Subsidy city…airport, airlines and the Council

Earlier this week it emerged that the Wellington City Council’s decision to subsidise flights between Wellington and Canberra (and on to Singapore), details of which are still unknown to ratepayers, had been made on the basis of almost no supporting documentation.   There were, so the Ombudsman found, no emails, no cost-benefit analyses, in fact almost nothing at all.    As Stuff reported it:

Documents released by the Wellington City Council show that apart from a presentation made to councillors after the decision was made, the council generated a single two page document, which refers to the subsidy only in passing.

This subsidy could be as much as $8 million over 10 years.

Outrageous as the lack of documentation is, in a way it isn’t really surprising.  This is the Wellington City Council –  and the cabal at the top of the organization –  we are dealing with.  They aren’t exactly known for rigorous and robust policy and analysis processes.

In any half-decent public sector agency, proposing to use public money,  there would have been a proper substantive piece of policy analysis, reviewing the arguments and evidence,  critiquing the reasoning and evidence advanced by the private parties pursuing such a subsidy and, typically, an attempt at a properly quantified cost-benefit analysis.  Not all cost-benefit analyses are very robust, but if officials are forced to write down their reasoning and assumptions at least it opens things up to subsequent scrutiny and questions, based on numbers, not just the hunches or preferences of councillors.

But Wellington City Council doesn’t do things that way.

After refusing comment for several days, the Council’s CEO –  a temporary blow-in from the UK with no obvious expertise in evaluating industry subsidies or airlines – dug his own hole deeper today.

Lavery initially claimed that he had received a six-page report on the funding request written by “my staff”, before acknowledging that the report was actually written by Wellington Airport which had “different interests” to the council.

That looks a lot like a deliberate attempt by the Council to mislead the public.

The council commissioned no work of its own to review the airport’s claims, but could have, Lavery said.

“We could have done that, if we’d felt uncomfortable with it. But we didn’t, so we didn’t. And that’s not uncommon.”

So  he acknowledges that analysis done by the airport company will have been done primarily serving the interests of the airport company  (as it should) but nonetheless saw no reason to commission any analysis of its own, as regards the interests of the Council and the citizens and ratepayers of Wellington.  He didn’t feel “uncomfortable” with the airport company’s short paper.  And why would he?  I’m sure it was written persuasively and Lavery has no known background in aviation matters.  But that is precisely why he (and his bosses) should have commissioned some independent analysis.  Not to have done so might serve his “can do” mentality, but it looks and feels much more closer to dereliction of duty to the citizens of Wellington.

Lavery goes further

“The “paper trail” is the contract itself,” Lavery said.

Later he claimed government agencies often signed contracts without other documentation.

“That’s the way any contract goes. You get in rooms and have discussions. Then you write it up, that’s the way it works.”

Yes, I’m sure all the contractural terms are in the contract itself –  a contract so secret that not even councillors have access to its terms – but that simply isn’t the point.  What matters here is the disciplined process and analysis leading up to the decision to negotiate the contract at all.  And on that, in Lavery’s own words, there was all but nothing.

Of course, it is easy to focus on Lavery.  No doubt he likes the power the leading cabal of Council have entrusted to him .  He even argues that

The amount at issue was a “relatively modest delegation” Lavery said, adding that he had the power to allocate much larger amounts on sewerage schemes.

One is a core ongoing operational function of the Council, the other is a new industry subsidy, in a sector where councils don’t have a great track record.

But in fact the real responsibility here surely rests with the Council itself, and even more so on this particular occasion with the leading cabal –  the outgoing Greens mayor Celia Wade-Brown, the Labour Party Deputy Mayor Justin Lester, and councillor Jo Coughlan.  Lester was apparently a key figure in the discussion over this new subsidy, and Coughlan has chaired the Economic Growth and Arts Committee which seems to deal with such matters.

