september 2018 - newsbook

Performance Audit: An evaluation of Government’s

deal to design, build and operate

the Malta National Aquarium

September 2018

facebook.com/NAOMalta nao.gov.mt

National Audit OfficeNotre Dame RavelinFloriana FRN 1600MaltaTelephone: (+356) 2205 5555

ISBN: 978-99957-60-18-2linkedin.com/company/naomalta

Final Cover.indd 1 26-Sep-18 11:07:19 AM

Performance Audit

An evaluation of Government’s deal to design,

build and operate the Malta National Aquarium

Table of Contents

List of Abbreviations 4Executive Summary 5

Chapter 1 - Terms of Reference 131.1 Introduction 131.2 Audit Focus 161.3 Methodology 171.4 ReportStructure 18

Chapter 2 - Enhancing Malta’s Tourism Product 192.1 Introduction 192.2 TheNationalAquariumcomplexsignificantlyupgradedthefacilitiesin theBuġibbaandQawraarea 192.3 TheNationalAquariumisattractingforeignandlocalvisitors 202.4 TheMNAasaleadingentityforthelocalpreservationofmarinelife 222.5 Thecomplexisaprimerevenuegeneratorinthearea 232.6 Conclusion 24

Chapter 3 - Financial considerations 253.1 Introduction 253.2 The50-yearrent-freeconcessionimpliesthatGovernmentincurreda substantialcostwhentheforegonevalueofpubliclandistakenintoaccount 263.3 TheMNAcomplexisgeneratingrevenuesinexcessofprojections 303.4 Conclusion 31

Chapter 4 - The contractual framework 334.1 Introduction 334.2 ContractualprovisionsdidnotalwaysensureabalancedService ConcessionAgreement 344.3 Conclusion 39

Chapter 5 - Monitoring 415.1 Introduction 415.2 MTA,generallyhastheappropriatemonitoringmechanismsinplaceas stipulatedbythecontractualframework 415.3 MTAhasnotpresentedNAOwithdetaileddocumentationtosupport projectcostcertification 425.4 MTAdelayedtheappointmentandisnotfullyexploitingthereviewcapabilities oftheAuditingBody 43

NationalAuditOffice-Malta 3

5.5 MTA’sfinancialmonitoringdoesnotextendtoanalysisofMNA’saudited financialstatements 445.6 Conclusion 44

List of Tables

Table1:Contractor’sprojectionsversusactualvisitorstotheNationalAquarium (2014to2017) 21Table2:Percentageincreaseininboundtourismagainstpercentageincreaseof touristsvisitingtheNationalAquarium(2014to2017) 22Table3:LocalvisitorstotheNationalAquarium(2014to2017) 23Table4:CosttoGovernmentfora50-yearrent-freeconcession 28Table5:NetbenefitsorlossestoGovernmentthroughthe50-yearrent-freeconcession 29Table6:ActualperformanceoftheMNAcomplex 31Table7:Embracingbestpracticescontractualcauses 34

List of Figures

Figure1:TheMaltaNationalAquariumtimeline(1993to2013) 15Figure2:FinancialoutlayfortheNationalAquarium 16Figure3:Thecontractualframework 33

4 NationalAuditOffice-Malta

An evaluation of Government’s deal to design, build and operate the Malta National Aquarium

ANAO AustralianNationalAuditOffice

BoQ BillofQuantity

CBA CostBenefitAnalysis

DBPFOT Design-Build-PartFinance-Operate-Transfer

DGRegio Directorate-GeneralforRegionalandUrbanPolicy

DoC DepartmentofContracts

ERDF EuropeanRegionalDevelopmentFund

EU EuropeanUnion

FIDIC InternationalFederationofConsultingEngineers

GPD GovernmentPropertyDepartment

IAID InternalAuditandInvestigationsDepartment

IRD InlandRevenueDepartment

IRR InternalRateofReturn

ISSAI InternationalStandardsofSupremeAuditInstitutions

IZVG InternationalZooVeterinaryGroup

JASPERS JointAssistancetoSupportProjectsinEuropeanRegions

MEPA MaltaEnvironmentandPlanningAuthority

MIP MaltaIndustrialParksLimited

MNA MaltaNationalAquarium

MTA MaltaTourismAuthority

NAO NationalAuditOffice

NGO Non-GovernmentalOrganisation

PPCD PlanningandPrioritiesCoordinationDivision

PPP PublicPrivatePartnership

VAT ValueAddedTax

WACC WeightedAverageCostofCapital

List of Abbreviations


Executive Summary

Introduction

1. One of themajor tourism projects undertaken in recent yearswas theMalta NationalAquarium(MNA)inQawra.Thisprojectconstitutedanexpenditureofover€15.4million,where48.6,8.7and42.7percentof fundingemanatedfromtheEuropeanUnion(EU),Governmentandtheprivatesectorrespectively.Inaddition,Governmentoutlayincludeda50-yearrent-freeconcessionofasiteofover20,000squaremetreslocatedonpublicland.TheMNAcommenceditsoperationsinOctober2013.

2. Theauditobjectives,outlinedbelow,reflectthemaincriteriaadoptedtodeterminethedegreetowhichthisventureconstitutedvalueformoney.Tothiseffect,thisreviewsoughttoevaluatetheextenttowhichthe:

i. projectcontributedtoMalta’stourismproduct;ii. directfinancialbenefitstoGovernmentreplicatethepublicinvestment;iii. Contracts’ clauses safeguard Government’s interests and ascertain a balanced

partnershipintermsofprojectbenefits;andiv. MaltaTourismAuthority(MTA)ismonitoringprojectimplementation.

3. ThisExecutiveSummaryincludesextractsfromMTA’sfeedbackonthisperformanceaudit.A

moredetailedpresentationofMTA’scommentsisincludedintheReportproper.Moreover,inviewoftheircommercialsensitivity,whileavailabletotheNationalAuditOffice(NAO),somestatisticsarenotbeingreproducedinthisReport.

Enhancing Malta’s Tourism Product

4. TheMNAcomplexestablisheditselfasanintegralpartofMalta’stourismproduct.Tothisend,thisperformanceauditrevealedthatMNAoperationshavefulfilledpredeterminedandothergenerallyacceptedcriteriarelatedtoaqualitytourismproduct.

5. The National Aquarium project, which was part of the plan for the embellishment ofBuġibbaandQawra,significantlyoverhauledthefacilitiesavailableintheareabyprovidinga high-end National Aquarium complex, housing a visitor attraction and educationalfacilities,adivinginstituteandvariouscateringestablishmentsprovidingancillaryfacilities,together with a retail outlet and car parking facilities. The facilities also include freelyaccessiblepublicareassuchasthelargeplazaandgamesarea.Theprojectalsoincludedrestorationofhistoricstructuresinthearea.Additionally,thecomplexisregularlyusedas

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aneventsvenue,someofwhichdirectlyattractvisitorstoMalta.SincetheinterestintheDivingInstitutebythisSector’sassociationsdidnotmatchexpectations, in linewiththeconcessionAgreement,theContractornowmainlyutilisestheInstitute’sfacilitiesforothercommercialpurposes.ThelackofinterestintheDivingInstitutedeviatesfromtheproject’sperformanceindicators.

6. Between2014and2017, thenumberofvisitors totheNationalAquarium(touristsandlocal)ofwhichmorethantwothirdsweretourists,significantlysurpassedtheforecastedvisitors.Theforegoingconsiderstwofactors,namelythatatthetimeofprojectingvisitorforecasts(2008/9)thetourismindustrywasexperiencinganegativegrowth.Conversely,insubsequentyears,the industrywentthroughasignificantgrowthwheretheNationalAquariumvisitorsgrowthwasdoubletheincreaseintouristarrivals.

7. TheMNAcomplexisinitselfaprimerevenuegeneratorintheareathroughvariousaspects,mainly employment as well as entertainment and catering activities. During 2016, theMNAemployed98personsduringthewintermonths,withthisnumberalmostdoublingduringthesummerpeakseason.Inturn,suchemploymentcontributedtotheeconomyandinfluencedpositivelyGovernmentrevenuegeneratedthroughincometaxandsocialsecuritycontributions.

Financial considerations

8. Thepermanentcapital injected intheprojectbythethreemaincontributorsamountedtoaround€15.45million(€6.6millionbythecontractor,€7.5millionbytheEUand€1.35millionbytheGovernment)–thisexcludingthepresentvalueofthelandforegoneovertheconcessionperiod.Thisperformanceauditestimatesthatsuchpresentvalueoflandforegonevariesbetween€2.6millionto€28.5million,dependingonthemarketvaluethatistobeattributedtoit.Tothisend,theNAOattributedanaveragevalueof€15.5million,whichrepresentsthesemi-commercialnatureoftheMNAcomplex.Ontheotherhand,MTAcontendsthatitisthe€2.6million,thatisthelowervalue,whichshouldbeconsideredforthepurposeofthisexercisesinceitreflectsthelackofpreviousmarketinterestintheproject.

9. WhileacknowledgingthevalidityofMTA’sargumentation,theNAOconsidersthatthevalue

ofthesiteinquestionisbetterrepresentedbyanaveragevalueof€15.5millionattributedforsuchland.Consequently,thetotalcapitalinjectedintheprojectwouldamountto€31million.Onthisbasis,theproportionofcapitalforkedoutbytheContractorwillamounttoonlyaround21percent.Consequently,themajorquestionlingersastohowsufficientwasandistobethereturnofcapitaltoGovernmentovertheprojectperiod.Ofrelevancein this context is theneed to improve systems toensure theappropriateattribution tothevaluationofpubliclandconcessionsinvariouscommercial,semi-commercialandnon-commercialsettings.


10. Thebetter-than-expectedperformancefromtheMNAcomplexismainlyduetoapositiveoutcomefortourisminMaltaandtheoperator’sabilitytoexploitbusinessopportunities.Tothiseffect,envisagedprofitsincreasedfrom12.69percentquotedintheCostBenefitAnalysis (CBA) to 16.2 per cent estimated by MTA. However, as Government is not abeneficiaryofrevenuesgeneratedbytheproject,afinancialimbalancewascreatedinthereturnsattributabletoGovernmentandtotheContractorwithintheprojectperiod.MTAcontendsthatrevenueswerenotapriority,asGovernmentwasafterthepositiveeconomicbenefitstotheproject’slocality.

11. Whilenotnecessarilyclearlyvisibleatthetimeofprojectcommencement,suchafinancialimbalancecouldhavebeenratifiedthroughamuchstricterclaw-backclause.Inthiscase,thiscouldhaveentailedcompensationforthelandconcession,whichwouldhavebecomechargeable or reinvested in the development of theQawra / Buġibba area if companyrevenues far exceeded theoriginal estimate. Thus, one couldhaveensured thatwithinthe50-yearServiceConcessionAgreementperiod,theGovernmentwouldbemorefairlyentitledtoashareofthefinancialbenefitsemanatingfromtheproject.SuchcircumstancespresentabetterbalancebetweentheinterestsofthetwopartieswheretheContractorbearstherisksofadverseperformanceandGovernmentwouldnotjustbenefitindirectlythroughtaxation,butalsodirectlythroughrevenuesgeneratedbytheproject.

