.

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1: The purpose of the Niue Tourism Property Trust is to benefit the Niue Government by contributing to the long-term financial viability and economic development of Niue. It does this by holding and developing property in Niue for tourism in keeping with an arrangement between the governments of Niue and New Zealand.

Matavai Niue Limited is a company registered in Niue. The Niue Tourism Property Trust owns 100% of the share capital of Matavai Niue Limited.

More information about the Niue Tourism Property Trust and Matavai Niue Limited is provided in the background section on pages 5 and 6.

2: This was “(i) provide employment opportunities for locals, (ii) train locals to be senior managers at the Resort, (iii) support local tourism business/suppliers, (iv) assist in destination marketing of Niue, and (v) provide authentic Niue experience at the Resort”.

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