NAO delivers damning indictment on €4.2 million Café Premier bailout

A damning, and embarrassing indictment of the way the new Labour administration rushed to pay the private company Cities Entertainment (CE) the sum of €4.2 million to buy back its public lease of the Café Premier, was published yesterday in the House of Representatives.

The report by the National Audit Office, requested by the Opposition, was spurred on by MaltaToday’s first report back in February 2014 when it broke the story that the Government Property Department (GPD) had withdrawn legal action for the rescission of CE’s lease, despite having fallen back on some €250,000 in ground rent.

Instead, on the advice of former GPD director and advisor to the Prime Minister, John Sciberras, the Cabinet approved a €4.2 million bailout to buy back the 65-year lease on the café in Old Theatre Street, Valletta; which money was used to pay the State back on outstanding rents, energy bills, VAT and tax, as well as Banif Bank loans of €2 million and a €210,000 fee to CE’s shareholder Mario Camilleri for brokering the deal with John Sciberras.

The NAO found a “lack of rigorous and documented consideration of other options” such as the legally justified rescission of the lease; “poor governance” with the Prime Minister’s negotiating team failing to involve the GPD from the initial stages of negotiations; an absence of documentation to sustain government claims that there was a danger to the overlying National Library by gas cylinders in the café; and that a 5% commission for CE’s shareholder was “unsubstantiated and… inappropriately included in the agreement.”

The government  yesterday said that it had taken note of the NAO report and that it would take the necessary safeguards to see that “similar shortcomings will not be repeated in future.”

But Opposition leader Simon Busuttil laid the blame at the feet of Prime Minister Joseph Muscat, pointing out in a tweet that he was the minister politically reponsible for the Café Premier “scandal”. Indeed, the NAO report shows that it was Muscat’s advisor John Sciberras who led the negotiations with Cities Entertainment.

The Auditor General delivered a damning verdict of callous governance against the Labour administration, finding that a €4.2 million buy-back of the 65-year lease to Cities Entertainment (CE) was discriminatory and could expose public finances to similar requests in the future and exposing it to criticism in terms of fairness and equality. 

The story was broken by MaltaToday in February last year, and led to a NAO report which found poor governance in the way the Office of the Prime Minister controlled negotiations and only involved the Government Property Department at the last stages of the done deal. Although the €4.2 million was a fair market price, the NAO had reservations as to whether this represented value for money.

Since 2004, CE was being called upon by the Commissioner of Land to settle outstanding ground rent of €251,572. In 2008, despite agreeing on a repayment schedule, the Commissioner of Land warned CE it would take legal action, and in 2009 filed a judicial protest stating it had no option but to initiate proceedings for the rescission of the agreement. By the time legal action was taken in early 2013, and despite new efforts made to agree on a repayment schedule, the Government Property Department was not in a position to withdraw legal action unless payments were effected.

The Café Premier was indefinitely closed on 8 March, 2013, on the eve of the general election.

A few weeks after Labour’s election, CE director Mario Camilleri of shareholders M&A Investments, wrote to the Prime Minister requesting a meeting; Muscat replied that same day to schedule a meeting on 17 April, during which meeting Camilleri proposed transferring the Café Premier lease back to the government. In May 2013, former GPD director John Sciberras was brought into the negotiations – even though he was officially appointed as Muscat’s advisor on government property matters in June.

Sciberras brought down Camilleri’s offer of €5.37 million to €4.2 million after using the services of a government architect – whom MaltaToday has previously identified as the new director of the Joint Office and former Labour candidate Duncan Mifsud.

It was Joseph Muscat who authorised Sciberras to table an initial offer of €3.5 million net of tax, that is of €3.97 million.

At this stage, Camilleri was aware that the other shareholder, Neville Curmi, was angling for a deal with a third party. But Camilleri told Sciberras he preferred cutting a deal with the government if it came with a better price. As it turns out, both offers tabled by the government and the third party were identical, but there is no evidence to suggest that the government was aware of this offer: a fact that could have saved it from buying back the lease.

When in July, Sciberras said that the government was sticking to a €3.97 million price, Camilleri requested a meeting with the Prime Minister, whom he met with Sciberras and principal permanent secretary Mario Cutajar. In August, Camilleri proposed a €4.2 million price to Muscat, who in turn sought the advice of chief of staff Keith Schembri.

Muscat also asked for advice from the finance ministry, which replied saying that the government would have to set apart an additional €1.4 million in that year’s budget and the remaining accounted for in the ensuing two budgets.