The contractual framework

12. TheMNAproject’scontractualframeworkcomprisesthreemaincontracts.FirstlythereistheEmphyteusisAgreementbetweenGovernmentPropertyDepartment(GPD)andMTAregardingtheuseofpublicly-ownedland.Thesecondagreementrelatestotheco-financingGrantAgreementbetweenthePlanningandPrioritiesCoordinationDivision (PPCD)andMTA relating to the design and build elements. The third element of the contractualframework comprises the agreement between the Contractor and the Department ofContracts on behalf of theMTA with respect to all aspects of the 50-year concessionandprojectdelivery,includingitsoperations.Thisauditfoundthat,incases,thesethreecontractsdonotcomprehensivelyassurethatGovernment’sinterestsarefullysafeguardedasfollows:

a. The50-yearconcessiontotheContractorfortheoperationoftheNationalAquariumcomplexislongerthanthenorm.AshortercontractperiodisseenasmoreadvantageoustoGovernment as itwouldhaveprovided the latter theopportunity to reviewandre-negotitiateconditionstoseekabetterdealwithinashortertime-frame.This50-yearconcessionwasgivenfollowingMTA’sconsultants’advicewhichconsideredthatadditionalinvestmentwasrequiredtomaintaintherelevantstandardsfortheNationalAquarium complex in later years. Nonetheless,World Bank guidelines outline thataconcession is typically foraperiodof25 to30years (i.e., longenoughat least tofully amortisemajor initial investments). The International FederationofConsultingEngineers(FIDIC)ModelandJointAssistancetoSupportProjectsinEuropeanRegions

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(JASPERS)recommendaperiodofuptotwentyyears.Inasimilarvein,PublicPrivatePartnerships(PPPs)whichhavealreadybeenundertaken inMaltaweregenerallyofuptoarenewable25-yearperiod,evenwhenthematerialityinvolvedexceededtheinvestmentmadewithrespecttotheMNAproject.

b. RentpayablebyMTA, rather than theContractor, for the transferof land from theGovernment Property Department amounts to €25,000 annually, which will beconstantthroughouttheconcession.MTAcontendsthatthisvalueispurelysymbolictoascertainthatGovernmentretainsthetitleoverthelandinquestion.

c. Theuseofpublic land for theactualNationalAquariumconstitutesonly sevenpercent of the total area in question. Supporting amenities constitute 26 per cent ofthe concession area. Another 67 per cent of the area is being utilised for outdoorrecreationalspace,andininstancestohostcommercialevents.Giventhatthisisarent-freeconcessionandthatgovernmentisnotentitledtoanydirectrevenuegeneratedfromthissiteforaperiodof50years,raisesquestionsastowhetherthecontracthasappropriatelymanagedtobalancetheparties’interests.

d. The Service Concession Agreement does not appropriately define deliverables, asreferencestothefinalplanoftheMNAcomplexarenotincludedinanAddendum.

e. While the Service Concession Agreementwas forward-looking to the extent that itincluded claw-back clauses, suchprovisions did not fully anticipate thepotential ofchangingeconomiccircumstancesortourismarrivals.Tothiseffect,stricterclaw-backclauseswouldhaveensuredamorebalancedpartnershipbetweenthepartiesinvolvedinthisventure.

Monitoring

13. ThecontractualframeworkpermitscomprehensivemonitoringofallaspectsoftheMNAcomplex.Moreover,MTAhasaMonitoringCommitteeandisinreceiptofauditedfinancialstatements andanannual report evaluating theextent towhichprojectobjectivesandtargets are attained to support itsmonitoring function.Nonetheless,MTA’smonitoringcoverage did not extend to all aspects of the design, build and operate Agreement asfollows:

a. WhiletheMonitoringCommitteemeetsonaneedsbasisandatleastannually,meetingminutesarenottaken.

b. TheconcessionAgreement,draftedontheFIDICmodeltemplate,considersalumpsumagreementforthedesignandconstructionoftheMNAcomplex.Despiteitsadvantages,thiscontracttypereducessubstantiallythecontractor’sobligationsoncostreporting,which ultimately impinges on the principle of transparency. Thus, the Contractor’s


contributionof€6.6milliontogetherwiththedevelopmentcostsincurredbytheotherparties,whichcollectivelyamountedto€8.85million,couldnotbeconclusivelyverifiedbytheNAO.MTAstatedthatthecostsoftheprojectwerecertifiedbytheappointedindependentarchitects.Theprocessundertakenaspartofthislumpsumcontractinthecertificationofpaymentshasbeenreviewedandacceptedbyvariousauditbodies(bothNationalandEuropean).MTA,however,acceptsthatunfortunatelytheworkingsundertakenatvariousphasesofconstructionwerenotincludedintherelativecostingsandcertificationreports.Tothiseffect,MTAispursuingthematterandtryingtoobtainsuchworkings.

c. InlinewiththeprovisionsoftheConcessionAgreement,theMTAandtheContractorwere required to appoint jointly an Auditing Body to carry out independent andimpartialauditduringtheOperationService.However,thisappointmentmaterialisedtwoyearsafterthestartoftheMNA’soperations.Furthermore,thescopeofreviewagreedwith theAuditingBodydoes not extend to a financial reviewbasedon theannualauditedaccounts.

Overall Conclusions

14. It is undisputable that the Malta National Aquarium is a quality tourism product andgenerallyexceededexpectationsonmanycounts.ThequestionarisesastowhetherthisjointventureinvolvingEU,NationalandPrivateSectorfunds,reflectsabalancedpartnershipwhererisksandbenefitsareequitablysharedbetweenthetwomainplayers:GovernmentandtheContractorofthisdesign,buildandoperateproject.

15. Thefirstpointrelatestotheparties’outlay.OnthebasisofNAO’sattributionofvaluetothepubliclandusedinthisconcession,thebalancetiltsinfavouroftheContractorastheoperator’s inputtotheprojectamountedtoaroundonefifthofthetotalcapitaloutlay.ThisstateofaffairslargelymaterialisesbecauseofGovernmentpracticeswherethevalueoflandconcessionsdoesnotreflectcommercialorsemi-commercialrates.

16. Lessons drawn from this performance audit for future joint venture projects relate tocontractual clauses, in particular claw-back clauses. The Agreement covering this jointventure was innovative as it introduced claw-back clauses, however, these provisionswerenotstrictenoughtocaterforchangingcircumstancesoveraperiodof50years.TheimportanceofthisissuehasalsobeenrecognisedatEUlevel,wherebyinthepastthreeyears,theCommissionhastakenactiontostrengthenclaw-backclausestoensurethattheconcessionaireisnotover-compensatedthroughouttheconcessionperiod.

17. Thisperformanceauditacknowledgesthevalueoflumpsumcontracts.However,NAOdidnotfindevidencethatGovernmentalentitiesinvolvedintheevaluationoftheContractor’ssubmissionsatthetenderingphasecarriedoutcomprehensiveassessmentstoverifythattheMNA infrastructurewould equate to that noted by the operator. This issuemainly

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resultedastherelevantworkingsundertakenbyGovernmentalentitieswerenotincludedinofficialdocumentation.

18. SimilarlytootherreportsconcerningjointventuresbetweenGovernmentandtheprivatesectorpublishedbyNAO,thisReportshowedthatthesharingofbenefitsandrisksofjointventuresbetweenGovernmentand theprivatesectorwasnotalwaysequitable.This isnot,inanyway,tobeinterpretedthatprivateinitiativeorprofitsinsuchventuresaretobestifled.Onthecontrary,theyshouldbeencouragedtothefull.Nonetheless,NAObelievesthatwhilethereisscopeforGovernmentandtheprivatesectortoworkfurtherintandemand todevelopqualityprojects, thepotentialexists foramorebalancedpartnership intermsofrisksandrewards.

Recommendations

19. Atthestrategiclevel,thisperformanceauditidentifiedanumberofissues,whichNationalAuthorities1couldconsiderforfutureprojectsinvolvinglandconcessionsaswellasjointventuresbetweenGovernmentandtheprivatesector.Attheoperationallevel,thisstudyhighlightedelements that if addressed,would further safeguardGovernment’s positionandensureamorebalancedpartnershipwithinthisServiceConcessionAgreement.Withinthiscontext,NAOproposesthefollowingrecommendations:

Atthestrategiclevel:

a. When valuing public land identified for concession purposes involving commercialand semi-commercial operations by third parties, project evaluations by NationalAuthoritiesarealsotoconsidertheopportunitycoststoGovernmentbasedonmarketvalues.Thisapproachwouldproduceamorerealisticevaluationonprojectfeasibility.Thisapproachmayincludeforecastsoffuturecompensationvalueforconcession,thatis, such compensationwill change depending on themarket prices throughout theperiodoftheConcession.

b. NationalAuthoritiesaretodrawuppolicies,whichclearlyillustratethecomputationof the compensation element in cases of service concessions involving commercialactivities. Such a policy should also provide clear guidance on the extent towhichcompensationforsucheventualitiesaretobebasedonmarketvalues.Apolicyinthisregardwouldeliminate subjectivitywhenattributing compensationvalues topublicland.

c. NationalAuthoritiesaretodocumentthebasisonwhichvalueisattributabletopublicland identified for transfer to thirdparties.As land is a highly priced resource, this

1NationalAuthoritiesnamelyincludethoseentitiesresponsibleforfinance,contractsandland.


proposal aims to enhance good governance, particularly through the principles oftransparency,accountabilityandvalueformoneyespeciallywhensuchtransfersarenotsubjecttoaParliamentaryResolution.

d. In the same vein, National Authorities involved in evaluating service concessioncontractsaretodocumentthebasisonwhichconcessionperiodsaredecided.Tothiseffect,National Authorities are to document the respectiveweightings allocated tothe key elements considered during the dialogue stage of tender evaluation,whendeterminingthelengthofconcessionperiods.

e. InlinewithEUdevelopmentsoverrecentyears,serviceconcessioncontractsbetweenGovernment and contractors are to include stricter claw-back clauses. This wouldbe particularly relevant in situations of long-term agreements. Apart from obligingthecontractortokeepinvesting intheproject,suchclaw-backprovisoscouldrelateto compensation or obliging the contractor to contribute in the upgrading of thesurroundingarea.Thistypeofclaw-backclauseswouldensurethatGovernmentdoesnot benefit solely from the development of sites or areas but also partakes in thefinancialbenefitsreapedbytheproject.

f. Atthetenderevaluationstage,NationalAuthoritiesinvolvedintheawardingoflumpsumcontractsaretoascertainthefeasibilityofsubmissionsthroughcomprehensivevalidationstudies,theresultsofwhicharetobeincludedwithofficialdocumentation.Such studies are to assess the reasonableness of bidders’ claims of works to beundertaken and that rates quoted compare well to prevailing market prices. ThisapproachwouldensurethatGovernmentbenefitsfromtheadvantagesoflumpsumcontractswhilemitigatingitsdisadvantages.

Atthe operationallevel:

g. MaltaTourismAuthority’sMonitoringCommitteeistodocumentmeetings’minutes.This is conducive to greater transparency as well as encourages continuity in theCommittee’simportantfunction.

h. Similarly,MTA is to document the outcome of inspections carried out at theMNAcomplex.Documentinginspectionresultsconstitutesgoodgovernance.

i. MTA is to extend the scope of its audit of the MNA complex to include a morecomprehensivereviewofthefinancialstatementssubmittedannuallybytheContractor.Suchareviewwouldbecriticalparticularlyinviewoftheclaw-backcontractualclausewherebytheoperatoristoinvestabnormalprofitsintheproject.Moreover,amorein-depthfinancialreviewisdesirabletomonitorthereturnsbeingmadebythedifferentcommercialoutletsontheMNAsite.

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Chapter 1

Terms of Reference

1.1 Introduction

1.1.1 During recent years, the Ministry for Tourism in conjunction with the Malta TourismAuthority(MTA)hasembarkedonanumberofprojectswiththeaimofimprovingtourists’experience inMalta.Oneof themajorprojects, involvinga capital expenditureofover€15.4millionistheMaltaNationalAquarium(MNA).

1.1.2 TheMaltaNationalAquariuminQawracommenceditsoperationsinOctober2013.TheEuropean Union (EU), Government and the private sector co-funded the project. Thisprojectspreadsoverapproximately20,000squaremetresandcomprisesamongstothersthe public National Aquarium, a public garden at promenade level, a multi storey carpark,facilitiesforlocaldiveschools,cateringfacilities,amerchandiseoutletandatouristinformationkiosk.Theprojectalsoincludesalargeplazaandgamesareawhichareopenforfreeforthepublic.Furthermore,theprojectalsoincludedrestorationofhistoricstructuresinthearea.