I suspect that what actually happened is that the airport company –  always keen to attract new flights – was negotiating with Singapore Airlines, who wouldn’t fly to Wellington (making a normal return on capital) without some sort of subsidy. So the airport company approached the senior “booster” councillors, and Lavery, with the idea of a subsidy scheme, all backed up (we are told)  by a six page paper from the airport company.  Lavery won’t really have been acting alone here –  even if he signed the contract –  but giving effect, with no supporting documentation, to the preferences of these key councillors, perhaps especially Justin Lester who will have been looking to the new flights starting around local body election time.

A lot of people attack this subsidy as corporate welfare.  I’m less sure about that. I doubt Singapore Airlines is benefiting much – the deal probably just makes it barely economic for them to trial this odd route.  Probably Wellington Airport, and its shareholders, are directly benefiting, since they make their money from people and planes passing through Wellington Airport.  But the biggest intended gainers really look like the Mayor (then still toying with re-election) and councillors Lester and Coughlan, wanting to be able to sell voters a line that “Wellington was prospering, new connections were growing etc”, all with ratepayers’ money as secret subsidies.   It was certainly convenient timing that the flights started almost to the week when the voting papers went out.

Justin Lester in particular seems to now be feeling some heat.

Lester believed the decision to subsidise the route was a good one, but called on Lavery to release further information.

“I haven’t seen enough information yet” to be satisfied the process had been robust. “I think there should have been more paperwork.”

Easy to say now as people are filling in their postal votes having read the Dominion-Post’s coverage.   But there is no evidence that the Deputy Mayor sought that sort of documentation and scrutiny back when he, and the rest of the cabal, were doing the deal.  Lavery has already told us about the documentation: there wasn’t any, and it is hard to believe that Lester was not aware of that all along.  As I say, Lavery won’t have been acting without political cover.

It is disgraceful all round.  And good reason to be very uneasy about how the Wellington Council will go about evaluating a proposal to contribute to the runway extension (on top of the considerable money already spent).  No doubt they will assure us that for a much bigger commitment there would be much more scrutiny, and much more transparency.  But how much confidence should voters have in such assurances?  Very lirtle, I’d suggest.

A couple of weeks ago, Treasury put out a link to a rather good few pages on a Policy Quality Framework, developed I gather in the Department of Prime Minister and Cabinet.  I can only commend it to the incoming Wellington City Council, and their employee Mr Lavery, as a starting point for evaluating policy proposals.  It is easy to read and digest, but would involve a sea change at the Council.  Evidence, rigour, and documentation have a great deal to commend them.  It is, after all, public money not that of Mr Lester or Mr Lavery..

To end, I’m reproducing a mock Council discussion sent to me the other day by an irate reader, and reproduced with his permission:

Today’s Dom Post on SQ flights left me more than outraged – quite ruined my breakfast
I can imagine the discussion at the Council table:
Councillor A: “ I have an idea – why don’t we increase the rates on struggling widows in Tawa and use the funds to subsidise shareholders in Singapore Airlines”
Councillor B: “Shouldn’t we call for tenders first as other airlines might be interested. After all Air NZ will lose traffic from Auckland?”
Councillor C: “ No we can’t do that – it is commercially sensitive?”
Councillor D: “ Hang on a minute – since when is a subsidy a commercial activity?”
Councillor E: “ Good point – perhaps we should rename it as market development and then the CEO can authorise it without bothering us”
Councillor A: “The taxpayers’ money will bring added business to Wellington – drawn from Christchurch and Auckland. And what is more, these flights will save Wellington business people 40 minutes compared to going via CHC to get the SQ flight from there. That is a big saving”
Councillor B: (the lone slightly more rational member): “ If business folks and others are enjoying a benefit that must be worth something to them – so why don’t we recoup the costs of the subsidy by a surcharge on the tickets for SQ flights?. Actually, come to think of it, the ratepayers are already subsidising all other flights out of Wellington through our involvement in the WIA so we could charge an extra fee on those too”

Councillor A: “ You all seem to be overlooking the multiplier effect; our own analysis (based on data supplied by the WIA and Singapore Airlines) shows a significant net economic benefit to Wellington”

Councillor B: “ But perhaps we should get a slightly more independent, disinterested party to review the business plan?

