Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Too soon to say if SkyCity deal is buy of the century

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Rival 'bidders' for the convention centre were definitely sold a pup

John Key and Steven Joyce want an international-class tourist asset built without calling on taxpayer funding. Photo / Christine Cornege
John Key and Steven Joyce want an international-class tourist asset built without calling on taxpayer funding. Photo / Christine Cornege

When Michael Cullen bought "the train set" back from hard-nosed Australian transport operators Toll Holdings in 2008, Australian wags labelled it the Sale of the Century.

The former Labour Finance Minister wrote a cheque for $665 million to acquire Toll NZ's rail and Cook Strait ferry operations and relaunched the business as KiwiRail in a patriotic fanfare at Wellington Railway Station. Toll had placed its book value for the assets at only $430 million. Naturally, Toll was feted by Australian analysts and the sharemarket which regarded the Kiwi assets as "a dog" and couldn't believe the price the Kiwis were paying.

Hidden costs soon emerged (as well as preferential undertakings to Toll) and the "dollars out" cost became $690 million.

By the following April, the rail assets that the taxpayer had stumped up $690 million for were revalued at $349 million by Treasury - an upfront loss to the taxpayer of $321 million.

It's worthwhile recalling this cautionary tale when we assess the quality of the deal two businessmen-turned-politicians - John Key (who did a great deal of initial eyelash fluttering with the SkyCity board) and Steven Joyce - have notched.

Neither Cullen nor the Key/Joyce combo involved the New Zealand Treasury as a frontline negotiator in their respective deals.

Politicians of both Labour and National stripes wanted to get to the finish line and carping memoranda from Treasury officials full of economic jargon, net present values, cost-escalators, discounted cash flow etc; not to mention the crying need to invest in other more worthy investments, did not feature highly in their deliberations.

It's worth remembering this when Labour bangs on now about Joyce/Key short-circuiting good governmental processes.

Labour's moral high ground doesn't look so very high when it comes to such matters.

We won't know for a while yet whether the "convention centre for pokies" deal SkyCity inked with the Key Government is the Buy of the Century. But judging by the raft of official papers released over the past two weeks, it does (on the surface) look very much as if SkyCity has scored a licence to print money with a good deal of downside risk underwritten by the Kiwi taxpayer.

If you worry about global warming and climate change issues, it would be attractive to say Cullen was motivated by a noble objective when he began the Labour Government's great rail buyback. A succession of owners had run the network's capacity down (though Toll was not the major culprit). Labour was imbued with the sustainability philosophy and believed shifting freight off roads and on to rail would reduce carbon emissions and ease pressure on the nation's roading network.

John Key and Steven Joyce were motivated by a different and (to some) even more noble objective: Getting an international-class tourist attraction asset built - because that is what successful national convention centres are - without the Government having to put its hands in the taxpayers' pockets to do so.

The problem is the deal created an uneven playing field and reinforces the impression that the Key Government will opt for backroom deals over due process.

Treasury's advice suggested the convention centre could turn out to be a white elephant in that New Zealand already had a disproportionate share of the international convention business.

That does not necessarily follow. If we have a good share of that business without marketing it, targeted marketing efforts may well ensure New Zealand gets an even bigger share of the convention business.

The real issue is whether the Government has given away too much on the concession front (it has essentially swapped $400 million in gambling concessions for a $400 million centre it otherwise would have paid for).

What is also clear is that the four other "bidders" involved in the convention-centre wrangling were sold a pup.

Almost from the start, the deal was SkyCity's for the taking. The SkyCity board knew exactly what the Government's bottom line was.

The other companies did not realise they were there simply to add competitive ballast to a so-called expressions of interest process.

If the late Lloyd Morrison (Infratil was one of four other contenders) had known what was going on he would have been on the phone to Key.

But Ngati Whatua is still around. The tribe want a refund for the fees it wasted.

It's unlikely this Government will do that. But other commercial players will be just that much more wary in future.

- NZ Herald

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