1.1.3 Againstthisbackdrop,theNationalAuditOffice(NAO)conductedtheperformanceaudit:‘An evaluation of Government's deal to design, build and operate the Malta NationalAquarium’. The aim of this audit was to evaluate whether the joint venture betweenGovernmentandthePrivateSectorforthedesign,buildandoperaterelatingtotheMaltaNationalAquarium,2constitutedagooddealforGovernment.

Background

1.1.4 Theneed forMalta tohaveaNationalAquariumfirstemerged in1993but theprojectultimatelymaterialised twenty years later. Until a few years ago, the Northern part ofMalta,mainlythetouristicareasofBuġibba,QawraandStPaul’sBay, lackedinfacilitiesbeingofferedbothfortouristsaswellaslocalsresidinginandvisitingthearea,especiallyduringthewintermonths.Throughouttheyears,therehavebeenmanyinterventionstotrytorevivetheareafromitsdecline.

2 ThroughoutthisReport,theterms‘MaltaNationalAquarium(MNA)’,the‘NationalAquariumproject’and‘NationalAquarium’areusedinterchangeably.



1.1.5 Theprojecttakeoffwasdelayedbytheidentificationofanappropriatesiteandasustainablefinancialoperatingmodel.Furtherhindrancesemergedintheformoftheprevailingslowgrowth in the tourism industry registered during the early 2000s in view of the globaleconomiccrises.

1.1.6 Figure1presentsasummaryof theNationalAquariumprojecttimelinesincethe initialstagesin1993untiltheNationalAquariumwasfullyoperationalin2013.

1.1.7 Figure 1 shows that the Malta Tourism Authority (MTA) sought to ensure project

sustainability throughEUFunds. InSeptember2007,MTAsubmittedanEUApplication,requestingassistancefortheconstructionoffacilitiesatQawraPoint,whichincludedtwomarinevisitorattractionsandlandscapedareaswithseatingandopenseaviews,togetherwithaNationalAquarium,amarinearchaeologymuseum,adivinginstituteandaGreektheatre.

1.1.8 The original intentionwas for Government to develop the visitor attractions itself andsubsequentlyleaseittoacommercialoperatororforaGovernmentagencytooperatetheattractions.However,theprojectultimatelyevolvedintoaPrivatePublicPartnership(PPP)wheretheDepartmentofContracts(DoC)issuedapubliccallforbiddersinterestedinaDesign-Build-PartFinance-Operate-Transfer(DBPFOT)arrangementinJanuary2009.

1.1.9 The tender highlighted that the Projectwas to be fundedby the EU andMTA at a co-financingrateof85percentand15percentuptoamaximumof€7,500,000excludingValue Added Tax (VAT), for the design and construction,whichwould complement theConcessionaire'sownfunding.Atthispoint,thetenderdidnotclearlyspecifytheamountrequiredtobefundedbytheConcessionaire.

1.1.10 Twobiddersqualified for the tenderdialoguephase.However,onlyonebidder, Ebcon-GlobalJVrespondedtothecall'InvitationtoDialogue'inJanuary2010.Theproposedbidcomprisedasignificantlylargerfacilitywithawiderscope(andrelatedhigherexpenses)thanhadbeenoriginallyintendedbytheMTA.Laterthatyear,theEUGrantAgreementwassigned,thatisaroundthreeyearsaftertheinitialsubmissionoftheEUApplication.


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Figure 1: The Malta National Aquarium timeline (1993 to 2013)



1.1.11 On18May2011,theDepartmentofContractsissuedthe‘LetterofAcceptance’toEbcon-GlobalJV.ThisletterformedpartoftheServiceConcessionAgreementsignedbetweenthisContractor3andtheMaltaTourismAuthority4on12September2011.Figure2illustratesthefundingsourcesoftheacceptedcontractamountfortheNationalAquariumprojectof€15,441,904.Thisamountdoesnotincludethevalueofaround20,000squaremetresoflandhousingtheMaltaNationalAquarium.

1.1.12 Inaddition to theco-financedgrantof€8.85million,Governmentprovidedapublic landconcessionwithafootprintofover20,000squaremetres,uponwhichthecontractorwastodeveloptheinfrastructurerelatedtothewholeoftheNationalAquariumproject.ThelandconcessionarrangementinvolvedthattheCommissionerofLand,onbehalfofGovernment,and theMTA signa65-years temporaryemphyteusisdeedat anannual rateof €25,000.Subsequently,MTAgrantedtheconcession for thisstretchof landtotheContractor foraperiodof50years.MTAdidnotinstituteanycompensationforthedurationofthisconcession.

1.2 Audit Focus

1.2.1 This performance audit sought to assess whether the Service Concession Agreementbetween Government and the Private Sector concerning theMNA, constituted a gooddeal forGovernment.Themaincriteriaadopted todetermine thedegree towhich thisventureconstitutedvalueformoneyarereflectedinthisaudit’sobjectives.Thesesoughttoevaluatetheextenttowhich:

Figure 2: Financial outlay for the National Aquarium

€

€€

3Ebcon-GlobalJVisthecontractsignatoryandthisconsortiumincludesElbrosConstructionLtd,EbconInvestmentsLtd.,GlobalAquariumsBVandMarinescapeProjectsLtd.MarineAquaticisthecompanyresponsibleforrunningtheMNAcomplex.

4TheDepartmentofContractssignedtheserviceconcessionagreementonbehalfofMTA.


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a. theprojectcontributedtoMalta’stourismproduct;b. directfinancialbenefitstoGovernmentreplicatethepublicinvestment;c. contracts’ clauses safeguard Government’s interests and ascertain a balanced

partnershipintermsofprojectbenefits;andd. MTAismonitoringprojectimplementation.

1.3 Methodology

1.3.1 Theattainmentoftheaboveobjectivesentailedanumberofmethodologicalapproaches.Theseincludedthefollowing:

a. Adherence to ISSAIs:Theauditwascarriedout inaccordancewiththeStandardforPerformanceAuditing, International Standardsof SupremeAudit Institutions (ISSAI)3000.

b. Documentation review: TheMNAServiceConcessionAgreement togetherwith thesevensubsequentAddendawasevaluatedtoestablishwhetherthecontractclausessafeguardedtheparties’intereststotheproject.Furthermore,reviewsoftheEUGrantAgreement,thetemporaryemphyteusisdeed,surveys,auditandinspectionsreportsaswellasstatisticsmaintainedbytherespectiveGovernmentalentitieswereundertaken.

c. Semi-structured interviews:QualitativedataprovidedtothisOfficethroughthevariousinterviewsundertakenwererequiredtosubstantiatethevariousgatheredinformation,mostlyrelatedtotheNationalAquariumServiceConcessionAgreement,theEUGrantAgreement,theCostBenefitAnalysisdocuments,andvariouscorrespondence.Tothisend,NAOinterviewedkeyofficialswithinMTA,thePlanningandPrioritiesCoordinationDivision(PPCD),DoCandtheLandsAuthority.

d. Data analysis: Analysis of data maintained by the MTA pertaining to visitors tothe National Aquarium was undertaken. Such analysis highlighted whether MNAcontributedtowardsMalta’stourismproductandasanattractiontothelocalresidents.

e. Financial analysis:AnalysisofthevariousCostBenefitAnalysis(CBAs)reportsrelatedtothisproject,togetherwithreviewingoftheAnnualReports,FinancialStatementsandanyotherfinancialrecordswereundertaken.Forthispurpose,NAOengagedtheservicesofaFinancialConsultanttoprovidetherequiredtechnicaladvice.

f. Econometric models:TheNAOreviewedtheprojectappraisalmodelsdevelopedbyMTA.ThesemodelsevaluatedGovernment’sopportunitycost for theconcessionofpublic landutilisedfortheproject.Theseevaluationsalsosoughttobenchmarktheproject’santicipatedInternalRateofReturnwiththeexpectedWeightedAverageCostofCapital(WACC).

g. On-site visit:NAOconductedafamiliarityon-sitevisittotheMaltaNationalAquarium.



During this visit, officials from the MTA and representatives of MNA providedinformationrelatedtothisproject.

1.3.2 Duringthecourseofthisaudit,NAOencounteredthefollowinglimitations:

a. AlackofdocumentationrelatingtoprojectdesignandconstructioncostsincurredbytheContractor.

b. Cost Benefit Analysis undertaken by Government concerning the project did notcomprehensivelyconsidertheopportunitycostsinvolvedinprovidingthelandconcession.Moreover,wheresuchcalculationswereavailable,theydidnotconsiderthemarketvalueoftheapproximately20,000squaremetresoflandinvolvedintheconcession.

c. NAOwasnotfurnishedwithabreakdownofthevariousrevenuestreamsgeneratedbytheproject.TheabsenceofsuchinformationhinderedNAOfromanalysingdeclaredrevenuesfromtheprojectaswellasvalueformoneyanalysis.

1.4 Report Structure

1.4.1 FollowingthisintroductoryChapter,theReportproceedstodiscussthefollowing:

• Chapter2analyseswhethertheprojectcontributedtoMalta’stourismproduct.Tothiseffect,theNAOreviewedtheextenttowhichthisprojectinfluencedMalta’stourismproductandvariousrelatedKeyPerformanceIndicators.

• Chapter3evaluatesthedegreetowhichthedirectfinancialbenefitstoGovernmentemanatingfromtheprojectreplicatethepublicinvestment.Thisassessmentconsiderstheco-financinggrant,theMNAfinancialstatements,projectappraisalsaswellastheanticipatedterminalvalueoftheproject.

• Chapter4discussesthedegreetowhichtheContracts’clausessafeguardGovernment’sinterests and ascertain a balanced partnership in terms of project benefits. ThediscussionwillanalysethecontractclausesagainstgoodpracticecriteriaestablishedbytheAustralianNationalAuditOffice.

• Chapter5discussestheextenttowhichMTAmonitoringiscontributingtowardstheproject’s realisation.To thisend, theChapter focuseson thecomprehensivenessofMTAoversightintermsofprojectdevelopmentandoperations.

1.4.2 TheconclusionsandrecommendationsemanatingfromthisperformanceauditareincludedinthisReport’sExecutiveSummaryonpages9to11.


Chapter 2

Enhancing Malta’s Tourism Product

2.1 Introduction

2.1.1 ThisChaptershowsthattheMaltaNationalAquarium(MNA)complexestablisheditselfasanintegralpartofMalta’stourismproduct.Tothisend,thisperformanceauditrevealedthatMNAoperationshavefulfilledpre-determinedandothergenerallyacceptedcriteriarelatedtoaqualitytourismproduct.Withinthiscontext,thisChapterdiscussestheproject’scontributionto:a. upgradetheQawraarea;b. createaversatiletourismproduct;c. conservelocalmarinelife;andd. generateeconomicactivity.

2.2 The National Aquarium complex significantly upgraded the facilities in the Buġibba and Qawra area

2.2.1 Untilafewyearsago,theNorthernpartofMalta,particularlythetouristicareasofBuġibba,QawraandStPaul’sBaylackedinfacilitiesbeingofferedbothfortouristsaswellaslocalsresidinginandvisitingthearea,especiallyduringwintermonths.Throughouttheyears,therehavebeenmanyinterventionsandotherattemptstorevivetheareafromitsdecline.

2.2.2 The Qawra Coast Development Brief document was published in 2003, with anotherupdatedversionpublishedin2007,withtheaimofaccommodatinganumberofleisureandrecreationfacilitiestodiversifyinwhatwasbeingprovidedintheareaofBuġibba,StPaul’sBayandQawra.Theembellishmentoftheareawasahighpriorityatthetime.