Councillor C: “No, no  – we can’t do that– remember all this is highly commercial sensitive

But, as I noted sadly to my correspondent, it was, of course, even worse than that. There was no such discussion around the Council table before the deal was signed –  just the inner cabal and Mr Lavery.  Even after the deal was done, councillors –  elected members –  are only allowed access to the terms if they pledge subsequent secrecy.  It is no way to run a government, but sadly it seems all too common in local government.  Wellington might well be no worse than most, but its failings are quite egregious enough.

UPDATE: When I wrote this post I hadn’t read the Herald story, from which this comes

“I think the current debacle in the press illustrates perfectly why it’s not appropriate to have it in the political domain. It gets politicised, and I think a lot of organisations wouldn’t touch us with a barge pole if that happened.”

The Dominion Post has reported the 10-year subsidy is worth up to $800,000 a year, but Lavery would not reveal the agreement, citing commercial sensitivity.

“We don’t want to lose out to competitor cities that would love to have the deal we have with Singapore Airlines,” he told Radio New Zealand.

Two thoughts:

  1.  “politicized” = voters/citizens concerned about how the city council they elect spends their money?    It simply isn’t the business of Councils to be subsidizing flights…..or election campaigns.
  2. “competitor cities”.  Those would be…..?  SQ already fly to Auckland and Christchurch, so was Lavery (and Lester) concerned about somehow “losing out” to flights from, say, Palmerston North to Canberra?

 

 

19 thoughts on “Subsidy city…airport, airlines and the Council

    • Yes to some extent, altho in many cases I use direct quotes from Lavery and Lester themselves. Councillors and Mr Lavery have had several days to correct any material errors in the reporting.

      Do you have information on an alternative perspective?

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  1. About 1991 an independent review of the WCC was conducted under the leadership of Basil Logan, Malcolm McCaw and Suzanne Snively. It recommended major changes. The disclosure by Al Morrison (now of SSC) that the “Rabbit Club” existed amongst the senior officers of the Council was the impetus for its implementation and a the spill of the executive team. The Rabbit club’s document of membership clearly treated councillors with derision.
    Lavery’s comments seem to indicate that rabbits have bred again.
    The current crop of councillors, deserve derision for allowing the hutch to be re-populated.

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  2. Michael
    A huge percentage of your complaints are hypothetical and almost all “facts” are speculative or partial. It is fine to have debates about board-management role separation, and about what should and should not be delegated and about how delegations are exercised. But you have undertaken this exercise by hypothesizing misdemeanors and sloppiness based on guess work as to what did or didn’t happen.
    Then based on your entirely slanted hypothetical case study (all the way down to imaginary conversations) you go straight for “off with their heads”.
    Really?
    Where is the rigor and empiricism in this?
    I have quite a bit to do with Wellington City Council at an officer and elected level and I have interacted with many other councils over the years. My impression is that the people of Wellington can take comfort that it is well managed and well governed.
    I realize that you will see me as part of the cabal, but I have no reason to point this out here other than because I think you are being outrageous and unfair.
    I am not in any way commenting on the handling of the specific decision. I know absolutely no more about that than Ive read in the DomP, which tells me precisely nothing.
    Unfortunately its all too likely that no one will now be inclined to “spill the beans”, because the DomP has decided it’s on a crusade and is hardly likely to pull back to a more reasoned analysis.
    It is all a shame. Trust is crucial for good government as is openness.
    Its hard to see either being advanced by this episode.
    Tim Brown

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  3. Tim

    Thanks for commenting.

    As you know, I’ve always been clear that I think WIAL and Infratil in particular act in the interests of their shareholders, and that that is as it should be. My concern is with WCC.

