Send in the Clowns: The CAA’s $8.5 million Asteronomical fiasco

05 April 2013 / by Des Lines / Consultation, Costs, Governance
Wellington's Asteron Centre, with 45,000 square metres of space, 33,000 of them lettable and a rates bill of almost $2 million, some of it paid by aviators along with the annual $1.8 million in rent. CAA occupies part of floor 14 and the entire penthouse (with some of the best views). It's truly asteronomical

Heads in the clouds? Wellington’s Asteron Centre, with 45,000 square metres of space (but just 33,000 m2 lettable) and a rates bill of almost $2 million, some of it paid by aviators along with the CAA’s annual $2.4 million in rent. CAA occupies part of floor 14 and the entire 15th floor penthouse (the best views don’t come cheap, as any pilot will tell you)

Back in the 70s when I was a Boeing 737 F/O with NAC, we had a simulator instructor named Jim Hutchison, who had a quirky sense of humour. Jim would sit behind his two crew, and whilst setting up his simulator control panel, he would quietly hum away the old Stephen Sondheim song made popular by Barbra Streisand, “Send in the Clowns”.

The subtlety of the song, which begins…

Isn’t it rich?
Are we a pair?
Me here at last on the ground,
You in mid-air.
Send in the clowns

… was usually lost on the crew, who were about to begin their proficiency check ride and had other things on their minds!

So, where is this preamble headed?

We have seen many clowns amongst our politicians, CAA board members and past directors of the CAA. They have introduced wide-ranging changes and policies that have affected us all (and will continue to do so) before nimbly stepping away from their wreckage.

A case in point, which I have been investigating, relates to the relocation of the CAA offices from the comparatively low rent district of Petone to prime real estate in the heart of the Wellington CBD.

In October 2007, with leases on its premises due to expire and space constraints being experienced (due no doubt to an expanding bureaucracy) the CAA began a process to determine its accommodation options. In August 2008, the Authority made a decision to lease space in a building under construction at 55 Featherston St, Wellington for Asteron Life, an insurance company. This project would culminate in the CAA moving out of its premises in a previously converted warehouse in January 2011 to the central Wellington location to “provide a more productive and efficient work environment”. In the words of that classic Tui beer ad, “Yeah right”!

At the time of the decision by the CAA Board and the Director, a Labour-led Government was in power. In true “Yes Minister” style, where the tail wags the dog, the then Minister of Transport Annette King signed off on it.

We recently asked the CAA some history questions. In a letter dated February 25 2013, Jo Beckwith, the CAA Official Information and Privacy Officer, replied:

Q. Who were the members of the CAA board in August 2007 who made the decision to relocate the CAA offices to 55 Featherston St, Wellington?

A. Rick Bettle (Chairman), Errol Millar, Darryll Park, Susan Hughes and Ross Crawford.

Q. Was the decision of the CAA board unanimous or were there any dissenting members who questioned the wisdom and financial cost of the move?

A. No dissenting view was recorded.

Q. How many of those 2007 CAA board members are still sitting on the board?

A. None of the abovementioned board members are currently on the CAA board.

The Director of the CAA at the time was Steve Douglas, who also departed subsequent to implementing this decision to relocate.

So, in essence, all the major players make an expensive decision to relocate, then bail out before the repercussions occur, or in the vernacular, the brown stuff hits the fan! Similarities exist in the way former Prime Minister Dame Jenny Shipley and other independent directors resigned from the Mainzeal board, a day before the company was placed in receivership.

The only person still with the CAA (and who would inevitably have had an input into the decision) was the present Director, Graeme Harris, who was Chief Operating Officer at that time.

There was, however, one lone dissenting voice to this very expensive relocation that we are all now paying so dearly for. It came from the Hon Steven Joyce – recently tasked with fixing the Novopay teachers’ pay debacle.

The general election and change in government resulted in Labour’s Minister of Transport, Annette King, departing the scene, and the Hon Steven Joyce assuming the role of Minister of Transport. In a press release of 30 April 2009, he made his views clear.

Minister not impressed with CAA relocation costs

Transport Minister Steven Joyce says he is “not at all impressed” with the $8.5 million cost for the Civil Aviation Authority to move from its current Petone location to a new, multi-storeyed building in downtown Wellington.