2.2.3 AsoutlinedinParagraph1.1.4ofthisReport,theideaofdevelopingaNationalAquariuminMaltadatesbackto1993,whentherewasaplantoconstructaNationalAquariuminMarsascala.However,location-wise,Marsascalawasthoughttobetooremote,especiallyfortourists.Shortlyafterthat,QawraPointwas identifiedasapossible locationforthisproject since it was a touristic zone, which required investment to revive it. However,theprojecttakeoffwasdelayedduetothelackofidentificationofasustainablefinancialoperatingmodel.

2.2.4 The National Aquarium project, which was part of the plan for the embellishment ofBuġibbaandQawra,significantlyoverhauledthefacilitiesavailableintheareabyproviding

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ahigh-endNationalAquariumcomplex,housingavisitorattractionandeducationalfacility,divinginstituteandvariouscateringestablishmentsprovidingancillaryfacilities,togetherwitha retail outlet and carparking facilities. The facilitiesalso include freelyaccessiblepublicareassuchasthelargeplazaandgamesarea.Theprojectalsoincludedrestorationofhistoricstructures inthearea.Thesefacilitiesare in linewithGovernment’sstrategicobjectivesforasignificantupgradeandregenerationeffortsintheBuġibbaandQawraareatosustainthislocalityasatourismhubandreducetheseasonalityelement,whichatthetimewasimpactingadverselyonavailablebedcapacity.

2.2.5 Apart from offering a visitor attraction and various catering facilities, the complex isregularlyusedasaneventsvenue.Tothiseffect,large-scaleeventsareheldthroughouttheyear,suchasmusicfestivalsandparties,inandaroundtheCafédelMaranditssurroundingarea,whichareattendedbyparty-goers fromalloverEurope.Thisvenuealsooffersanoutdoor areawith a largepool deck aswell as the surroundingbar anddiningoptionswithinthecomplex.Moreover,threespecialeventsrelatedtomusicfestivalsandaNewYear’sEveCelebrationwereheldintheMNAPjazzasinceitsopeningin2013.

2.2.6 Furthermore, theNationalAquariumcomplexalso includesadiving institute,where itsmainobjectiveistoprovidefacilitiesfordivingassociationsinMalta.Inthisregard,oneofthekeyperformanceindicatorsaimstoincreasedivingtourism.Tothiseffect,thepremiseswere used marginally by MTA for seminars. However, since 2014, such activities havedeclinedconsiderably.Moreover,thisauditdidnotencounteranydocumentationshowingthatthesefacilitieswereactuallyusedbylocaldivingassociations.MTAcontendsthatthissituationmaterialisedduetodeclininginterestfromlocaldivingassociations.

2.2.7 MTA contends that the foregoing needs to be viewed within the economic contextprevailingatthetimeofembarkingontheproject,whichwasparticularlyinfluencedbytheinternationaleconomiccrises.Onanationallevel,thisresultedinoverallweakeconomicconditionswiththecountrygenerallylaggingintermsoflong-termgrowthandemploymentprospects.Acaseinpointrelatestothenegativegrowthintouristarrivalsbetween2008and2009.Thisinstigatedanoverallstagnantoutlookforthetourismsector,whichwasingreatneedforupgradesandinnovativeinterventionstoimproveproductquality.

2.3 The National Aquarium is attracting foreign and local visitors

2.3.1 TheabilitytoattractvisitorstotheNationalAquariumisacriterionadoptedforthepurposeofthisperformanceaudittodeterminetheextenttowhichthefacilityconstitutesaqualitytourismproduct.


2.3.2 During 2015, more than half of the tourists stayed in St Julian’s and in St Paul’s Bay(includingBuġibbaandQawra).5Furthermore,inthefollowingyear,thetoptwolocalitieswheretouristsstayedlongestwerealsoinStJulian’sat25percent,followedbyStPaul’sBay (including Buġibba andQawra) at 23 per cent.6 Although these figures cannot besolelyattributedtotheconstructionoftheNationalAquariumcomplex,butalsotootherdevelopmentintheareaandthepositiveoutcomeoftouristsvisitingtheIsland,itisclearthatthisprojecthashadamajorpositiveimpactandhasledtomorevisitorsinQawraanditssurroundingareas.

2.3.3 Moreover, one of the indicators which form part of the European Union (EU) GrantAgreementrefertothetargetednumberofannualforeignvisitors,whichmustbeadheredtoaspartoftheAgreement.AnaddendumtotheGrantAgreementsignedon27July2016revisedthisfigureupwardsby50percent.Thisrevisedvaluereflectsanestimatedated21March2013furthertotheCostBenefitAnalysis(CBA)assignedoffbyLondonEconomicson28January2013.Itwasnotedthatsuchafiguremaybesubjecttochangesinlinewithany revisions,whichmaybe required to theCBA. It is tobenoted that thisAddendumwasplannedtobefinalisedbyendJune2013.However,itwassignedaroundthreeyearslaterinJuly2016.TheGrantAgreementprovisionsarereflectedintheServiceConcessionAgreement.

2.3.4 ThetotalnumberofvisitorstotheNationalAquarium(touristsandlocal)duringtheperiod2014to2017showsthatthenumbersareincreasing.7Table1comparesvisitorsandtouristarrivals against the relative projections. In view of their commercial sensitivity, thesestatisticsarebeingexpressedinpercentageorindexformratherthaninabsoluteterms.

Table 1: Contractor’s projections versus actual visitors to the National Aquarium (2014 to 2017)8

YearTotal visitors Total tourists

Projected

(index)

Actual

(index)

Projected

(index)

Actual

(index)2014 1.00 1.01 1.00 0.772015 0.92 0.95 0.97 0.862016 0.87 1.11 0.94 1.072017 0.81 1.24 0.91 1.34

2.3.5 Table1 indicates that theNationalAquariumcomplexhadapositive impactonMalta’sTourismProduct.BoththetotalnumberofvisitorsandtouriststhatvisitedtheNationalAquariumsignificantly surpassed the relative forecasts.Moreover,while theprojectionshaveforecastedadownwardtrend,inbothscenariosapositiveupwardtrendmaterialised.Theforegoinghastobetakenintoperspectiveofthetourismindustry.Duringtheperiod,

5NationalStatisticsOffice(2016),TrendsinMalta–2016,page85.6NationalStatisticsOffice(2017),RegionalStatisticsMalta–Edition2017,page204.7AstheNationalAquariumopenedduringOctober2013,visitorsfor2013areexcludedforthisanalysis.8Allcalculationsarebasedontheprojectedvaluesfor2014.

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2014and2017,7.8milliontouristshavevisitedtheMalteseIslands.Inthisregard,Table2comparesthepercentageincreaseinthetotalnumberofinboundtouristswiththeincreaseofthenumberoftouristsvisitingtheNationalAquarium.

Table 2: Percentage increase in inbound tourism against percentage increase of tourists visiting the National Aquarium (2014 to 2017)

YearTotal tourists visiting Malta

Annual increase in tourists

visiting Malta

Annual increase in tourists

visiting the Malta National

AquariumNo. % %

2014 1,714,533 n/a n/a2015 1,799,213 5 122016 1,988,447 11 252017 2,314,596 16 25

2.3.6 Table2showsthattheNationalAquariumpercentagegrowthinvisitsbytouristsconsistentlyexceeded the percentage increase in inbound tourism. This implies that the NationalAquariumisprovidinganalternativetourismproducttotouristsvisitingMalta.Moreover,theabovefiguresshowthatthereisahighcorrelationbetweenthetotalnumberoftouristsvisitingMaltaandthosevisitingtheNationalAquarium.Inthisregard,thesuccessoftheNationalAquariumisheavilydependentontheprosperityofthetourismindustry.

2.3.7 ThisSectionoutlinedthatvariousstatisticsareavailableregardingthenumberofvisitorstotheNationalAquarium.However,adetailedstudywithregardtotheMNA’scontributiontowardsthecountry’sGrossDomesticProduct,itsimpactonthemarineenvironmentandtheeducationalactivitiesprovided to its visitors isnotavailable. Furthermore, statisticsavailable only related to visitors to the National Aquarium, and not to the rest of thecomplexsuchastherestaurantsandotherancillaryfacilities.

2.4 The MNA as a leading entity for the local preservation of marine life

2.4.1 OneofthemaintargetsoftheNationalAquariumwastheabilitytoprovideaneducationalfacility to raise awareness about the local marine environment, as well as a drivinginstrumenttopromotemarineconservation.TheMNAaimstobetheleadingentityforthepreservationofthemarinelifeanditsenvironment.AnumberofprojectsinthisregardwerecreatedthroughcollaborationwithvariousNon-GovernmentalOrganisations(NGOs),withtheaimofpromotingawarenessandeducationamongstchildrenandadultsalike.

2.4.2 VariouspublictalksformpartofthedailyprogrammeattheMNAinordertohelppromoteawarenessonessentialissuessuchaslittering,lossofspeciesandconservation.TheMNAhas teamedupwithanumberofNGOsandorganisations tohelp spreadawarenessofmarineconservationand issuesrelatedtothe localmarineenvironment.EnvironmentalconservationinitiativesincludeworkandprojectswithSharklab,Birdlife,TheHerpetological


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Society, Malta Aquarist Society, Migrate LIFE+, fish4tomorrow and Dr Klown amongstothers. Furthermore, theMNA is regularly involved in “Clean Up” initiatives alongsideNGOsandotherorganisations.

2.4.3 Fromaneducationalaspect,variousstudentvisitsareorganisedattheNationalAquariumby local schools.Tosupplementstudentvisits,anumberofeducationalprogrammes inlinewiththeMalteseNationalcurriculumwerepreparedincollaborationwiththeiLearnBiologyTeam.

2.4.4 TheNAO’sanalysesfocusedonthetotalnumberoflocalvisitorsduringtheperiod2014to2017.ThisdataalsoincludesschoolchildrenvisitingtheNationalAquariumaspartofschooloutings.However,adecreasingtrendwasregistered inthetotalnumberof localvisitors.Duringthisperiod,thetotallocalvisitors9amountedto31.7percentofthetotalvisitorsvisitingtheNationalAquariumspecificallyforitsmainattraction.Table3illustrates,inindexformatthenumberoftotallocalvisitorsfortheyears2014to2017,togetherwithwhatwasoriginallyprojectedbythebidder.

Table 3: Local visitors to the National Aquarium (2014 to 2017)

YearLocal visitors

Projected

Local visitors

Actual(Index) (Index)

2014 1.00 1.69

2015 0.79 1.202016 0.70 1.212017 0.55 0.98

2.4.5 AscanbeseenfromTable3above,theContractor’sprojectionsenvisagedadeclineoflocalvisitorsfortheperiod2014to2017.Ontheotherhand,whiletheprojecteddeclineinlocalvisitorsovertimematerialised,inabsoluteterms,thenumberoflocalsvisitingthefacilityconsistentlysurpassedtheContractor’sannualprojections.

2.5 The complex is a prime revenue generator in the area

2.5.1 Another criterion adopted by this performance audit to establish the degree to whichtheMNAcomplex contributed to thenational tourismproduct related to the revenuesgeneratedbythefacility.ThisreviewrevealedthattheMNAcomplexisinitselfaprimerevenuegeneratorintheareathroughvariousaspects,mainlyemploymentandcateringactivities.

2.5.2 During2016,theMNAemployed98personsduringthewintermonths,withthenumberofemployeesnearlydoublingduringthesummerpeakseasonto179employees.Inturn,

9AstheNationalAquariumopenedduringOctober2013,visitorsfor2013areexcludedforthisanalysis.



suchemploymentcontributedtotheeconomyaswellasinfluencedpositivelyGovernmentrevenuegeneratedthroughincometaxandsocialsecuritycontributions.

2.5.3 Furthermore,theMNAcomplexhastodategeneratedsubstantialrevenue(seeparagraph

3.3.4).AsmostofthisrevenueissubjecttoValueAddedTax(VAT),itisestimatedthatMNAcomplexoperationsgeneratedaround€5millionbetween2013and2017.

