Monday, August 08, 2022

SkyCity convention centre faces significant delay after fire

SkyCity Entertainment’s international convention centre in downtown Auckland is likely to be delayed by at least another year after a fire rampaged through the seven-storey building this week, leaving commentators scrambling to assess the likely financial impact.

On Thursday afternoon, an inspection team was able to enter the building for the first time since the fire broke out on Wednesday and confirmed construction work on the $700 million project will be stopped for “a number of months.”

Most of the fire in the partly built convention centre is now out although firefighters are still dealing with hotspots.

SkyCity Chief Executive Graeme Stephens said the fire was “absolutely devastating for us,” but he and his counterpart Ross Taylor from the main contractor Fletcher Building have jointly proclaimed their mutual commitment to completing the project. The centre will rise “like a phoenix from the ashes” they said at a media conference on Wednesday.

The question for the various commercial players, the stock market, the convention and hospitality industry and for Auckland city and its events marketing team is when. 

Stephens’ statement that there will be a “material delay” is well short on real information. 

“There is now a multi-stage process we must follow to move the project forward. Firstly, Fire and Emergency teams will remain on site until the fire is successfully extinguished and the site is declared safe to re-enter. Once the site is handed back to us, investigations can begin to determine the cause of the fire and the extent of the damage," the company said.

Fletcher Construction said based on available information it is likely the centre will be delayed by a further year at least.

For a project already close to two years behind schedule this has to be very unwelcome news, and it could get a whole lot worse.

At the Wednesday news conference (the only one held so far) Fletcher Construction’s Ross Taylor was not keen on the idea that the construction work to date might have to be torn down and the project started again. However, he could not dismiss the possibility entirely until a full inspection has taken place.

Discussion about the impact of the fire has so far centred around the likely financial impact on the company and the city and by extension New Zealand as a whole. It has also focused on the question of who will be held responsible for the fire and therefore who will be financially liable.

SkyCity has said there will be a “material delay” in completing the building, but has not quantified that either in terms of time or cost.

It is certainly an important project for the city and for New Zealand. The $700 million convention centre would be the largest in the country and was being built specifically to attract large international conferences which no venue can handle now.

The project itself was born in controversy. The need was clearly identified by the convention and tourist industry but no commercial operator or council would take it on. Following a dinner with the then Prime Minister John Key,  SkyCity offered to build a convention centre next to its own premises in downtown Auckland and to meet the whole cost.

A deal was reached with the government in 2013 whereby SkyCity would fund, build and own the convention centre and in return received an extension to its casino licence from 2021 to 2048, 230 more pokie machines and other concessions estimated to be worth NZ$527 million over 35 years.

The company has since added an extra hotel and new food and beverage operations to its existing hotel and casino complex and its 328 metre Sky Tower rising above the city is an iconic landmark for Auckland like the Eiffel Tower or the Empire State Building and frequently features in the city’s branding and marketing.

However, construction of the convention centre is now nearly two years behind schedule and the main contractor, Fletcher Construction has already lost many millions of dollars on the project. It has also paid SkyCity $39.5 million in liquidated damages so far for the delays in completion.

The question of liability has been the subject of much comment in New Zealand media, although none of the commentators have seen any of the insurance policies taken out by SkyCity or Fletcher Construction, or even know the identity of the insurance companies involved. Both SkyCity and Fletchers have refused to say who has provided their insurance.

Both companies have affirmed that their insurance coverage will provide adequate funds – once the question of liability and the quantum of damage is known.

However, commentators have raised issues about the possible impact of negligence by sub contractors in setting off the fire, the lack of fire alarms and sprinklers on the floor where the fire began, and the fire service’s inability to use heavy aerial appliances and cranes to fight the blaze because these were out for maintenance.

Both Fletcher Building and SkyCity Entertainment have confirmed they have contract works and third party liability insurance in place on the construction site.

Raine Selles, managing director at CMC Asia Pacific said this was a force majeure event. But he added it was too early to tell if any party would become liable, as that would depend on the reason for the fire.

John Tookey, who teaches a construction management at a local university said losses as a result of the direct effect of the fire were set to be huge.

"The consequential effects of smoke and water damage are likely to be every bit as substantial if not more. When these losses and the business-related cash flow impact of cancelled conferences are calculated, the final bill could see the sky as the limit."

It has been reported that the fire was started by an unattended blow-torch that was left by a worker who went on a break. Tookey said he believed that person was likely to be a subcontractor. But until the dust settled on the situation it would be difficult to know.

"That is why on the liability side it will be a dog's breakfast."

SkyCity Entertainment Group has declined to name its insurer but says it's an international company and that the consequences of the fire in the roof of the new convention centre and the disruption to its existing facilities will be fully covered.

"We're comfortable with the credibility of the insurer and their ability to meet their obligations," Stephens said.

Reaction on the stock market has been muted. SkyCity shares closed on Thursday at $3.90 down only two percent from its opening price of $3.98 on Monday prior to the fire. Fletcher Building is down just one cent from its opening price of $4.72 on Monday.


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