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America's Cup audit - 'Friendly fire' fails to sink Team New Zealand

by Richard Gladwell/ 30 Aug 2020 22:03 PDT 30 August 2020
Emirates Team New Zealand - Waitemata Harbour - August 28, 2020 - 36th America's Cup © Richard Gladwell / / nz

It came as no surprise that after five months of investigation by government-appointed auditors Team New Zealand Ltd and America's Cup Event Ltd were cleared of all claims of financial misappropriation.

Twenty years ago almost to the day, after NZ had defended the 2000 America's Cup, as Sir Peter Blake, Alan Sefton and others were exiting Team New Zealand, a flying squad from Inland Revenue, acting on information received, invited themselves aboard for a six-day snap audit.

In his book "Sir Peter Blake - an amazing life", then Team New Zealand Director Alan Sefton wrote recalling the incident:

"Almost certainly as a consequence of all the misinformation being fed to the media, Team New Zealand was subject to a full examination by Inland Revenue and received a completely clean bill of health. Not one cent was unaccounted for, and everything was as it should be."

Twenty years on, those same lines could have come straight out of the Audit Summary Report, released by the Ministry of Business Innovation and Employment, on Wednesday.

Five months ago, MBIE appointed two former senior officials from the Serious Fraud Office to investigate several claims of financial impropriety that had been made against the America's Cup champions and their event management arm, America's Cup Event Ltd.

In summary, the forensic accountants found:

• There was no loan from ACE to ETNZ,

• There was no fraud by ACE or ETNZ,

• That no personal expenses of Grant Dalton or any other personnel were paid from Crown monies,

• That there has been no financial impropriety of any nature.

Several of the issues had occurred and been notified to the other entities up to a year ago. Had had they been of serious concern, at the time should have been addressed using the reporting and audit processes outlined in the Host Venue Agreement. There are very clear provisions in that agreement for handling "misappropriations" - which in this context means there is a disagreement as to how an intercompany transaction is handled between the entities. There is always a clear obligation for the parties to act in good faith, and for prompt action be taken if there is an issue.

That does not seem to have been the case in this relationship - and the Summary Report from the auditors does not address the latency of these concerns and issues, which gave rise to the audit investigation.

The current situation has parallels to April 2015, when Emirates Team New Zealand had a contract cancelled to stage the 2017 America's Cup Qualifiers in Auckland, after the Kiwis backed the position taken over a potential change of class by now-Challenger of Record, Luna Rossa. Once again the America's Cup team were flamed by the New Zealand media. The matter went to the Arbitration Panel, and in a confidential settlement the three man Panel ruled heavily in the Kiwis favour. The other competitors opted for a voluntary 24 day time-out on sailing their AC50's to avoid having the Panel rule (probably more harshly) on that issue.

The key factor in both the April 2015 situation, and the current circumstance, is the quality and experience the Board and management of the now 36 year old Team New Zealand. Despite all the tumult of the America's Cup world, it is very hard to believe that the business and legal acumen residing within the group of management and directors would have allowed anything to be signed off or tolerated that was not going to stand up legally.

Pandemic? What pandemic?

Instigated on March 18, the snap-audit could not have come at a worse time for the team.

A week later, on March 25, at two days notice, New Zealand was put into a five-week Alert level 4 Lockdown in response to the COVID-19 outbreak.

[In New Zealand Level 4 is most extreme of Lockdown Alerts, requiring all but essential services, to shut their offices and workplaces, for schools to close, and with people confined to their immediate family "bubble" only. Many refer to it as being under house arrest.]

In the face of a rapidly deteriorating situation in Europe, Emirates Team New Zealand's focus, along with the four Challenger teams was how to pivot and alter the direction of their design, construction and sailing programs, as well as meet sponsorship commitments on a program which COVID-19 had turned inside out.

Compounding the Lockdown issue was the effect of COVID-19 on the two America's Cup World Series Regattas in Cagliari, Sardinia on April 23-26 and Portsmouth on June 4-7. ETNZ and ACE were responsible for the organisation of the Portsmouth event.

The America's Cup Arbitration Panel ruled on March 18, five days after MBIE instigated their snap audit, that the Cagliari regatta was cancelled due to a Force Majeure condition. Six days later - and with New Zealand about to go into a Level 4 Lockdown, ETNZ/ACE together with their British partners ORIGIN Sports, cancelled the Portsmouth event, they were responsible for organising.

About this time, Emirates Team NZ's AC75 was on a ship heading for Singapore, before being transhipped to Italy. Despite public calls by the Kiwi team for the ACWS events to be cancelled - which would have allowed Te Aihe to return directly to New Zealand. That did not happen, and Te Aihe was transhipped to Italy a day or two before COVID-19 was declared to be a Force Majeure event - allowing contracts to be exited, without liability for damages.

Team New Zealand's Te Aihe journeyed to Europe and back - losing five vital months.

The summary report makes no mention of any of these events, nor does it give the team any credit for having to deal with a deteriorating, and uncertain situation overseas, and giving those situations a higher priority than answering auditor queries on historical detail.