2.5.4 ThemajoreventsheldattheMNA,suchas“LostandFoundFestival”,“SUNbreakMalta”and“Showers”attracttouristsspecificallyfromthepartyandmusicscene,leadingtoanincreaseinbednightsinthearea,aswellastheusageofcateringfacilitiesbothwithintheMNAcomplexaswellasothercateringestablishmentsinthelocality.

2.6 Conclusion

2.6.1 This Chapterof theReport outlined that theMNAproject fulfilledmost of its strategicobjectivesapart fromthoserelatingtothediving institute.Theproject regeneratedtheQawraarea through theprovisionof alternative leisure facilities toboth the locals andtourists.

2.6.2 TheNationalAquariumcomplexalsodiversifiedMalta’stourismproduct,wherebytouristsmainly chooseMalta as a sun and seadestination. Through its all year round facilities,theNationalAquariumcomplexprovidedanadditionalfacilitytoattracttouristsnotonlyduringthesummerperiodsbutalsointheshouldermonths.

2.6.3 WiththeexceptionoftheDivingInstitutefacilities,whichdidnotattainprojectedtargets,theMNAprojectisaqualitativeadditiontoMalta’stourismproduct.Withinthiscontext,thenextChapterofthisReportdiscussestheextenttowhichGovernmentisreapingdirectfinancialbenefitsinlinewithitsoutlayintheproject.


Chapter 3

Financial considerations

3.1 Introduction

3.1.1 This Chapter discusses that the Malta National Aquarium (MNA) Service ConcessionAgreement necessitated the inclusion of stronger safeguards to allow for the possibilityof changing economic scenarios in the long term. Determining the extent to which thisconcession constituted thebestpossibledeal entailed, inter alia, evaluatingwhether thedirect financial benefits to Government emanating from the project reflected the publicinvestment.

3.1.2 Government’smainoutlaysincludedthe20,000plussquaremetresiteattheQawraareaaswellasitsshareoftheco-financingelementpertainingtoEuropeanUnion(EU)fundingof€1,350,000.Anadditional€7.5millionintermsofEUfundssupplementedthisoutlay.WhenconsideringtheContractor’scontributionof€6,591,904,then,ifoneexcludesthevalueofthelandconcession,ittranspiresthattheEUgrantconstitutes49percentoftheinvestmentwithin this project. Consequently, the EU funds granted for this project arean integralelementofprojectcosts irrespectiveofwhetherornotGovernmentdirectlyincurredthem.

3.1.3 Directorate-GeneralforRegionalandUrbanPolicy’s(DGRegio’s)publicationentitled“GuidetoCBAofInvestmentProjects”2008outlinesthatevaluatingaproject’sperformancefromtheperspectiveoftheassistedpublicandpossiblyprivateentitiesintheMemberStatesentailsfocusingonthefundsprovidedbythebeneficiary(‘aftertheEUgrant’).Theseincludethosefundsthatshouldbemadeavailableasnationalpubliccontributions,privateequity,ifany,andtheneedtopaybackloansandinteresttothirdpartyfinanciers.Therationaleforthisapproachtodevelopingaproject’sCostBenefitAnalysis(CBA)isthat,foragiveninvestmentcost,thebeneficiary(the‘owner’oftheproject)willneedtosinklesscapitalinit,becausetheEUtaxpayercoversashareoftheprojectcosts.ThisisconsistentwiththescopeoftheEUgrantitselfintheframeworkofCohesionPolicy,whichistoincreaseinvestmentopportunitiesbyashiftincapitalneeds.10TheCBAsubmittedforthepurposeofthisproject,generally,followedtheseprinciples.

3.1.4 WithinthecontextofEUgrant,thisChapterdiscussesthedirectfinancialbenefitsreapedbyGovernmentinthefollowingcircumstances:a. the50-yearrent-freelandconcessiontohousetheMNAcomplex;andb. benefitsemanatingfromtheMNAcomplexoperations.

10EuropeanCommissionDirectorateGeneralRegionalPolicy,2008,GuidetoCBAofInvestmentprojects,page45.

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3.2 The 50-year rent-free concession implies that Government incurred a substantial cost when the foregone value of public land is taken into account

3.2.1 Thepublic landuponwhichtheMNAcomplex isdeveloped is inaprimesitealongtheQawrapromenade.ThisauditsoughttodeterminewhetherGovernmenthasbenefittedfinancially,orasaminimum,recoveredtheopportunitycosttiedtothis land.However,defining the value of publicly owned land, within the context of this audit, is not astraightforwardendeavour.

3.2.2 Themain challenge relates to the value of publicly owned land assigned by the LandsAuthority(formerlytheLandDepartmentwithintheGovernmentPropertyDepartment).In this case, the Authority transferred the land to theMalta Tourism Authority (MTA),which subsequently was utilised by the MNA contractor through to the 50-year rent-freeconcession. Inpast cases,where transfersoccurred toothergovernmentalentitiesembarking on projects of a social nature, or even to third parties (such as Ħal-FerħComplex),againforsocialpurposes,prevailingpracticeshavebeenthatsuchlandisnotvaluedatmarketrates.Suchvaluationsonanon-marketbasis,alsooccurwhenevertheMaltaIndustrialParksLimited(MIP)transferlandtopromotethedevelopmentofindustrialzones.

3.2.3 It is acknowledged that the above practices are intended to correctmarket failures ortopromotebusinessesand,given suchconsiderations, the ratesusedare set soasnotto reflect market values. However, the question arising here is as to whether, in thedeterminationoftheopportunitycostassociatedwiththelandconcessionfortheMNAproject,thereductioninthemarketvalueisanelementtobeconsideredfullyoratleastpartially.

3.2.4 Inthistransfer,theLandsAuthorityonthebasisofthecurrentdevelopment,fullyembracednon-market practices, estimating the valueof the land in question at €3.54per squaremetre. This rate reflects the practices adopted to transfer public land to GovernmentDepartments.

3.2.5 Ontheotherhand,theLandsAuthorityestimatesthatifitweretotransferthissitedirectlytotheContractorandconsideringitscurrentuse,theemphyteuticalrentalchargewouldamountto€400,000equivalentto€20.14persquaremetre.Nonetheless,theannualrentchargedtoMTAforthesiteinquestionequatesto€1.26persquaremetre.

3.2.6 Inasimilarvein,MTAreiteratedthattherelevantratesshouldbethenon-marketbusinessdevelopmentonesatamere€5.56persquaremetre,thisreflectingMIPrates.TheMTAcontended that this was particularly to be so in this case because the landwas beingallocatedforbusinessdevelopmentpurposes,andwasalsotieduptoaspecificuseratherthangenericcommercialdevelopment.


3.2.7 Yet the project in question clearly includes commercial elements andmay probably bebestdefinedasasemi-commercialone.Withinafullycommercialcontext,theChamberofArchitectsandtheInlandRevenueDepartment(IRD)estimatetheratestobe€70and€61.4persquaremetrerespectively.Furthermore, informationmaintainedbythe latterfortheperiod2013to2015,showsthatfordutyofthetransferofpropertypurposes,evenagriculturalland,whichprobablyapproximatestothesemi-commercialsituationprevailingin thiscase, isvaluedatarelativelyhigherratethanthenon-marketoneof€19.39persquaremetre.11

3.2.8 The scarcity of land renders it as a highly priced resource. Determining the extent towhichGovernmenthasbenefittedfinanciallyfromtheuseofthissitebytheMNAprojectraisesacriticalpoint.This relates to thegrantofa long-termconcessionasagainst theimmediatecashoutflowofaround€6million,paidbytheContractorandthereforesavedbyGovernment.Theextenttowhichtherent-freelandconcessionbalancestheinterestsof the parties involved in theMNA project is to be consideredwithin the context andcircumstancesinfluencingtheevolutionofthisproject.Tothiseffect,themaininfluencingfactors relatedto thediversificationof the tourismproduct,whichcouldbesustainableinthesloweconomicgrowthenvironmentprevailingduring2008/2009aswellastothegrantingofEUfunds.

3.2.9 MTA, as the beneficiary, did not charge any rent to the Contractor, this possibly takingintoaccountthatsuchanimmediatechargecouldhavedisincentivisedprojectbiddersandpossiblyinfluencedthelevelofEUgrant.However,theAgreementdidnotevenmakeanallowanceforaclaw-backinvolvingcompensationinthefutureinthecaseofareversaloftheprevailingeconomicscenariowithinthe50-yearcontractperiod,areversalwhichalreadydidactualiseshortlyafterprojectcommencement.

3.2.10 InestimatingtheopportunitycosttoGovernmentoftherent-freeconcession,oneneedstotakeintoaccountthatultimately, inpractice,thiswasnotaninter-departmental landtransfer.Furthermore,theactualopportunitycostofsuchaconcessionhingesonthevalueplacedontheforegonerentalratepersquaremetreasalignedwithmarketvalues.Table4illustratessuchanopportunitycosttakingvaryingbasis.12

11 Theagriculturevalueof landnearlyequatestotheestimatesproposedbytheLandsAuthorityof€20.14persquaremetre.However,applyingtheprudenceconcept,therateof€19.39wasused.

12 The estimation of squaremetre rates by the Lands Authority andMTA are based on site area of 19,858 and 21,583 squaremetresrespectively.

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Table 4: Cost to Government for a 50-year rent-free concession

Rate per square

metreAnnual rental rate

Present value of cost

over a 50-year period

at four per cent

discount rate13

€ € €Annual rental value reflecting the

averagechargesforMIPsites5.5614 119,922 2,576,189

Average Annual rental values of

agricultural landinMaltabasedonIRD

(2013–2015)

19.39 418,494 8,990,173

Average Annual rental values of

commercial landinMaltabasedonIRD

(2013–2015)

61.4 1,325,488 28,474,377

3.2.11 Asshownabove,thisopportunitycostistantamounttoaminimumpresentvalueofaround€2.6million,thisifoneconsidersMaltaIndustrialParks(MIP)siteannualrentalvalues.Thisrisestoaround€9millionifoneconsidersagriculturallandratesasperIRDandfurtherupto€28.5millionifoneconsiderscommerciallandrentalvaluesasperIRD.Consequently,the average rate when considering the minimum and maximum values quoted hereinwouldamountto€15.5million.

3.2.12 MTA recognises the wide discrepancies associated with land valuation. The Authoritymaintains that for thepurposeofdetermining the foregonevalueof thepublic land inquestionbroughtaboutbythe50-yearrent-freeconcession, itconsidersthattheuseofthe lower landvaluenoted intheprecedingparagraph ismoreappropriate.Thisstanceisjustifiedasitreflectsthelackofpreviousmarketinterestintheproject.TheAuthorityreiterated that by notmaking use of the lower value for such an assessment,will givea skewed image of the project. While acknowledging MTA’s argumentation, the NAOconsiders that the valueof the site inquestion isbetter representedbya value,whichreflectsthesemi-commercialuseofthesiteinquestion.

3.2.13 Within this context,Table5 reflects themodeldevelopedbyMTA,whichwasoriginallybased on the annual land rental rate foregone pertaining to MIP. This is here beingextendedto includetheaboveratesbasedonbothagriculturalandcommercial land inMaltaasperIRD(2013–2015).Aconsistentdiscountrateoffourpercentwasemployed,thisrepresentingtheGovernmentopportunitycostofcapital.ThisexerciseexcludestheEUgrantcomponenttoavoiddistortingthefinancialimpactofthelandrentalelementonthenetfinancialbenefitsorlossestoGovernment.

13 Adiscountrateof fourpercentwasemployedsincethisrepresentstheopportunitycostofcapital,definedas ‘theexpectedreturnforgonebybypassingotherpotentialinvestmentactivitiesforagivencapital’.