Instead of dissolving the emphyteutical grant – as the government was empowered to do – the GPD paid Cities Entertainment €4.2 million to pay the government back on arrears and taxes, rather than having them pay the money they owed from their own reserves. 

Of the total sum, the owners had to pay back: €307,346 to settle outstanding arrears with the government property division and €504,000 in capital gains tax owed on the land; then the sum of €192,748 to the Inland Revenue Department to settle income tax and social security payments, €227,058 to the VAT Department on outstanding dues and legal procedures against the company, and €130,963 in energy bills for ARMS; and also €210,000 to the company’s own shareholders M&A Investments and €3,265 to creditors Golden Harvest. 

Finally, another €2,560,800 was paid to Banif Bank, in settlement of the outstanding bank loans that Cities Entertainment held with the bank, payable in four instalments.

Notary takes €20,000 and shareholder takes €210,000 fee

The NAO audit has revealed that a €20,000 legal consultancy fee to Notary Malcolm Mangion, of Labour MP Charles Mangion’s notarial firm, was “somewhat ambiguous” with the only evidence in relation to Mangion’s role being his request for payment two days prior to the signing of the contract. In fact, Mangion had last created a valuation for the Café Premier site back in 2009.

And then it was only in December 2013 that Mario Camilleri requested a €210,000 payment for shareholders M&A Investments, his company; this was “an issue of great contention” right up to the actual signing of the agreement, with Camilleri and co-shareholders Neville Curmi disagreeing on this payment.

But the NAO queries the payment, a 5% total of the €4.2 million payment, because it relates to a settlement of CE’s dues with a creditor, in this case Mario Camilleri himself, the shareholder.

Indeed the NAO considered Camilleri’s evidence of a 2002 balance sheet noting M&A’s €465,000 investment as insufficient and which “established no link to the €210,000 payment… had M&A Investments sold its shareholding in CE, then the possibility of payment would have been considered plausible.”

While Camilleri denied this was a brokerage fee, Neville Curmi provided the NAO a CE board resolution that specified “intermediary costs” equal to the 5% of the sale value.

Despite the fact that the government would still have paid €4,200,000, irrespective of the arrangement with M&A Investments, the €210,000 payment was a private matter and unsubstantiated, deemed by the NAO as inappropriately included in the agreement. 

Lack of transparency and good governance

The Cabinet memorandum dated 10 September, 2013 defended the Café Premier buy-back, citing the removal of possible danger posed to the National Library by underlying catering establishments, the provision of greater accessibility to the Library, resolution of the problem of arrears faced by CE and the re-dimensioning of available space resulting in the generation of income to the government.

But the absence of documentation substantiating these needs was considered a significant shortcoming by the NAO. Indeed, the NAO found no evidence of the use of LPG cylinders on the premises, except for PPS Mario Cutajar’s claim to the contrary.

The NAO also found that the GPD was only involved at the final stages of the reacquisition of the Café Premier, when all had been already agreed upon. Had the government consulted with the GPD, the court action might have proceeded.

Interestingly, the appointment of GPD architect Duncan Mifsud to carry out the valuation of the Café Premier took place without the knowledge of the director general of the GPD. “The NAO considers such a practice as undermining the DG’s authority and responsibility for the department, and could have placed the GPD Architect in an awkward situation.”

The valuation report, despite being prepared on an official GPD letterhead was not retained in file, “indicative of a lack of transparency and poor governance”, the NAO said.

The NAO’s concern was drawn to the various instances where repayment agreements entered into by CE and GPD for the settlement of outstanding ground rent were not honoured, way before the 2013 election.

“This reflects the poor account management practices employed by GPD, including very weak enforcement capabilities and no structured system for the follow-up of agreements entered into… failure to take the required action in this regard is ultimately counter-productive, as the Department is perceived as ineffective in terms of enforcement.”

Findings by the NAO

• Fair market value but not necessarily value for money

• Lack of rigorous and documented consideration of other options, such as legal action which government failed to pursue, when Cities Entertainment was in breach of the lease agreement with government

• Poor governance with government’s negotiating team failing to appropriately involve GPD from the initial stages of negotiations

• Payment of €210,000 to M&A Investments was an intermediary payment, that is, a brokerage fee or commission, equivalent to five per cent of the transfer value of €4,200,000

• Aside from this payment, no evidence of other commissions being paid out of public funds was found

• No evidence of danger to overlying Biblioteca as claimed by civil service head

• No evidence for ambiguous €20,000 consultancy fee paid to notary Malcolm Mangion

• Shareholder was economical with the truth over 5% fee he claimed on value of €4.2 million deal