The rental costs in the new building will be considerably higher on a per square metre basis than the CAA’s current facilities in Petone.

The decision to relocate was made last year, prior to the general election, and was supported by the then Transport Minister Annette King. The move is scheduled for the end of next year.

”I am not impressed that these costs are being incurred to this level and at this time when New Zealanders are having to tighten their belts in the current global economic recession,” says Mr Joyce.

About 90% of CAA revenue comes from industry fees and charges, including the domestic passenger levy.

Mr Joyce says he has made his views on this matter very clear to the Civil Aviation Authority.

“I have tested the options to amend or not go through with this move over a period of time with the Chair of the CAA. Unfortunately commitments were made with the support of the previous government that are unable to be changed.

“The CAA has assured me that everything possible will be done to contain costs going forward from here.”

Then Mr Joyce, in comments to ONE News on Tuesday June 30, 2009, said:

“The CAA say moving to Featherston Street means they will be closer to other industry players and to Parliament.

“There is no need for the Civil Aviation Authority to be based within a stone’s throw of Parliament and [in] brand new premises.”

ONE News discovered that in July 2008, Audit New Zealand had questioned whether it was appropriate to use passenger levies to pay for the new premises. The CAA got around that by paying higher rent over time instead of a lump sum.

Steven Joyce became a minister later that year, but by then it was already a done deal and they had to carry on or be sued for around $27 million.

“It is the lesser of two evils,” said the Minister.

A further question put to the CAA and answered by Jo Beckwith:

Q. The old premises in Lower Hutt were stated as being “no longer suitable for the purposes of the CAA”. In what ways were they considered unsuitable?

A. The CAA’s former premises in Petone were considered unsuitable for the following reasons:

1. The building’s plant was beyond the end of its useful life cycle. The heating, ventilation and cooling plant was failing and could not adequately heat or cool the building. In addition, the roof was leaking creating hazards in the workplace and the plumbing was failing causing damage to both the CAA and the landlord’s property.

My comment:

I would have assumed that there was a contractual lease agreement that obliged the landlord to repair/replace these deficiencies and that most landlords would have done their utmost to keep their building tenanted by a government SOE such as the CAA.

2. The premises were not conducive to attracting and retaining staff.

Comment:

In the past, we have had some good people working for the CAA, but the comments from ex-employees were generally that they left because the culture and bureaucracy stifled their ability to achieve any meaningful change to systems and practice – not because of the “un-conducive premises”

3. Staff were located in two buildings.

Comment:

In Christchurch, post-earthquake, many large businesses have found little hindrance to continuing effectively whilst located in separate buildings. In fact, many have decided that there are distinct advantages to their clients and staff in no longer being located in the CBD.

4. The premises were not large enough to accommodate the then forecast growth in staff numbers.

Comment:

It would appear that there were moves contemplated to increase staff numbers but little mention of any efficiencies gained by the relocation that would lead to a reduction in staff.

The cost and funding of the relocation

As disclosed above by Steven Joyce, the cost of the relocation amounted to $8.5 million.

The hard fit-out of Levels 14 &15 of the Asteron Centre at 55 Featherston St was funded by a term loan from the Crown agreed to by Cabinet. CAA funded the capital work-in-progress from its cash reserves, with the loan drawn down in December 2010.

This differs from the original concept, which was based on funding the hard fit-out by a sale and leaseback option with the landlord (challenged by Audit NZ).

While the details have not yet been disclosed, the loan was to have a term of four-and-a-half years. The financial projections assume the principal repayments will reflect the nine-year term of the lease, with any outstanding principal repayable as at June 2015. The CAA has stated:

“The levies, fees and charges introduced on 1 November 2012 have been calculated to cover the outgoings on the loan through to June 2014, the end of the three-year period covered by the Funding Review.

“It is assumed that outgoings for subsequent years will be covered by a combination of re-financing and revision of levies, fees and charges depending on the fiscal position and operating conditions prevailing on the CAA at that time.”

Comment:

Whilst we considered that the new fees, levies and charges, introduced on November 1 2012 were exorbitant, it has been clearly signalled from the above that there is potentially still worse to come if there is a continuing decline in the fiscal position of the CAA.