14 The rental value of €5.56 considersMTA’s categorisationof the site into proportions of 63 and 37 per cent of productive and non-productiveland.Tothiseffect,theapplicableMIPrateswouldbe€2and€11.65persquaremetrerespectively.


Table 5: Net benefits or losses to Government through the 50-year rent-free concession Annual rental

value reflecting

the average

charges for MIP

sites

Average Annual

rental values of

agricultural land in

Malta based on IRD

(2013 – 2015)

Average Annual

rental values of

commercial land in

Malta based on IRD

(2013 – 2015)€ € €

Opportunity Cost of Resource:Annualrentalvaluepersquaremetre(See

Table4)

5.56 19.39 61.4

Foregoneannualrentalrevenue 119,922 418,494 1,325,488

Present value of cost over a 50-year period (2,576,189) (8,990,173) (28,474,377)

Financial Outcome for Government from Project:Co-financingOutlaybyMaltaGovernment (1,125,000) (1,125,000) (1,125,000)VATrevenuefromEU-fundedcomponent 1,147,500 1,147,500 1,147,500

Net Financial Cost 22,500 22,500 22,500

Asset Creation Value to Government from Project:Valueofassetatendoffirst50-yearperiod

for40years

20,138,202 20,138,202 20,138,202

Present Value of Asset transferred after

50-year period

2,833,699 2,833,699 2,833,699

Net direct gain (+ve)/loss(-ve) to Government 280,010 (6,133,974) (25,618,178)

3.2.14 AsshowninTable5,takingintoaccounttherevisedrentvaluesandkeepingconstantallothervariables,thenetlossestoGovernmentincreasefromaquasi-breakevenpositiontoamaximumnetlossofaround€26million.

3.2.15 Arelatedissueconcernstherateof€5.65persquaremetre,whichwastakenintoaccountbytheMTAinarrivingattheoriginalquasi-breakevenpointof€280,010.MTAderivedsucharatebyconsideringthattwothirdsofthelandinquestionhasaminimalvalue(estimatedat€2)onthebasisthatthisproportionofthesitedoesnotgenerateanyrevenuetotheproject.However,thisiscontentiousasitexcludesthefollowing:

a. thatthe63percentportionoflanddeemedasunproductiveiscomplementaryandformsanintegralpartoftheproject;

b. thatallsuchlandformedpartoftheconcession;andc. thatoverthe50-yearconcession,certaincircumstancesmaychangewiththeContractor

developingmorerevenuegeneratingamenitiesonsite.

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3.2.16 Itmaybearguedthat thenegativeoutcomeoutlined inTable5couldbepartlyor fullycompensated by other possible financial benefits emanating from this project, such ashigher tourismearningsandemployment.Yet there isnoevidence thatsuchadditionalbenefitscouldnothavealsoemanatedfromalternativeusesofGovernmentresources.

3.3 The MNA complex is generating revenues in excess of projections

3.3.1 FinancialstatementssubmittedbytheContractorintermsoftheconcessionAgreementshows that theMNA complex is increasing its revenue substantially. The generation ofrevenuesisnotonlyacriticalelementtoprojectsustainabilitybutitisalsoanimportantconsiderationfromtheGovernment’spointofviewontwocounts.ThefirstpointrelatestothepotentialbenefitstoGovernmentthroughthisincreaseinrevenuesduringthe50-yeardurationofthisServiceConcessionAgreement.Secondly,revenuesinfluencethevalueofoperations,whichwilleventuallybecomeGovernment’sresponsibilityoncetheconcessionisterminatedaftertheagreedtimeframe.

3.3.2 To thisend, thisperformanceaudit sought toascertainhowsuch revenuescompare toprojectionsmadeattheproject’splanningphase.Themainsourcesofdatautilisedinthisexercisepertainedtotheauditedfinancialstatementsfor2011–2017submittedbytheContractorandtheCBAcommissionedbyMTAandconcludedin2013.ThelatterpresentedoperationalprojectionsfollowingcompletionoftheMNA’sconstructionphase.

3.3.3 MTAworkingsshowthatMNAcashflowsweregenerallyonanupwardtrend.Fromthecommencement of operations in 2013 up to end 2017, revenues increased by 21 percent. In accordance to the sameMTA workings, such revenues are expected to reach€1,160,000byend2022.Althoughsuchworkingsshowthat,therateofgrowthwillslowandeventuallystop,overa50-yearperiodrevenueswouldremainsubstantialandreflectahealthybusiness.

3.3.4 FromtheContractor’sperspective,thegrowthinrevenuesgeneratedbytheMNAcomplexwas reflected by a steady increase in the rate of return on capital employed. In 2013,this indicatorstoodat7.1percentandby2017 increasedto28.2percent.Evenwhenconsideringthat2017wasanexceptionalyearforthetourismindustry,suchtrendsaugurexceptionallywell for the futureof thisconcession.Using thesamefiguresprovidedbyMTA,andassumingthatallnetprofitsaftertaxwillbereinvestedintheproject,thereturnoncapitalemployedstillremainshighrangingfrom17.1to23.5percent.

3.3.5 Other indicators continue to highlight the strong financial performance of the MNAcomplex,namelytheInternalRateofReturn(IRR),theproject’spaybackperiodandthenetpresentvaluesofcashflows.Table6showstheactualperformanceoftheMNAcomplex.


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Table 6: Actual performance of the MNA complex

ActualIRR 16.2%Payback 8yearsNetPresentValueofCashflows €1,343,630

3.3.6 This Section of the Report continues to highlight the strong financial performance oftheMNAComplex.This impliesthatattheendoftheconcessionperiod, it is likelythatGovernmentwillreceivetheMNAamenitiestogetherwithahealthybusiness.Theterm‘likely’isbeingusedsincea50-yearconcessionperiodisconsiderableandsubjecttovariousexternalities.

3.3.7 Themainpointof contention remains that, throughout thedurationof theconcession,Government will not benefit financially from the MNA’s healthy business. Admittedly,theAgreementprovidesforrevenueclaw-backclauses,which isan innovativeprovisionin contractsof thisnature.But themainbeneficiarywould stillbe theContractor sinceincreased investment within the same site will continue to generate revenues, whichGovernment will not be entitled to.Moreover, the claw-back clause as applied in thiscasemaynotbefullyeffectiveastheMNAcomplexmighteventuallyreachitsexpansionsaturationpointandfurthergrowthmaythennotbefeasibleorevenpossibleanylonger.Suchasituationarisessincetheclaw-backclauserestrictsinvestmenttotheMNAsiteonlyanddoesnotconsider that fundsaredirected towards the furtherdevelopmentof thislocalityorthelocalcommunity.Inviewoftheforegoing,MTAcontendsthatrevenueswerenot apriority, asGovernmentwasafter thepositiveeconomicbenefits to theproject’slocality.

3.4 Conclusion

3.4.1 Thepermanentcapitalinjectedintheprojectbythethreemainstakeholders-thatistheGovernment,theContractorandtheEU–amountedtoaround€15.45million(€6.6millionbytheContractor,€7.5millionbytheEUand€1.35millionbyGovernment)–thisexcludingthepresentvalueofthelandforegoneovertheconcessionperiod.Asstatedearlier,suchpresentvalueoflandforegonevariesbetween€2.6millionto€28.5million,thisdependingonhowmuchmarketvalue is tobeattributedto it.Addinganaverageof€15.5millionforsuchvalue,thetotalcapitalinjectedwouldamountto€31million.Onthisbasis,theproportionofcapitalforkedoutbytheContractorwillamounttoonlyaround21percent.Consequently,themajorquestionlingersastohowsufficientwasandistobethereturnofcapitaltoGovernmentovertheprojectperiod.Ofrelevanceinthiscontext,isamajorlesson tobe learned for futureprojects: this relates to theneed to improvesystems toensuretheappropriateattributiontothevaluationofpublic landconcessionsinvariouscommercial,semi-commercialandnon-commercialsocialsettings.



3.4.2 Another imbalance was created in the returns attributable to Government and to theContractorwithintheprojectperiod.Whilenotnecessarilyvisibleatthetimeofprojectcommencement, suchapositioncouldhavebeenavertedbyamuchstricter claw-backclause wherein, for example, part of the rental value foregone, would have becomechargeable or reinvested in the development of theQawra / Buġibba area if companyrevenues far exceeded theoriginal estimate. Thus, one couldhaveensured thatwithinthe50-yearServiceConcessionAgreementperiod,theGovernmentwouldbemorefairlyentitledtoashareofthefinancialbenefitsemanatingfromtheproject.Suchcircumstancespresentabetterbalancebetweenthe interestsofthetwopartieswherethecontractorbearstherisksofadverseperformanceandGovernmentwouldnotjustbenefitindirectlythroughtaxationbutalsodirectlythroughrevenuesgeneratedbytheproject.Inanycase,theapplicationofstrictercontractclausesisthesecondmajorlessontobelearnedintheallocationoffutureprojects.


Chapter 4

The contractual framework

4.1 Introduction

4.1.1 Theaimofcontractualprovisionsistodefineparties’responsibilitiesaswellassafeguardingsignatories’ interests. Within this context, contractual clauses are deemed critical tothe realisation of project objectives, including those related to deliverables and valueformoney.Thisperformanceaudit revealed that in the long-term, in cases, contractualprovisionswerenotconducivetoabalancedServiceConcessionAgreement.

4.1.2 TheMalta National Aquarium (MNA) project’s contractual framework comprises threemain contracts. Firstly, there is the Emphyteusis Agreement between the GovernmentPropertyDepartment(GPD)andtheMaltaTourismAuthority(MTA)regardingtheuseofpubliclyownedland.Thesecondagreementrelatestotheco-financingGrantAgreementbetweenthePlanningandPrioritiesCoordinationDivision(PPCD)andMTArelatingtothedesignandbuildelements.ThethirdelementofthecontractualframeworkcomprisestheAgreementbetweentheContractorandtheDepartmentofContracts(DoC)onbehalfoftheMTAwithrespecttoallaspectsofthe50-yearconcession,projectdelivery,includingitsoperations.ThelatterisconsideredasthemainAgreementsinceitgenerallyencompassesthecontractualconditionsestablishedbytheothertwocontracts.Figure3refers.

Figure 3: The contractual framework

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4.1.3 Thisauditfoundthat,incases,thesethreecontractsdonotcomprehensivelyassurethatGovernment’s interests are fully safeguarded. To this effect, this Chapter discusses theextenttowhichcontractualclauseswithinthethreeagreementsembracegoodpracticeguidelinesandprinciples,whichadequatelysafeguardGovernment’sinterests.

4.2 Contractual provisions did not always ensure a balanced Service Concession Agreement

4.2.1 ThisSectionoftheReportevaluatesthethreeagreementsthroughtheclausesstipulatedin the Service Concession Agreement betweenMTA and the Contractor. This approachisbeingadoptedsincethelattercontractgenerally invokestheclauses intheothertwoagreementsinvolvedintheMNAproject.ThisReportwillclearlyoutlinewhenreferencingdoesnotrelatetotheConcessionAgreement.

4.2.2 This performance audit analysed the extent to which contractual clauses adequatelysafeguardedGovernmentinterest.Attheoutset,theNAOassessedwhethercontractualprovisionsthereinembracebestpracticesadvocated intheguidelinesdevelopedbytheAustralianNationalAuditOffice(ANAO)entitled:“DevelopingandManagingContracts–Gettingtherightoutcome,achievingvalueformoney”.Table7refers.

Table 7: Embracing best practices contractual causes

Best practices contractual clauses

Status

Appropriately included

Not appropriately robust to safeguard

Government’s interestOmitted

Termination XEnddate XPenalties XPayments XAccessanddisclosure XAssistanceprovidedtothecontractor XConfidentialinformation XConflictofinterest XContractvariations XDisputeresolution XInsurance XIntellectualpropertyrights XKeypersonnel XLiabilitiesandindemnities XSecuritiesandguarantees XSub-contracting XTransitionarrangements XWarrantiesandfitnessforpurpose XDeliverables XBenefitSharing15 X

15https://www.fhwa.dot.gov/ipd/pdfs/p3/model_p3_core_toll_concessions.pdfasat20August2018.


