BusinessDesk: Len Brown backs ‘breakeven’ convention centre, struggles with gambling implications

By Hannah Lynch

Auckland mayor Len Brown supports the convention center at the heart of a contentious deal between the National Party and SkyCity Entertainment Group, a facility that the council’s own research shows would be “breakeven” at best.

Under the SkyCity proposal, the casino and hotel operator would pay the full $350 million construction costs for a centre capable of holding 3,500 seated delegates or 4,500 in an exhibition format. The payback for SkyCity would be changes to gambling regulations that would allow it to install more gaming machines.

Brokerage Goldman Sachs last month estimated SkyCity would need 350 to 500 extra machines to profit from the deal, generating as much as $46 million of revenue in the first full year of operation. The opposition Labour Party says the deal means legislative change goes to the highest bidder as several other parties made proposals.

“I recognise the need for a convention centre in Auckland because it will play a role in transforming our economy and provide more jobs,” mayor Brown is a statement. “I am always concerned about the impact of more gambling and if the government proceeds with the proposal I would expect it to include strong measures to mitigate harm.”

“Council has no say over the outcome and is not party to the details, however we will consider them when they are finally released,” he said.

According to a report for the council and the Ministry of Economic Development in 2009 the convention center could generate $17.7 million of revenue a year, including $13 million directly from conferences. Costs and overheads could amount to $16.6 million.

That would leave net operating cash flow at $684,000 once an amount of $706,000 had been put aside for an asset replacement fund. Overall there will be an annual increase of $84.5 million increase in tourism-related spending.

“Based on the projections, the facility will operate on a breakeven cash flow basis,” the report said. “This level of cash flow performance is consistent with major Australian venues including Melbourne and Adelaide.”

Goldman Sachs equity analyst Marcus Curley said SkyCity needs 350 to 500 extra pokie machines for the $350 million investment to produce an acceptable level of return for shareholders.

“This implies incremental revenue from the gaming expansion of between $37 million and $46 million in the first full year of operation,” Curley said in his report.

In February, the casino and hotel operator’s first-half profit jumped 17 percent to $78.8 million. The biggest improvement in Auckland came from slot machines, where gross gaming revenue rose 12 percent to $197 million, while non-gaming sales climbed to $71.9 million from $58.5 million.

Opposition parties have criticised the deal saying National needs to reopen the tender process after Prime Minister John Key admitted he encouraged SkyCity to make a pitch for the centre in his role as Minister of Tourism.

In February 2010, Gerry Brownlee, then Minister of Economic Development, shelved a joint plan between council and government to investigate an international conference centre. Instead he directed MED to put out a request for high levels of interest, according to cabinet papers released today by Labour, which obtained them under the Official Information Act.

“Although large convention centres can be operated at a profit, international studies show that they rarely produce sufficient returns on the cost of capital needed for their construction,” according to a cabinet paper on March 17, 2010.

SkyCity told Key in 2009 that it wanted to build the convention centre. Brownlee met the casino operator in February 2010.

During the tender process for the centre, the four other contenders couldn’t match SkyCity’s offer to pay outright for the centre.

Ngati Whatua chief executive Tiwana Tibble told TVNZ that its offer was still on the table but admits it cannot compete with SkyCity’s $350 million offer. He said putting it out to tender again would be a waste of taxpayer money. 

The deal has been welcomed by Tourism New Zealand saying it would be a major boost for the economy. The centre was highlighted as a top priority in the organisations 2011-2014 manifesto.

“The national convention centre to be built in Auckland will boost New Zealand’s economy by an estimated $90 million annually,” it said on its website. “It will enable the visitor industry to target a whole new market that can’t be accommodated by existing conference facilities.”

“Encouraging a regional network of centres will further boost the important convention and incentive market,” it said.

Shares in SkyCity fell 1 percent to $3.85 and have gained 11 percent this year.