    As far as I can tell, the following facts are uncontested:
    1. There was no serious WCC documentation or analysis on the decision to subsidise these flights. Lavery said as much directly, and the Ombudsman in effect confirms it.
    2. There was no discussion/debate by the elected Council of the terms of any support for these flights. Councillors still do not have general access to the terms of the deal.
    3. Lavery thinks it is right and proper that such industry subsidies should be decided by him, not by the elected representatives – and thinks the current scrutiny is a “press debacle”
    4. Justin Lester has repeatedly and publicly associated himself with this subsidy. It isn’t Lavery in the photo of the announcement of the new subsidized flights
    http://www.newshub.co.nz/business/singapore-airlines-to-start-trans-tasman-capital-flights-2016012013

    Given all that, and just the nature of politics and bureaucracy, I find it very hard to believe that Lavery simply did the deal with no political cover, from (probably all of) Wade-Brown, Lester, and Coughlan.

    So I’m not sure really what you are objecting to. You seem to be putting a lot of weight on the “mock debate” one of my readers had sent in. I wasn’t – I included it as a bit of a diversion towards the end of the post, but also to highlight the point in 2 above, that the Council as a whole did not get to decide on this subsidy.

    If I recall rightly, in previous comments it has been pointed out that you have given endorsements to Coughlan and Lester. If I recall rightly, you’ve noted that they weren’t exclusive endorsements. Nonetheless, it is probably relevant context in the middle of the voting season. (And yes, to be fair and balanced, I did give my first preference vote to Nicola Young, largely on the airport issue.)

    Michael

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  4. Tim, If you’d only said that you think the council officers and councillors are doing a good job etc. I would have been ok with that. But you chose to go further.

    You state “A huge percentage of your complaints are hypothetical and almost all “facts” are speculative or partial.”. That in itself seems like a hypothetical or speculative comment with no facts to back it up. Which complaints are you claiming are hypothetical? Which of the facts are hypothetical or partial? It seems to me you are very much choosing to align yourself with the “cabal” by these comments.

    The bottom line is Lavery & co did no significant written analysis, I’m not aware that anyone is disputing that as a fact.

    Getting back to the issue, I note a few other comments on Stuff: –
    1) “Lavery says considering a request to fund Wellington Airport’s runway will be “completely different””. I would hope that the only difference is scale and that the same process is done for both. Both should have a written analysis at the end of it.
    2) “Mayoral candidate Justin Lester has said he believes there should be more paperwork from the deal which should be released”. I’m not sure how to interpret his use of the word “should”. Does he mean paperwork should have been done, or does he mean that there is more paperwork available for release. Lavery may not appreciate the former interpretation from his mate in the “cabal”, and the latter interpretation would imply worrying implications for the OIA that generated this issue.
    3) “Lavery also disputed … that no one from the council raised … the question of whether the subsidy would make the difference to whether Singapore Airlines flights were launched”. If only there was a written report that could clarify the matter.
    4) “Lavery said the topic was “absolutely central” to his discussions with the airport”, “We obviously talked to the airport about that extensively” and “We were investing money and we had to make sure that we were putting the right amount in place.”. Implying there was some analysis done, just never written down. Perhaps we should be grateful that all those involved from the council are so good that they were able to do the analysis, change variables, exchange revised numbers etc. without needing to put anything in writing.

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  5. Wellington City Council has and Economic Development AND Arts Committee?? On what planet are these two even remotely related… a bunch of luvvies deciding economic strategy/policy??

    Seriously… WTF???

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  6. Hi Tim,

    Have to say that it is extremely surprising that you, as Chair of Wellington Airport, weren’t aware of the subsidy or that it was coming to your organisation virtually as a grant?

    And could you comment on the funding that the Fringe Festival (of which you are a board member) received from WCC after the official grants process had closed and with the active support of Justin Lester?

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  7. Lavery should have offered the sweetheart deal to the Chinese airforce. They would have likely paid Wellington City Council $800k a year and built the Airport extensions for free if WCC also offered them the privilege of building a separate independent airstrip alongside the existing runway.for the Chinese airforce to use. With their experience with building runway strips on water they would have completed the extensions plus another runway within a week.

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  8. Now I am starting to wonder if WCC paid David Jones to open their first NZ store in Wellington? I had thought it was real dumb for a top retailer to kick off in Wellington rather than in Auckland. Perhaps there is a sweetheart deal in there as well?

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  9. Kevin Lavery cannot have made the decision on his own.