4.2.3 Table7showsthattheConcessionContractgenerallyreferstotheissuesthatwouldbeexpectedinthistypeofagreement.Nonetheless,withinthiscontract,anumberofclausesdo not fully embrace the best practices guidelines referred in paragraph 4.2.2. In suchinstances,theContractdoesnotappropriatelysafeguardGovernment’sinterests.

Enddatesofconcessionsarenotfullyconducivetovalueformoney

4.2.4 TheANAOguidelinesarguethatitisagoodpracticeforallcontractstospecifyanenddate.Incontracts,whichincludeanoptionforextension,theenddatewillgenerallybeadatebeyondwhichanycontractextensionoptioncannolongerbeexercised.Moreover,theseguidelinesnotethatenddates,inthemselves,mustbeconducivetovalueformoney.TheenddateswithintheMNAContractraisetwovalueformoneyrelatedconcerns,whichwillbediscussedintheensuingparagraphs.

Concession to Contractor given for 50-year period is deemed to be longer than the norm for

similar type of projects

4.2.5 TheMNAcontractstipulatesthattheconcessiontotheContractorfortheoperationoftheNationalAquariumcomplexwasgivenforaperiodoffiftyyears.Attenderingstage,theclausefortheoperationperiodinthetenderdocumentwasflexible,wherebytendererswereaskedtostatethenumberofyearsthattheyintendedtooperatethecomplexforpriortotransmittingthewholeoperationtotheGovernmentattheendoftheconcession.

4.2.6 The selected Contractor outlined a fifty-year concession period, and although variousdiscussions ensued, including with Joint Assistance to Support Projects in EuropeanRegions(JASPERS),thistimeperiodwasfinallyagreedtoandgrantedtotheContractor.ThisconcessionwasgivenonthebasisthatadditionalinvestmentwasrequiredtomaintaintherelevantstandardsfortheNationalAquariumcomplexinlateryears.However,suchaperiodisconsideredtobeexcessiveonseveralcounts:

a. Ashortercontractperiod isseenasmoreadvantageoustoGovernmentas itwouldhaveprovided the latter theopportunity to reviewand re-negotitiate conditions toseekabetterdealwithinashortertime-frame.

b. TheWorldBankoutlinesthataconcessionistypicallyforaperiodof25to30years(i.e.,longenoughatleasttofullyamortisemajorinitialinvestments).

c. Public Private Partnerships (PPPs) which have already been undertaken in Maltaweregenerallyofadurationofuptoarenewable25-yearperiod.Insomecases,thematerialityofthepreviousPPPsembarkeduponsignificanlyexceededtheinvestmentmadebytheContractorwithrespecttotheMNAproject.

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d. TheInternationalFederationofConsultingEngineers(FIDIC)modelsuggestsa20-yearperiodratherthanalongerperiod.

e. JASPERSsuggesta15to20yearperiod,uptoamaximumof25yearsforsmiliartypesofprojects.

ThetransferoflandhousingtheMNAprojecttotheMTAissubjecttoanon-reviewablestandardrateforamaximumperiodof130years

4.2.7 ThetransferoflandfromtheGPDtoMTAtohousetheMNAprojectin2011wasaffectedthroughatemporaryemphyteusisagainstayearlyandtemporarygroundrentof€25,000forsixty-fiveyears,whichcanbeextendedbyafurthersixty-fiveyears.Thisrent ispaidbyMTAandnot theContractor. Furthermore, the amount paid for ground rentwill beconstantthroughoutthesixty-fiveyears.MTAcontendsthattherentalvalueduebytheAuthoritytotheGPDispurelysymbolictoascertainthatthetitleofthelandremainswithinaGovernmentalentity.

Government assistance included the rent-free land concession for 50 years

4.2.8 TheANAObestpracticesguidelinesnotethatGovernmentsoftenprovidecontractorswithassistancetofacilitatethedeliveryofgoodsorservices.Inthiscase,GPDtransferred19,858squaremetresoflandtoMTAforconstructingaNationalAquariumwithancillaryfacilitiesatacostof€25,000perannumfor65years. Inturn,MTAgrantedafifty-yearperiodtobuildandoperatetheMNAproject,atnocost,whileretainingownershiprights.

4.2.9 MTAcontendsthatarentelementforthelandconcessionwasomittedfromtheConcessionAgreementasthedirectionatthetimewasthatGovernmentshouldnotbeseentobegeneratingrevenuefromsuchaprojectinviewthattheoperatorwillbeimplementingandmanagingtheproject.Evenmoreso,giventhespecificsectoranditscommercialsensitivity.

4.2.10 AnothercontentiousissueregardingtheconcessionofthislandarisessincetheNationalAquariumitselfconstitutesonlysevenpercentofthetotalareainquestion.Supportingamenitiesconstitute26percentoftheconcessionarea.Moreover,another67percentof thearea isbeingutilised foroutdoor recreational space. It canbeargued that theseproportionsarearequirementtofacilitatetheregenerationofthearea.However,giventhatthisisarent-freeconcessionandthatgovernmentisnotentitledtoanydirectrevenuegeneratedfromthissiteforaperiodof50years,questionsariseastowhether,inthiscase,thecontracthasmanagedtobalancetheparties’interests.


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TheContractdoesnotappropriatelydefinedesignrelateddeliverablesasreferencestothefinalplanoftheMNAcomplexarenotincludedinanAddendum

4.2.11 Acriticalfunctionofacontractisthatitclearlydefinestheagreeddeliverables.Inthiscase,generallyacceptedpracticesdictatethattheAgreementreferstotheagreeddevelopmentplanstogetherwiththerelativespecifications.

4.2.12 AsthemainobjectiveoftheServiceConcessionAgreementwastoengagetheContractorto,inter alia,providetheprojectdesign,oncesuchataskwascompleted,bestpracticesdemandthatthepartieswouldsignanaddendumtotheAgreement.Thiswouldenhancetheclarityofdeliverables,facilitatethemonitoringofcontractimplementationandenablethecontracttoserveastheprimarysourceofreferenceincasesoflitigation.

4.2.13 MTAcontends that theoverallprojectproposalwasapproved inprincipleatevaluationstage.TheDesignPhasewasconcludedwiththeProposedPlansthatwereapprovedbytheMTAandlaterbythePlanningAuthorityandtheConstructionPhasewasconcludedwiththesatisfactorycertificationofthearchitectsincharge.TheinclusionofanAddendumtoreflectthefinaldesignwasneverenvisagedbytheContractbecauseitisnotamodificationbutamereconclusionofaphaseanticipatedintheContract.WhileacknowledgingMTA’sstandpoint,thisOfficeemphasisesthatalldeliverables,includingprojectdesign,aretobeincludedinalegallybindingagreement,inthiscaseanAddendumtotheproject.Includingtheprojectdesign inanaddendum,wouldnotonlyconstitutebestpracticesbutwouldclearlydelineatethelegalobligationsofbothparties.

Contractual claw-back clauses did not anticipate the substantial increase in touristarrivalsandthelevelofrevenuegeneratedbytheMNA

4.2.14 Aconcessionimpliesthatcontractsignatoriesshareboththerisksandbenefitsemanatingfromtheproject.AttheendoftheAgreement,GovernmentwillbeentitledtoanytitleorinterestovertheSite,anyPermanentWork,Plant,improvements,buildings,orany(other)

propertywhichisimmovableintermsofarticles308,articles309and310oftheCivilCode (Chapter16oftheLawsofMalta),within,on,under,adjacenttoorsurroundingtheSite.

4.2.15 TheAgreementalsostipulatesthat,duringtheoperationoftheNationalAquariumcomplex,aswellasthroughoutanyextensiongrantedaftertheconcessionperiod,anyrevenueistheexclusivepropertyoftheContractor,andimprovementstothesitehavetobecarriedoutincaseofexcessrevenue.Nonetheless,thisAgreementhasanumberofclaw-backclausesintendedtobeinvokedinthecaseofabnormalrevenuegenerationbytheContractor.Tothiseffect,theAgreementstipulatesthatintheeventthatrevenuecalculatedcumulativelyforperiodsoffiveyearseachshallexceedtheamountofagreedprojectedrevenuebyatleast100percent,thenthecontractorshallcarryoutimprovementstothesitereflectingsuchexcessrevenue.



4.2.16 However, one notes that, in the case of re-investment, no guidance is available in theAgreementoutlininginwhattoinvest,exceptthatsuchimprovementsshouldtakeplacewithinthesite.Thesecontractualprovisions,however,safeguardGovernment’sinterestsonlyuptoacertaindegreeforthefollowingreasons:

a. UptotheterminationoftheAgreement,anyimprovementsthroughcapitalinvestmentto the MNA complex are to the immediate and sole long-term advantage of theContractor.BenefitsduetoGovernmentwouldbecomeapparentaftertheterminationoftheAgreementwhenGovernmentbecomesentitledtothetitleandallinterestsovertheSite.Giventhelongperiodinvolved,therecannotbeanycertaintyorguaranteesrelatingtotheproject’sviabilityin50years’time.

b. Theoretically, there could be a point whereby further investment within theMNAcomplexwouldnotbe required sincegrowthwouldhave reached saturationpoint.Within this context, it is not understood why clauses relating to further capitalinvestmentbytheContractorwasrestrictedtotheMNAcomplex,whentheprojectscopewasmuchbroaderandincludedtheQawra/Buġibba/StPaul’sBayareas.

c. ThroughoutthedurationoftheAgreement,thecontractualprovision,whichnamestheContractorasthesolebeneficiaryofrevenues,leadstoasituationwhereGovernmentisnotaffordedthestatusofanequalpartnerwithintheconcession.Thisfavourablecontractual bias towards theContractor becomesmore apparentwhen consideringtherent-freelandconcessionandthatclaw-backclausesdonotextendtoinvokethepayment of compensation in cases of abnormal revenue generation. This situationbecomesmorepronouncedwhenconsideringthat theclaw-backclauseswithin thecontractual framework did not anticipate the significant spike in tourist arrivals inrecentyearsandthematerialrevenuesgeneratedthroughtheMNAproject.

4.2.17 MTAcontendsthat thebetter-than-expectedMNAperformance is, ingoodpart,duetoapositiveoutcomefortourisminMaltaandtheabilityoftheoperatortomakeasuccessof theproject.Theseconsiderationscannotbeused toderiveanegative judgementontheoriginalAgreement,especiallywhensuchcontractwassufficientlyforward-lookingtorequireperiodicinvestmentstomaintainassetvalue,andevenfurtherinvestmentintermsofasurplusrevenueclaw-backtofurthervalorisetheasset.

4.2.18 Whileacknowledgingthecontext,foresightandensuingbenefitsofsuchclaw-backclauses,thesituationportrayedaboveprovidesampleevidencethatfuturecontractsrecognisetheimportanceofcompensationelements.Overthepastthreeyears,EUpracticeshavealsoevolvedtoprovidemorerealisticclaw-backmechanisms.


4.3 Conclusion

4.3.1 This Chapter has shown that most of the contractual provisions were drafted in linewithgoodpractice.Nonetheless,somecontractualclauseswithinthethreeagreementsgoverning the MNA project do not appropriately safeguard Government’s long-terminterests.

