Auckland City Council: Britomart Project

Summary Report

The Britomart project is the largest development of its type involving a local authority in New Zealand. It will have a major effect on Auckland's public transport and property scene for at least the next decade.

From a public transport and public amenities perspective, it involves the construction of an underground integrated transport centre, putting part of Quay Street underground, and developing pedestrian plaza and public open space.

From a commercial perspective, eleven sizeable property developments are envisaged over the next 10 years with a mixture of premium office buildings, hotels and apartment buildings., The project also provides for the protection and enhancement of heritage buildings in the area.

At the time of writing this report, a number of issues affecting the project have yet to be finally addressed and decisions on them made by the Council.

History of the Project

The project has its genesis in the Auckland City Council's wish to have a modem integrated transport centre at the foot of Queen Street, with better buildings and public areas adjacent to the harbour edge. It is a successor to a variety of previous development proposals.

The Auckland City Council (the Council) owns the existing city transport terminal and much of the property at the harbour edge. During the project development the Council acquired further property and bought out the rights of those with interests in properties in the area.

The Council began planning for the present Britomart proposal in 1994 and publicly released concept drawings in December 1994. Detailed architectural drawings and costings were then obtained, and in July 1995 the proposal was subject to public consultation.

In December 1995 the Council decided to proceed with the proposal on the basis that it was to avoid any development risk or cost. To this end, private sector developers were invited to submit bids that would remove the Council from the role of developer, and at the same time maximise the commercial returns to the Council.

The Council reached agreement with the preferred developer, in general terms, in April 1996. Further negotiations crystallised the obligations and responsibilities of each party to the development. These were agreed by the Council in November 1996 and a Master Development Agreement was signed shortly after.

Since that time, the Council has been endeavouring to obtain the remaining resource consents for the project. In May 1997 resource consents were refused and the Council appealed the decision. The appeal is now before the Environment Court and a decision is expected soon.

The Project Agreement

The main features of the project agreement are that the Council:

• Acquires a transport centre, a traffic underpass (Quay Street East) and public areas at a fixed cost of $100 million, with the developer being responsible for the completion of these facilities.
• Contributes $23 million to heritage protection and infrastructure services and $2.3 million towards associated works.
• Sells Britomart properties to the developer for $56 million, with the sale proceeds providing a loan to the developer for the same amount.
• Provides a "Standby Takeout Facility"' for unsold development sites. The maximum possible exposure is $230 million on the basis that unsold sites are held by the Council as a security.
• Obtains resource consents for the project, and forgoes development levies and rates for up to five years.

The Audit Office Review

The Britomart project has been, and continues to be, controversial - the nature, scale, cost and risks associated with the development are all the subject of considerable debate.

In September 1997, the Audit Office and the Council agreed that the Audit Office would conduct a review of the project. The terms of reference for the review were directed at the effectiveness of Council processes in six phases of the project. These phases were:

• establishing the desired outcomes;
• evaluating options for delivering these outcomes;
• evaluating and selecting the financier, developer and project consultants;
• establishing and maintaining effective project governance;
• providing timely and appropriate information to the Council and Councillors; and
• identifying and managing the risks to the Council.

We detailed our expectations of best practice under each phase, and assessed the Council's actual processes against our expectations. Where appropriate, we also examined the assumptions underlying processes.

Later, the Council asked us to examine the nature and amount of payments it had made to secure vacant possession of properties to enable the project to go ahead.

Results of the Review

For the purpose of being able to form an opinion on the quality of the Council's management of the project we formulated a set of expectations that, in our view, constitute best practice. In our experience, attainment, of these expectations in full is rarely achieved especially in a contract as complex as this.

Overall Conclusion

Taken as a whole the processes that the Council used to develop and control the project largely met our "best practice" expectations. While we had concerns (as discussed below) - particularly about aspects of the first two phases of the project - in our view these shortcomings did not seriously compromise the overall effectiveness of the Council's processes in managing this large and complex project.

We confirmed that the amounts paid for vacant possession totalled $4.5 million, as publicly released, and that the basis for the payments was reasonable.

We were also pleased to note that subsequent improvements in the governance arrangements have addressed some of the concerns we identify in this report.

Concerns Identified During the Review

Our most significant concerns were about some of the processes used to establish outcomes and evaluate options:

• One of our detailed expectations was that the Council - as part of its process of evaluating options - would have prepared a comprehensive cost-benefit analysis on transport aspects of the project. This was not done, although a similar study had been undertaken for a previous proposal. In our view such a study should have been an important element in the assessment process.
• A cost-benefit analysis would have attempted to forecast the economic benefits flowing to the community, and compared these benefits with forecast costs payable by the Council for the transport centre. The financial analysis that was done was not a comprehensive assessment of projected economic benefits and costs - rather, it covered the changes which might happen to the Council's balance sheet if the project went ahead.
• The project went to the public on the basis of "no cost" and "no development risk". The essence of the Council's "no cost" principle was that the value of Council assets at the end of the project should exceed the value of assets at the beginning. We doubt the suitability of using this method of establishing financial benefits, because it is unlikely that there would ever be a "cost" given that assets are valued on the basis of depreciated replacement cost.
• In addition, "no cost" (as used by the Council) does not mean what it might naturally mean to lay people - i.e. that there would be no net outflows on this project. There will, of course, be real costs to the Council in paying to develop the assets involved. It is not clear to us that the meaning of the "no cost" principle would necessarily have been well understood by everyone involved in the consultation process.
• A number of financial studies reported to the Council in November 1996 indicated that the Council's net financial position would improve as a result of the Britomart project. Thus the Council's "no cost" principle would be met. However, our review of one such financial study2 suggests that, if major assumptions underlying the study had been more rigorously analysed, the predicted improvement in the Council's financial position would not have been so clear cut.

We had other concerns about aspects of the project but these are less important than those stated above and again, in our view, did not compromise the overall effectiveness of the Council's processes:

• The project has both transport and commercial objectives which, while not mutually exclusive, may not always be complementary. In our view the Council's processes did not sufficiently address the potential conflicts between these objectives. A ranking or prioritisation of objectives would have provided decision-makers with a better yardstick for judging trade-offs between transport and commercial considerations.
• The Council's principle that the project should only proceed on the basis of "no development risk" was unlikely to be realised. Later developments, particularly aspects of the bids by prospective developers, confirmed that the Council could not avoid risk. Nevertheless, the processes by which the Council identified and mitigated risks were generally satisfactory.
• However, we were not entirely satisfied of the adequacy of the process leading to the Council's potential maximum commitment of $230 million under the Standby Takeout Facility. The Council has since sought an independent assessment of the risk posed by the Facility. This assessment indicates that the commercial risk imposed by the Facility is relatively small compared with the scale 'of the project
• Although the Council examined a variety of options for delivering the project and compared them against reasonable criteria, we felt that the comparison could have been more explicit and made available as part of the consultation process.
• The Britomart project was subject to an extensive and active communication strategy, but there were weaknesses in the consultative process - transport stakeholders were not consulted at an important planning phase, and reasons for the rejection of other options to deliver an integrated transport centre were not well explained. Extensive consultation with users has since taken place.
• The Council's processes for selecting project consultants did not meet our specific expectations. There was no competitive selection, contract documents were of variable standard, and some were not signed. The evaluation and selection of the preferred developer was of a better standard, but also fell short of best practice.
• We hope that the lessons learned from this review will assist both the Auckland City Council and other local authorities in managing any future major project. We are pleased to note that the Council is already applying some of our findings to other waterfront projects.