We are now resuming our regular program

On June 9, ETNZ and ACE turned off the information tap, advising the audit team that "it had provided considerable information in furtherance of the audit and was returning to its full program, requiring its full attention."

ETNZ's outwardly belligerent stance was justified three weeks later when leaked confidential correspondence found its way into the mainstream media, pushing COVID-10 off the front-page news on a major NZ daily for three consecutive days. The kiwi media barrage forced ETNZ and ACE to obtain a High Court injunction to prevent further publication of correspondence along with the threatened release of recordings of ACE management meetings.

Some of the issues highlighted in the media reporting, from leaked, confidential correspondence, were up to 12 months old. At the time of their occurrence, they were notified to MBIE, via the Event Steering Group mechanism soon after their occurrence, and no further action was taken at the time.

Unsurprisingly, Emirates Team New Zealand's focus, as with their competitors, was on pivoting their America's Cup defence program to respond to the risks, threats, challenges and opportunities afforded by the COVID-19 altered landscape.

Surprisingly, MBIE did not request an inquiry into how the confidential material came to be in media hands, or if MBIE did investigate, the findings have not been publicly released. ETNZ/ACE has now filed legal proceedings in respect of some of those issues.

The considerable reputational damage to the highly experienced directors and management of Team New Zealand Ltd and America's Cup Event Ltd has also been conveniently ignored.

Class Rule goes to mediation

The only matter unresolved is a charge of NZD$3million (USD $2.005million) relating to the decision to create the AC75class and develop the class rules for which ETNZ has charged against the Event of NZD$NZ40million (USD$25.5million).

The auditors seemed to have the view that this cost could be determined by the inspection of timesheets - against which the requested remuneration information could be applied and a cost estimated.

That approach view ignores the fact that ownership of the design and engineering software systems, along with the other related assets, including simulators, are required for the development of an America's Cup Class rule. Use of those assets come at a cost which should be reflected in the Rule development cost.

Or should the rule developer time be costed at the same rate as auditors, lawyers and accountants? There is a very compelling argument that the yacht design and engineering group have a more valuable skill set.

Regardless of rate arguments, it is very easy to get to a figure of $3million for the development of an AC75 class rule, within a six-month time-frame. The AC75 Class rule delivery timelines were the fastest since the 12 Metre class was dropped in 1987.

[The videos with this story give some idea of the depth of effort required for the concept development, design and engineering challenges which have to overcome to present a class which is at the forefront of sailing technology.]

The argument put to mediation is that this rule development should not have been a cost to the Event, claiming it was not contemplated as such by MBIE when they contracted for their NZD$40million or USD$25.5million Hosting Fee.

[By comparison, Bermuda paid a USD$15million sponsorship fee to the organisers of the 2017 America's Cup, backed up by a further USD$25million of sponsorship underwrite.]

There is no definitive answer as to who responsible for the development and cost of an America's Cup class rule.

Fast rewind back to June 26, 2017 and the final America's Cup media conference in Bermuda.

The shape of the next Cup was a hot topic, and ETNZ's Grant Dalton was quick to rule out the use of wingsailed catamarans in Auckland for a number of reasons - but primarily on the grounds of seaworthiness in the wind against tide situation in a NE sea breeze. The difficulties of launching catamarans and hard wingsails in a swirling SW wind are also well-known in Auckland.

On their return home, Team New Zealand's design team did look at the suitability of existing classes, before opting for the AC75 foiling monohull. The choice meant that a boat suitable for Auckland's conditions could be developed.

A long worklist

Over six months, the concept was developed tested and then promulgated in the form of the AC75 class rule. The rule is long-running at over 70 pages compared to the 40 of the IACC, and AC50/62 and 72 rules.

The 30plus design team was tasked with various elements of the design:

• Hull design and construction scantlings;

• Measurement consideration of the components, including minimum weights and the effect of crew weights;

• Rig options - wingsails, soft sails, or the chosen hybrid - a double skinned mainsail, other sail options including battening, jib and mainsail sizes, the use of Code Zeroes (which became irrelevant in the 2013 America's Cup), and sail handling gear, such as furlers, mainsheet systems and travellers;

• Spar and rigging options options - section specifications - minimum laminate - standing and running rigging specifications - technology restrictions;

• Mechanical engineering including "force input devices" being anything that is moved by a crew member to provide control or power input; the use of human or electric power (given that most supermaxis us electric power winches); the use of accumulators if human power were used, ensuring that cyclors or similar workarounds not just used to pump hydraulic oil around the AC75, sail control systems;

• The foil arm and the foil cant system are one-design supplied parts. The cant system, in particular, is a unique and complex piece of software-controlled electro-mechanical engineering which alone took six months to develop and test;

• Determining the media system requirements, equipment, weight and location as well as the crew information system;

Highly credentialed design team devises new rule

In the design rule development process, the designers/rule makers have to be sure that the element can actually be built and will work as intended - which often requires the construction of (multiple) test parts and maybe tooling. This process was well demonstrated by the destruction testing of the carbon foil arms after the original design failed well before reaching the prescribed safety level of twice the maximum working load.