4.3.2 Ininstances,thisperformanceauditraisedquestionsontheextenttowhichthegrantingofthis50-yearrentfreelandconcessionwillprovefavourabletoGovernment.Despitetheclaw-backclausestherein,thecontractualframeworkfurtherimpingesonvalueformoneyissuesasGovernmentwillnotreceiveashareofrevenuesorotherbenefitsgeneratedbytheprojectthroughoutthe50-yearconcessionperiod.Potentially,thissituationbecomesmoreaggravatedforGovernmentastheContractorisobligedtoinvestabnormalprofitswithin the complex thus generating further revenues to the same operator. To a greatdegree, this situationhasarisen,as, at thetimeofdrafting theConcessionAgreement,theupwardeconomictrends,aswellasthesubstantialincreaseintouristarrivalsinrecentyearswerenotanticipated.ThisReporthasalreadydiscussedthefinancialimplicationsoftheforegoingintheprecedingChapter.

4.3.3 ThenextChapterdiscussesanothercriteriaadoptedforthisaudit.Tothisend,thediscussiontherein focusesontheextenttowhichMTA,asapartytothisventure, isappropriatelymonitoringtheimplementationofthecontractualframework.

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Chap

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Chapter 5

Monitoring

5.1 Introduction

5.1.1 TheMaltaTourismAuthority’s(MTA)monitoringfunctionextendstoalltheMaltaNationalAquarium(MNA)projectphases,namelythedesign,constructionandoperationalstages.Effective monitoring ascertains contractual compliance, enables the early detection ofissues,whichmayhaveabearingontheperformanceoftheprojectaswellasensuringthat Government’s interests remain appropriately safeguarded throughout the ServiceConcessionAgreement.Thisperformanceaudit, incases,identifiedshortcomings,whichinfluencedthelevelofMTA’smonitoringfunctionoftheMNAproject.Withinthiscontext,thisChapterdiscussesthefollowing:

a. MTA’smonitoringmechanismsinplace;b. ConfirmationofthedevelopmentcostoftheMNAcomplex;c. TheappointmentandscopeofworkoftheAuditingBody;andd. Financialmonitoring.

5.2 MTA, generally has the appropriate monitoring mechanisms in place as stipulated by the contractual framework

5.2.1 MTA’smonitoringmechanismscomprisesvariouslevelsofreview.Tothiseffect,MTAhasaMonitoringCommitteetooverseethewholeoperationsoftheNationalAquariumproject.Moreover,theServiceConcessionAgreementbetweenMTAandtheContractorgivestheformeraccessibilitytothepremisesandotheroperationaldocumentation.

TheserviceconcessionagreementprovidesfortheappropriatelevelofMNAprojectmonitoring

5.2.2 Clause4.8oftheConcessionAgreementstipulatesthat,throughtheEuropeanUnion(EU)funding Grant Agreement, MTA has physical and operational documentation access toascertainthattheproject’sperformanceindicatorsareachieved.Moreover,theContractorisobligedtofurnishMTAwiththerelevantinformationforupdatingthecostbenefitanalysisrequiredforthecalculationoftheco-financingratepertainingtoEUfunding.



5.2.3 TheConcessionAgreement also provides for theundertakingof an audit of theMNA’sfinancialstatements.Clause4.2.5stipulatesthattheContractorisobligedtoprovideMTAtheannualauditedfinancialstatementswithin14daysthattheyaresubmittedtotheMaltaFinancialServicesAuthority.

5.2.4 Through clause 10.3, the Concession Agreement provides for the appointment of anAuditingBodytoauditandmonitortheperformanceoftheMNAproject.Tothiseffect,theconcessionAgreementstipulatesthatthepartiesshallequallyincurthecostsassociatedwiththeengagementoftheAuditingBody.

5.2.5 TheConcessionAgreementalsoprovidesformonitoringintermsofhealthandsafetyattheMNAcomplex.TheContractorappointed InternationalZooVeterinaryGroup (IZVG)toinspectthecomplexandreportaccordinglyintermsofAddendum7oftheConcessionAgreement.

TheMonitoringBoardwithinMTAmeetsannuallyandonaneedsbasisbutdoesnotmaintainminutes

5.2.6 A governance structure in the form of a Monitoring Committee exists within MTA tooverseethewholeoperationoftheNationalAquariumproject.ThemembersformingtheMonitoring Committee consists ofMTA representatives together with an architect anda lawyer. TheMonitoringCommitteeholds informaldiscussions, andmeetingsareheldwhenevertheneedarises.Nonetheless,anannualmeetingisheldtodiscusstheoutcomesofthepublishedAnnualReportandFinancialStatementsoftheMarineAquaticLimited.

5.2.7 MTAconfirmedthatinitiallyminutestothemeetingsbytheMonitoringCommitteeusedtobeheld,buttheCommitteedidnotpursuethispractice.AsatthetimeofdraftingthisReport,MTAdidnotfurnishNAOwithdetailspertainingtomeetingdatesandattendeesoftheMonitoringCommittee.

5.3 MTA has not presented NAO with detailed documentation to support project cost certification

5.3.1 TheconcessionContract,draftedontheInternationalFederationofConsultingEngineers(FIDIC)modeltemplate,considersalumpsumagreementforthedesignandconstructionoftheMNAcomplex.Theadvantageofalumpsumagreementparticularlyrelatestofullytransferringtherisksassociatedwiththesetaskstothecontractor.Acaseinpointpertainstotheexclusionofvariationcosts,whichwouldhavebeenincurredbyGovernment.

5.3.2 On the other hand, a lump sum agreement reduces substantially the contractor’sobligationsoncostreporting,whichultimatelyimpingesontheprincipleoftransparency.Nonetheless,Governmententitiescanmitigatethissituation, ifatthedesignevaluationstage,theEvaluationCommitteeverifiesthecostinformationsubmittedbythecontractor.


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In the absence of detailed Bills of Quantities (not a requirement through a lump sumapproach),suchataskisrenderedmoreproblematic.Nonetheless,validationcheckscanstillbeundertakenbydeterminingthevolumeofworkstobeundertakenandassumingprevailingmarketprices.However,documentationpresentedinthereportcompiledbytheEvaluationCommitteedoesnotrefertosuchanexercise.

5.3.3 MTAcontendsthattheContractorprepareddetailedcostingsrelatingtotheconstructionoftheMNAcomplexforbankloanpurposes.AsatthetimeofdraftingthisReport,MTAhadnotfurnishedthisOfficewithsuchdocumentation.

5.3.4 MTA also noted that its appointed architects certified that works were completed inaccordancewith theagreeddesignandspecifications.To thiseffect,MTAnote that thearchitect’scertificationalsorelatestothevalueoftheproject.MTAmaintainsthatsuchcertification draws on the architects’ judgment in accordance with their professionalwarrant.While acknowledging the rationale of such arguments, thematter could havebeenconclusivelyresolvedifMTAwasprivytotheworkingsundertakenbytheappointedarchitects.

5.3.5 Theprocessundertakenaspartofthislumpsumcontractinthecertificationofpaymentshasbeenreviewedandacceptedbyvariousauditbodies(bothNationalandEuropean).MTA,however,acceptsthatunfortunatelytheworkingsundertakenatvariousphasesofconstructionwerenot included in the relativecostingsandcertification reports. To thiseffect,MTAispursuingthematterandtryingtoobtainsuchworkings.

5.4 MTA delayed the appointment and is not fully exploiting the review capabilities of the Auditing Body

5.4.1 InlinewithArticle10.3oftheSpecialprovisionsoftheConcessionAgreement,theMTAandtheContractorwererequiredtoappointjointlyanAuditingBodytocarryoutindependentand impartialauditduring theOperationService.However, the followingcircumstancesmaterialised:

a. MTA appointed the Auditing Body in 2015 that is more than two years followingthecommencementof theproject’scommercialphase.Thedelay inappointingtheAuditingBodybreachescontractualprovisions,namelyAddendum3.AccordingtotheMTA,suchabreachofcontractwasdueasboththeContractorandtheMTAwerestillsettlingdownaftertheopeningoftheNationalAquarium.

b. The Auditing Body’s scope of work is not exhaustive. In the circumstances, theAuditingBody’sworkfocusesonoperationalindicatorsasoutlinedinScheduleXoftheconcessionContractanddoesnotextendtotheinterpretationoftheannualauditedfinancialstatementssubmittedbytheContractor.



5.5 MTA’s financial monitoring does not extend to analysis of MNA’s audited financial statements

5.5.1 Asoutlinedinparagraph5.2.3,financialmonitoringoftheMNAcomplexincludesauditedfinancial statements. These audited statements are prepared by a firm appointed bythe Contractor and referred toMTA in accordancewith Clause 4.25 of the concessionAgreement.However,MTA’sfinancialmonitoringof theMNAcomplex is subject to thefollowingissues:

a. MTA isnotawareof revenuegeneratedbyspecificstreamsas theauditedfinancialstatementspresentaglobaltotalofrevenuesgeneratedbythevariousfacilitieswithintheMNAComplex.ThisimpliesthatMTAisnotinapositionto:

i. compare between the projected and actual revenue by different streams as

expressedintheCostBenefitAnalysis(CBA)submittedbytheContractorandMTA.ii. undertakefinancialmonitoringofthedifferentamenitieswithinthecomplex.

b. AstheMTAmonitoringteamdoesnotincludeexpertiserelatedtofinancialmatters,thecoverageoffinancialmonitoringbecomessomewhatlimited.ThesecircumstancesariseasMTA’sfinancialmonitoringdoesnotextendtothecompany’sfinancialstructureandsubsequentinter-companytransactionsandthegearingratio.

5.6 Conclusion

5.6.1 MTA’smonitoringfunctioniscriticaltotheeffectiveimplementationofcontractprovisionsaswellassafeguardingGovernment’simmediateandfuturepositioninthisventure.Tothiseffect,thecontractualframeworkpermitscomprehensivemonitoringofallaspectsoftheMNAcomplex.However,MTA’scoveragedoesnotextendtoallaspectsofthedesign,buildandoperateAgreement.

5.6.2 AsshowninthisChapter,limitationsinthescopeofthemonitoringfunctionledtoanumberof implications.Firstly, suchasituationtransgressedontransparencyandaccountabilityissuesassociatedwithcontractimplementation.Secondly,thesecircumstancesinfluencedtimelyinterventionsforcorrectiveaction.Thirdly,suchasituationhasadirectbearingonGovernment’spositionasapartner inthisventure,particularlywithrespecttofinancialandoperationalperformanceofthecomplex.ThismaterialisessinceGovernmentwouldnotalwaysbeadequatelyinformedontheprogressofakeyelementofMalta’stourismproduct.


2017-2018 (to date) Reports issued by NAO

NAO Work and Activities Report

April2018 WorkandActivitiesoftheNationalAuditOffice2017

NAO Audit Reports

September2017 PerformanceAudit:LandscapingMaintenancethroughaPublic-Private Partnership

October2017 PerformanceAudit:MaintainingandRepairingtheArterialandDistributor RoadNetworkinGozo

November2017 Follow-upReportsbytheNationalAuditOffice2017

November2017 PerformanceAudit:OutpatientWaitingatMaterDeiHospital

November2017 ReportbytheAuditorGeneralPublicAccounts2016

December2017 AnnualAuditReportoftheAuditorGeneral-LocalGovernment2016

December2017 AnAnalysisonRevenueCollection

January2018 TheuseofITsystemstoidentifyskillsandprofessionaldevelopmentneeds withinthePublicService

February2018 PerformanceAudit:Thedesignationandeffectivemanagementofprotected areaswithMaltesewaters

March2018 PerformanceAudit:EvaluationofFeed-InTariffSchemesforPhotovoltaics

May2018 AnInvestigationofanonymousallegationonaHomeOwnershipScheme propertyinSantaLuċija

May2018 AnInvestigationoftheMaterDeiHospitalProject

June2018 AnInvestigationofallegationsonDingliInterpretationCentre

June2018 AnInvestigationintotheFindingsoftheLocalGovernanceBoard

June2018 AReviewofthePensionduetoaformerMemberofParliament

July2018 PerformanceAudit:AStrategicOverviewofMountCarmelHospital

september 2018 - newsbook

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