The ongoing failure of Berlin to build a new airport is a source of national embarrassment. Now Germany has another airport mess, involving the botched sale of Frankfurt-Hahn airport to Chinese buyers.
A Cold War American airbase now best known as a hub for low-cost airlines, Frankfurt-Hahn is located in the western state of Rhineland-Palatinate.
In June, state officials announced the sale of its 82.5 percent stake to a construction firm, Shanghai Yiqian Trading. The sale collapsed earlier this month, however, after the company failed to make an initial payment on the total sale price of €13 million, or about $14.4 million.
The complexity of the sale had led the state government to ask KPMG, an auditor based in Amsterdam, for help with due diligence. Now it looks as if KPMG may be liable for compensation for failing to adequately research the Chinese buyer, who submitted dubious financial documents before the state government finally pulled out of the deal.
The debacle has had political consequences in the state of Rhineland-Palatinate, which is ruled by a coalition of the center-left Social Democratic Party, the Green party, and the liberal Free Democrats. The state government narrowly survived a vote of no confidence called on the issue. There is likely to be an official commission of inquiry into what state premier Malu Dreyer has admitted is a “poor, embarrassing” affair.
KPMG’s exact role in the sale remains unclear. “We commission a company like that because we don’t feel we have expertise in every deal for that kind of sale,” said Ms. Dreyer in a recent television interview. KPMG was an experienced and internationally renowned firm, employing numerous China experts, she said. “Of course, we assumed that their checks and auditing were correct.”
Their trust was misplaced.
Rudolf Scharping, formerly state premier of Rhineland-Palatinate and federal defense minister, now runs a consultancy, which has advised German firms doing business in China. In an article for Handelsblatt, Mr. Scharping heavily criticized KPMG’s work. Chinese sources flagged Shanghai Yiqian Trading as a “shell company without credibility or credit worthiness.” Basic research into the Chinese company bidding for the airport would have revealed a severe lack of capital and a poor credit history, he said. “Even the slightest probing into publicly available sources should have set alarm bells ringing,” he added.
Even the slightest probing into publicly available sources in China should have set alarm bells ringing about this firm. Rudolf Scharping, Consultant and former defense minister
The state still wants to sell the loss-making airport. “We will continue to do everything to bring the sale to a conclusion, with new buyers,” Ms. Dreyer told Handelsblatt. “I have always emphasized that this is not an easy project,” she said.
The state government is still working with KPMG to sell the airport, albeit under the supervision of an additional outside auditor.
In response to Handelsblatt’s questions, the state interior ministry said an “internal appraisal” was investigating whether to pursue KPMG in the courts.
A KPMG spokesperson declined to address the accusations in detail. If they turn out to be true, it could prove expensive for the firm. Among the terms of the agreement between KPMG and the state is a paragraph stating that, “in case of ordinary negligence, the upper limit of liability will be €10 million.” Recouping that much would represent a triumph for the embattled state premier.
The airport is running a deficit and we need to find a buyer. Malu Dreyer, State Premier of Rhineland-Palatinate
It is possible that no charges will be brought against KPMG. According to Rhineland-Palatinate government sources, the botched first sale means the airport must be sold quickly, and changing adviser might impact that. In addition, KPMG had possession of important files which might be withheld in case of a law suit, holding up any new sale.
The sale is urgent. The airport has been losing money for many years. The chairman of its supervisory board estimates it only has money to keep going until September. The state has already budgeted a new loan of €34 million. “The airport is running a deficit and we need to find a buyer,” admitted Ms. Dreyer.
The state government has a track record of messy sales. An attempted private-partnership to develop the historic Nürburgring racetrack left the facility mired in debt and eventually forced into bankruptcy in 2012. Two years later a new buyer was found, only to rapidly disappear from the scene. The famous racetrack now belongs to a Russian investor.
Ms. Dreyer is keen to avoid any such parallels. The Chinese buyer behaved fraudulently, she said, and the state’s auditors did not recognize this quickly enough. “But the investor never actually had possession of state property,” she asserted.
If the state government demands compensation from KPMG, the company could take a hit to much more than its reputation. Their fee for consultation on the airport purchase appears to have been extraordinarily low. For auditing the “solvency” of potential buyers, the global audit firm demanded a fee of just €3,000 per audit. It could yet end up on the hook for millions in compensation.
Heike Anger is an editor for economics and politics at Handelsblatt. Christoph Schlautmann covers the logistics and waste management sectors for Handelsblatt. To contact the authors: [email protected], [email protected].