Monday, December 22, 2014

The perils of crony capitalism

Back in 2011, National, the party of wheeler-dealers, cut a nice little crony capitalist deal with their donors Sky City: Sky City would build a new convention centre in Auckland, and in exchange we'd relax gambling laws to allow them to suck more money out of the poor, and pick up the tab if the centre went over-budget. Doing the negotiation process, Treasury warned that this was a bad idea:

However, if Ministers wish to proceed with a contractual arrangement with SkyCity, Treasury considers that the difficulty of accurately assessing both the costs of the building and the revenue generated by the concessions will inevitably expose the Government to significant risks. These relate to both the information asymmetry between SkyCity and the Crown and costs to the Crown in respect of both negotiating the contract initially and then managing it over an extended period such as 25 years.
That warning has now come true:
Design improvements, a new five-star hotel and inflation have rocketed up the SkyCity convention centre's pricetag by as much as $130 million.

And while additional gambling concessions are off the table to meet any shortfall for the building, taxpayer funding is under discussion.

Sky City made a profit of $123 million last year, so its not as if they can't afford to cover the extra cost. But why would they, when the government has agreed to? Indeed, why bother to control costs at all, when any increase or overrun will be paid for by someone else? The incentives National wrote into the deal are terrible, and a perfect example of the perils of crony capitalism. As for how to deal with it, the answer is simple: walk away. If Sky City thinks an international convention centre is so profitable, they can fund it themselves. And if its not, they shouldn't expect us to subsidise their operations and their profits.