The design team also have to cognisant of not allowing an arms race to develop on one or more parts of the boat – specifically where a lot of money can be spent for very little gain.

For example with the wingsail shape used in the AC72 the class rule only required the wingsail area to be in the range of 255-260sq metres.

That led to a lot of computer analysis and design cost to create different wingshapes which after the 2013 America’s Cup, designers concluded the difference was only 3% or less. For the AC50 used in the 2017 America’s Cup, a one design wingsail was implemented – saving cost in design and analysis, as well as theoretically reducing the numbers in the design team.

Finally, there's the task of pulling all the design elements together, and the careful actual writing of the rule so that loopholes are closed; the intention of the designers is recorded, and the rule is unambiguous. The carefully constructed Definitions in the back of the AC75 Class rule, run to eight pages alone.

A significant benefit for the Event is that the AC75 Class has been developed by the winning design team from the previous Cup. Their ranks include one of the world's leading high-performance yacht designers, Guillaume Verdier whose design credits include the world's fastest monohull, the 100ft Comanche, shorthanded IMOCA60's, and large multihulls.

Of the teams involved in the 2021 America's Cup, at the time the Class Rule was being developed, Emirates Team New Zealand was the only team with a fully functional sailing simulator able to test design options. They were the only team who had designed and raced in the two foiling America's Cups - winning one and missing by the narrowest of margins in the other, both in foiling wingsailed catamarans

In selecting the AC75, Team NZ evened up 2021 Cup by choosing a neutral boat type and opted not to have foiling catamaran, where their foil design and other development from the 2017 Cup would provide the Defender with a substantial head start. The a very common downside for ETNZ, and any other team that attempts to draft a class rule, is the risk of unintended consequences - in that they write a rule that has an unintentional loophole, and interpret the class rule they way they intended to write, rather than is what was actually written. This happened with the design of the AC72, when Team New Zealand realised the boat could made to foil, rather than be displacement only as the rule makers intended. Oracle Racing took the matter to the International Jury, who ruled that the words written in the rule could be interpreted in the that Foiling was permitted.

A similar but different process to develop a Class Rule was followed by the Volvo Ocean Race, who after two successive races with a significant percentage of the fleet having to suspend racing, or withdraw from a leg completely, which eventually called into question the credibility of the event, and the return for team and race sponsors. For the 2014/15 edition the Race Manager commissioned Farr Yacht Design to design and engineer a one design Volvo 65, which could be used for two editions of the race. The withdrawal rate dropped significantly, there was very close racing and tight finishes became standard, usually within the same day after several thousand miles of racing. The costs of developing the class rule for the VO65 was carried by the Event - which had various income sources including Port/Stopover Investment fees similar to the 2021 America's Cup.

MBIE's Host Investment only part of Event Funding

There is a strong argument that having a high-quality rule makes for a better event. When seen in the flesh, the AC75 is a spectacular boat - which will get the attention of mainstream and sailing media and their fanbase.

For an organisation that has Innovation in its name, one would have thought that MBIE would have been more than pleased to pick up the cost of development and testing of the AC75 boat concept and class rule.

The AC75 is an outstanding showcase project for New Zealand design and engineering capabilities - extending well beyond the $2billion a year NZ marine and composite engineering industry. For the teams designing and building AC75's there is ample opportunity for their America's Cup program to be a unique demonstration of technology for their suppliers and sponsors.

The AC75 development and America's Cup comes at a time when New Zealand has to pivot on the back of the impact of COVID-19 and open up new business opportunities. That's a task the MBIE should be leading and encouraging.

It is clear from the Host Venue Agreement that the MBIE's much-vaunted $40million Event Investment is only part of the event funding.

Team New Zealand is required to secure the balance described as the External Funding Commitment in the Host venue Agreement.

Specific amounts and percentages are redacted from the publicly available version of the HVA. Our guess is that the NZD40million is about 60% of the total required with the balance being sourced by ACE/ETNZ from sponsors and other funders.

In addition to the event investment secured by ETNZ/ACE, Prada - sponsor of the Prada Cup and America's Cup - advised the Hong Kong Stock Exchange that the "Sponsorship Contribution to be paid by the Company for the management and organisation of the COR36 Events as naming and primary exclusive sponsor Euro 23 million" (USD$27.4million/NZD$40.6 million)."

COR36, the event management arm of Challenger of Record, Luna Rossa Prada Pirelli, controls that spend. [COR36 is responsible for the organisation of the Prada Cup. ACE does the same for the America's Cup.]

The total investment in the Prada Cup and America's Cup events comes at a very crucial time for the restart of the Auckland and NZ economy. It will provide substantial international exposure for New Zealand, the America's Cup and the sport of sailing generally.

While it is always essential to ensure that investment, Government or otherwise, is appropriately spent, there is a much bigger picture which must be kept in sharp focus - a successful Defence of the America's Cup.

That vision doesn't seem to be present, at least in some circles in New Zealand.

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