Speech by Steve Douglas, Director of Civil Aviation

In an address to the 59th Annual Aviation Industry Association Conference in Blenheim on July 27 2009, Steve Douglas said:

“Yes, the relocation will mean that we pay more in rental than we do at present. In the CAA’s case, the increase in rental is as much to do with the site that we are moving from, as it is the building we are moving to. The increase in rental from 2011 will need to be funded from future revenue, and this was taken account of in the funding arrangements put in place in the decision to relocate.

“I have pointed out that the CAA will need increased funding if it is to retain and build the capability it needs to undertake its role as an effective and responsive aviation safety regulator. These strategic projects, rather than the relocation, are likely to determine the future funding requirements of the CAA.”

What about that statement by ONE News that the shift will hit you in the back pocket?

“Well, if the domestic passenger levy were to be the only source of funding, the increase would be of the order of 20 cents per passenger sector. I’m sure that is not the impression you were left with as the result of TV One’s treatment of the issue.”

Comment

Rather than increasing the domestic passenger levy by 20 cents per passenger sector as suggested by the ex-Director Steve Douglas as a means of mitigating the increased costs, the CAA reduced the domestic levy to $1.97 (incl GST) from $2.00.

Comparison of rental costs

In order to research the previous Petone rental costs as opposed to those at 55 Featherston St in the Wellington CBD, I once again sought information from Jo Beckwith. In her letter of April 3 2013, she forwarded the following information:

“Please see our response below to your request for a cost comparison of the lease costs of the Petone and Wellington CBD premises.”

PETONE RENTAL COSTS Cost per m2 Total m2 Annual Rental
Aviation House 192.87 3376.00 $661,140.00
Home Ideas Centre 146.53 476.28 $69,789.31
TOTAL 3852.28 $730,929.31
[Average rental per m2 = $189.74]
WELLINGTON CBD RENTAL COSTS
Asteron Centre (part level 14) 550 1567.55 $862,152.50
Asteron Centre (level 15) 560 2841.10 $1,591,016.00
TOTAL 4408.65 $2,453,168.50
[Average rental per m2 = $556.44]
Rental increase $1,722,239.19

All figures are exclusive of GST

In the 2009-10 Annual Report of the Civil Aviation Authority, section 7.2, there is information regarding the relocation of the CAA. Under the subject heading of identified internal risks, it is stated:

“The CAA has exposed itself to financial risk associated with new buildings, fit-out costs, etc, at a time when its revenue flows have diminished.”

The way in which the CAA planned to manage those risks was stated as below:

“The costs estimated by the CAA for relocation have been rigorously reviewed, managed to reduce costs below its budget, and monitored within the budget set for the relocation. The funding of the ongoing accommodation costs is considered as part of the analysis of future revenues and costs being undertaken as part of the Funding Review mentioned in Safety Levy Revenue risks.”

The identified risks from the Safety Revenue were:

That Levies may not be sufficient to finance the required CAA capability in the medium term.

So, having identified that risk, the CAA then reduced the Safety Levy imposed on the airlines (which, incidentally, had the means to recover their costs from their passengers should the levy have been raised).

To sum up this investigation, it is my contention that no prudent Board of Directors or CEO of a business would willingly increase the overheads of that business by locking in a rental increase of more than 300% unless:

1. That business was in the privileged position of being a SOE Regulator.

2. The client base of that business was “captive” without having any options of taking their business elsewhere should they not wish to accept increases in fees, levies and charges.

3. The only means of objection that “clients” had to increased fees, levies and charges was the daunting prospect, for most people, of laying a complaint using legislative channels such as the Regulations Review Committee, the Office of the Attorney General or by Judicial Review.

Coupled with a global economic slowdown, the prospect of a falling client base as more pilots move away into lower-cost areas of general aviation and existing small aviation businesses either close or do not start up, the expensive relocation of the CAA does not make sound economic sense – except perhaps to a few clowns!

So, back to that old refrain…

Isn’t it rich?
Isn’t it queer?
Losing my timing this late
In my career?
And where are the clowns?
Quick, send in the clowns.
Don’t bother – they’re here.