    The “Terms of Refernce and Delegations” for 2013-16 (on the council’s website) state that for proposals greater than $100,000, the chief executive can allocate funds from the City Growth Fund “only in consultation with, and with the agreement of [or majority agreement of] the Mayor, the Deputy Mayor, the Chair Economic Growth and Arts and Councillors Marsh, Ahipene-Mercer, Woolf, Peck and Free as members of the Fund.”

    The interesting question is what information did the Mayor and those councillors have in front of them to approve the expenditure, or did they agree it without any documentation at all?

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    • Perhaps the “Terms of Refernce and Delegations” is why the figure is being guessed at ie. it could be upto $100k per year for eight years.

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    • It turns out the payment to Singapore Airlines comes from the ‘Destination Wellington’ Fund, rather than the City Growth Fund, as stated in an article by Andy Foster on Scoop today. It looks as if the chief executive could approve payments of any size from the fund without involving councillors at all.
      http://wellington.scoop.co.nz/?p=93082

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      • THanks James. A fairly preposterous defence by Andy Foster: the alleged benefits are always large (choose the right consultant, or just take the word of the people pushing for the subsidy) but the evidence is slight, and the documentation – at least in this case – next to non-existent.

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  10. An almost legitimate use of ratepayer funds made via deficient decision-making processes. I would say a 60/40 chance that a judicial review would be successful.

    The subsidy should have come from the Long Haul Attraction Fund. This was signalled in the 2011 Economic Development Strategy. Explicit narrative and $200k of funding was included in the 2012-22 Ten Year Plan but *not* in the 2015-25 TYP.

    The relevant CEO delegation is #5 which gives the CEO authority to sign any contract or MoU to give effect to the TYP/AP. So, basically, the CEO and Mayor, between them were authorized to negotiate and sign this agreement without any reference to anyone else at all.

    The only problem with their action is that the LHAF was specifically set up to attract DIRECT flights from Asia which this isn’t. That aside all decisions on spending public money still need to be made within the framework set out in the LGA. So this expenditure has to be on “good value local public services”, be transparent, take into account the views of the community etc etc.

    Once again WCC strike me as being cavalier with their legal obligations.

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  11. Michael I see you quoted on Stuff today. One question I have – and I apologise if you have already addressed it somewhere – is the effect on other airports. I would have thought the key decsion a tourist makes is whether to come to NZ in the first place. I would expect that which city to come in through was very much ‘second order’. So lets say a runway extension brings more people to Wellington and that is a ‘good thing’ for Wellington. But unless they were incremental tourists isn’t that an equally ‘bad thing’ for other cities unless they have capacity problems? Is this factored into any business case – particualry if GST is being touted as a benefit to central government?

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    • Andrea

      I did some reasonably substantive posts on the airport late last year (and will prob come back to them next week). This one https://croakingcassandra.com/2015/12/08/further-thoughts-on-wellington-airport-part-2/ will take you to the others. The Sapere cost-benefit analysis (commissioned by the airport company and WCC) did take into account the diversion, and in its national benefit calculations focused on the gains to existing fliers (time saved, altho they priced the time too highly), and the expected overall increase in people coming to NZ. Those latter numbers seem implausibly large to me (and people like Ian Harrison), altho my focus has tended to be on what I consider to be material overstatements of the “national benefits” even if the passenger assumptions are totally sound. I’ve argued, for example, that the discount rate they are using is far too low – almost certainly far below what INfratil will be using in its own calculations/decisionmaking, and that many of the “national benefits” are not benefits at all (the producer surplus estimates are far far too high).

      I’ll pick it up in a post next week, but where Hamish Rutherford has me suggesting that long haul flights will come, my real point was that if the runway is built it is all a sunk cost, and especially if the taxpayer/ratepayer picks up most of the tab no one will be requiring an economic return on investment. So there might be a few long haul flights – perhaps in 20 years time – but if the costs aren’t internalized, that won’t be evidence that the runway extension was a good “investment” (quote marks because it seems a lot like vanity consumption by councilors).

      Liked by 1 person

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