The Ministry of Finance and Economic Management (MFEM) has taken valuable lessons from the controversial Sheraton deal, reinforcing its financial policies and procedures to prevent similar issues from occurring in the future.

Secretary of MFEM, Garth Henderson, highlighted these lessons in a recent MFEM podcast, emphasising the importance of public financial management frameworks and procurement processes.

Reflecting on the Sheraton project, Henderson noted that poor financial oversight and currency risks played a major role in the challenges faced.

Construction on the Sheraton project, which was intended to be the first five-star resort in the Cook Islands, stopped in the early 1990s and almost bankrupted the government. The buildings remained derelict until Rarotonga businessman Chris Vaile revived the project in 2022.

Speaking on the MFEM podcast to commemorate the country’s 60^th anniversary later this year, Henderson said: “(Lawyer) Tim Arnold really supported the points I made in series three around the importance of public financial management. He told a story in the context of the inadequacies of the government loans and contracts legislation and emphasised the importance of the MFEM Act and the procurement processes that underpin it.”

The Sheraton project, which involved financial dealings in Deutschemarks and New Zealand dollars, exposed the government to currency fluctuation risks.

Henderson explained that MFEM has since adapted its debt management strategy to address such risks.

“What we’re doing now is managing that. Most of our US dollar debt repayments are paid from fisheries revenue in US dollars. The most recent debt we took out with ADB was normally denominated in US dollars, but we insisted on New Zealand dollars and managed to get that.”

Henderson pointed out that the procurement policies in place today would have mitigated the risks associated with the Sheraton deal.

“The procurement policy in place now, when we look at the problems they faced, the procurement would’ve mitigated that, would’ve managed that. The activity management system we have in place would’ve managed that. But at that time and place, it wasn’t in place and you had the problems.”

The Tarai Vaka Activity Management System, financial policies, and strengthened MFEM Act now ensure that government investments follow a rigorous and transparent process from conception to execution.

“We have the Government Financial Policies and Procedures Manual that determines how public finances are handled, how it’s expended. We’ve got the Tarai Vaka Activity Management System as well, which takes an investment idea, concept, planning document, tender process, contract, and then the project delivery. So that’s also strengthening the MFEM Act and public financial management.”

Henderson also raised concerns about competency and integrity in financial decision-making, referencing the legal aspects of the Sheraton deal.

“One thing he (Arnold) raised was the fact that two lawyers had made decisions in there but at the latest stage, admitted they made a mistake. What it means is that you can have a good PFM (Public Financial Management) framework in place, but you need competent people with the right integrity to make sure that that PFM framework is complied with. So, good lessons learned there.”

When asked if such a financial misstep could happen again, Henderson was cautiously optimistic it wouldn’t, but acknowledged that risks remain.

“I like to think that the MFEM Act, it sets the legislative framework for public financial management. Under the MFEM Act, we’ve got the procurement policy that we spent a lot of time strengthening, we’ve built the activity management system and we strengthened it, we got people trained to run it.”

However, he warned that political motivations and human factors could still create vulnerabilities.

“If there’s a compelling political reason to do something that is as challenging as the Sheraton project, it might get through if the people in the system that operate within this PFM framework are incompetent.

“And I don’t mean that in a negative way, simply don’t have the competencies to do the work. If their integrity is not there or there’s weaknesses in the individuals in that framework, then we might see something like this happening again.”

Despite these concerns, Henderson believes that increased transparency and public scrutiny today serve as protective measures against financial mismanagement.

“It’s kind of like when we look at public awareness, transparency in the past versus what we see now, I like to think that the increased transparency and consultation required means that the general public is part of this big decision-making process.

“Politicians cannot make decisions without some form or quantum of public support. I think we’re pretty good, but there’s always a risk there.”