RAW: Myths And Mysteries About The Zoo Bail Out – Part 1 – Background

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All Built and Ready for the 100% Increase in Panda Bound Patrons That Never Came

Financial ‘Pandamonium’ At The Zoo Solved?

In Zoo world, it has not just been the nocturnal animals who have been wide awake at night these past few months – most members of the Zoo’s Board will no doubt have been roaming about sleepless in the wee hours as well.

After the bollocking the Zoo’s board (Royal Zoological Society of South Australia Inc) got on ABC Radio a couple of weeks back at the hands of Professor Paul Barnes from Macquarie University who is an expert in Corporate Governance, guess what? The full Zoo accounts for 2010 made an appearance on the Zoo’s website and they make for interesting reading in the light of the Zoo bailout package announced this week.

Some Background

Anyone who lived in Adelaide in late 2009 or even just visited here for an hour in those times will never forget the mantra about the pandas – $700m in economic benefits for this state over 10 years.

Back then the government and the Zoo were arm in arm out justifying the $8m cost of the panda enclosure and the $20m new entrance development, the latter of which was to be wholly funded by the SA taxpayer.

But now, less than two years on and it has all gone very, well, panda shaped.

So, how did the Zoo get into the financial mess it is now in?

An analysis of the very basic financial data provided in the Zoo’s two previous annual reports and the full 2010 accounts reveals some startling information.

Over the three financial years (2008 to 2010), the Zoo spent $48.4 million on property, plant and equipment. The projects involved include the panda enclosure (stated as costing $8m), the new entrance ($20m) and the new chimpanzee enclosure at Monarto ($2m) which together total $30m.

The Zoo also bought the Warrawong business but this cost only around $400,000.

For this, the Zoo had about $22m in grants beyond their usual $3.2m annual contribution from the SA Government.

So, where has the other $18m gone?

The Zoo Annual Reports identify a few suspects being:

• The platform between the painted dogs and the lions at Monarto
• The Serengeti project – also at Monarto
• The enviro dome at the Zoo

But these hardly can be expected to add up to $18m. Were there cost blow outs? Well no, because the 2010 accounts carry this statement ‘The upgrade program was completed on time and to budget.’

So if it wasn’t cost blow outs why did the Zoo board proceed with whatever these other works were at a time when $30m in new spending was already being undertaken that would likely leave additional debt of $8m on top of the $1.9m that existed before the ‘transformation’ of the zoo for the pandas started?

There is just not enough information in the Zoo Annual Reports to answer those questions with some more than odd entries to the accounts making analysis just that more taxing but the full 2010 accounts do help us know the following:

Pandas Inside - White Elephants Outside

Auditors

• Unlike previous years, the 2010 accounts were not audited by KPMG, even though the 2009 AGM appointed them as auditors.
• A close inspection of the accounts makes it clear that in order for the 2010 accounts to be signed off by its directors with the customary ‘going concern’ statement (that is, that the Zoo could pay its debts as and when they all fall due in the ordinary course of business.) there needed to be a rollover of the Westpac banking facility of $24m. That did not occur until into December last year, well after the usual signing off period for the Zoo’s accounts which is September.
• Kryztoff suspects that the reason KPMG declined to sign off their audit and the accounts was that it was uncertain about the Zoo’s capacity as an on-going entity. The accounts note that the Westpac interest rate covenant of 1.5x (earnings before interest relative to interest expense) was not met in either March or June 2010.
• They go on to say ‘projected forecasts prepared by management of RZSSA from July 2010 to December 2011 indicate that it can service the debt levels shown in the Balance Sheet … together with the on-going operating cash flow requirements of the Zoos.’ But as events have become public, the Zoo has been unable for some months to make even interest payments to Westpac and required the Government to provide emergency funding to prop it up from as far back as May.

Panda Projections

• In its 2008 Annual Report, the Zoo President, Heather Caddick alluded to an expectation of attendances at the zoo doubling with the arrival of the pandas.
• In last year’s Annual Report, both she and Zoo CEO, Professor Chris West were almost breathless when talking about the impact the black and white duo was having on their attendance figures.

‘Visitation has reached about 70% higher than normal’, they wrote.

‘Put simply, Wand Wang and Funi are bigger than Lance Armstrong.

‘For the first three to four weeks we were running at about 450% above prior records and at least matching numbers with the Masterpieces from Paris exhibition in Canberra.’

• The 2010 accounts state ‘this investment [pandas and upgrade of front entrance] was predicated on a business plan prepared by RZSSA that indicated the organisation could support this level of debt through increased admission income and other revenue opportunities.’
• But 70% in the first seven months is not the 100% that it seems the Zoo convinced itself, Westpac and the Government were imminent and to be sustained for 10 years upon the moment the first panda poo could be sold in the gift shop.
• But by the time the projections (alluded to above in the quote from the accounts) were put together the pandas had already arrived (the previous November), the Zoo attendance  figures were not matching expectations and by July 2010 they had already been unable to meet their most basic loan covenant for the six months previous.

So, what fabulous projections were put forward that kept the show going back then?

Pre Panda Problems

• One of the problems with the famous $700m in economic benefits and the 100% increase in attendances is knowing on what these numbers were based. As per usual with Government sponsored investments, the details of the headlines are never revealed to the public.
• But we do know that well before the pandas turned up, warning bells ought to have ringing very loudly in the Zoo board room.
• And it seems when that plan was constructed figures may have been based on the stellar year of 2007 when zoo attendances topped 400,000 for the first time but by the time the pandas arrived attendances were down about 8% to levels not seen since 2003.
• But things were worse than that financially by that time as well.
• In 2007, the Zoo made a profit of $1.3m (including the SA Government’s usual input of $3.2m) and recorded cash flow from operations of about $2m (after also including the Grant.) But by the end of the 2009 financial year, the Zoo was losing $1.65m and had cash outflow from operations of $2.6m – a massive loss of $4.6m on two years before.
• Already the Zoo was having to start borrowing to stay afloat with loans going from $25,000 in 2007 to over $5m two years later.
• As for the other actual impacts of the pandas in the 2010 year, well, losses were around $2m, the biggest they had ever been, revenue per paying patron was up around 35% from $13 to $17 (which itself is quaint given the average price per person of a family pass is around $20) and cash flow from operations had improved to around $3.2m.
• But as a recent Sunday Mail survey of zoos revealed, attending the Adelaide Zoo is now one of the world’s most expensive zoological experiences especially given its relatively small size. So the expectation that an additional 350,000 – 400,000 people would suddenly make their way down Frome Rd seems at best heroic, especially given the cost of doing so.

One suspects and only the 2011 RZSSA Annual Report will actually reveal that attendance gains never met hopes nor have the gains been sustained after the initial hoopla. In fact the likely scenario is that they have returned to not much more than they were before the pandas turned up.

Being Transparent

• As for the problems already obvious when the 2010 report was written, the joint President and CEO’s Report was surprisingly silent. ‘The front entry precinct with its beauty and green credentials is one of six projects worldwide short listed for a World Architectural Festival award. This is like being featured at the Cannes Film Festival. Major thanks too are due to the State Government for their far-sighted investment in this new iconic entrance.’
• But may be in this next quote the first light was allowed to shine on the problems actually already in full bloom.

‘For a medium sized organisation the ‘stretch’ has been phenomenal, including financially. Many observers assume we are floating on a sea of panda generated dollars and while income has increased, so of course have our costs. We will be managing our repayment schedule for a while yet as our business plan unfolds and so it is fortunate that our bankers, Westpac, are also one of our closest and warmest corporate partners.’

• On the expense side, never a truer word spoken as salaries paid by the Zoo over the three years to June 2010 increased by a massive 50% while all around every metric in existence would or should have been indicating that severe belt tightening was due.