Part 5: Acquiring land and buildings

Inquiry into certain aspects of Te Wānanga o Aotearoa.

5.1
In this Part, we describe:

5.2
Our discussion includes land and buildings that TWOA obtained by purchase, lease, or construction.

General practices

5.3
In our view, TWOA has relied heavily on Rongo Wetere in its approach to buying, leasing, renovating, or constructing property. Rongo Wetere has gathered much knowledge and expertise in property dealings, and appears to have often acted on instinct. There has been a lot of informal and oral assessment and decision-making.

5.4
The Council was informed of property purchases, but decisions were sometimes made by Rongo Wetere and later reported to the full Council for formal approval. More recently, a property committee made up of senior TWOA personnel advised Rongo Wetere, but he still had an important role in these matters.

5.5
Given TWOA’s size and asset base, we expected it to have a formal capital acquisition strategy. We were provided with 2 documents – Capital Funding Business Plan 1999-2000 and Development Plan for 2001-2003. These documents were part of a Ministerial submission seeking Crown funding, and (among other things) discussed expected capital funding needs. However, while they were sufficient for their purpose, neither of them met our expectations of a capital acquisition strategy. The documents covered a relatively short period, and contained limited analysis of options, benefits, and risks.

5.6
In our view, capital acquisition decisions were made in an opportunistic fashion. To some extent, this may have been a necessary consequence of TWOA’s rapid and significant growth in recent years. TWOA’s Council acknowledges that this was not ideal, but told us that it was still able to obtain “reasonable or good terms”.

5.7
Business cases for proposals were often not documented. We were told that proposals were usually discussed and debated at length. A full and documented assessment of proposed purchases is important. Written business cases help ensure that decisions are thoroughly thought out at an early stage, and reduce the likelihood and effect of obstacles and surprises later.

5.8
One example of what can happen when a proper business case is not prepared is an 11 hectare rural site at Ohaupo, bought with the intention of constructing a carving school. TWOA discovered shortly afterwards that traffic access was difficult. TWOA has recently sold the property. Another example is the Glenview hotel complex (see paragraphs 5.29-5.47).

5.9
Policies on financial reporting and budgeting, investment, fixed assets, and property management did not exist at the time of the decisions discussed in this Part. TWOA has prepared such policies recently. This is a positive change, but these policies should have existed earlier. At the time of our fieldwork, most of these policies were still in draft form. In our view, they should be finalised quickly.

5.10
Our appointed auditor and other advisers have been urging TWOA, for some time, to document the business cases for major decisions. Documentation has improved very recently, but much of this has been compiled well after the decisions were made.

5.11
Capital purchases and construction projects increased significantly in recent years, as student numbers and funding grew. In 2004, the budget for building purchases and projects was $10.1 million, but $25.5 million was spent. In our view, little serious effort was made to control or constrain capital spending during 2004. The overspending has been a major contributor to the financial difficulties TWOA has experienced in 2005.

Property dealings with the AI Trust

5.12
The AI Trust gathered its property portfolio by obtaining old, run-down buildings cheaply, and refurbishing them. Many of its properties became the early campuses of TWOA, and TWOA still leases them from the AI Trust. In the early years of TWOA’s existence, the AI Trust purchased more properties, which TWOA immediately leased. This arrangement seemed to work well for both parties. We accept that it was a useful approach in the early years, when TWOA had little money of its own to fund capital projects.

5.13
TWOA told us that it would not have survived its initial years without the support of the AI Trust (which included TWOA leasing property at below-market rents, and using the AI Trust’s assets as collateral to obtain credit).

Conflicts of interest

5.14
For a long time, TWOA gave no consideration to identifying and managing conflicts of interest involving the AI Trust. Because of the way in which the 2 entities worked closely together, it appears to us that those involved did not consider that conflicts of interest could exist. People who were on the governing bodies of both entities signed many of the lease documents. Documents sometimes had the same individuals signing on behalf of both parties, or signing on behalf of TWOA on some occasions and on behalf of the AI Trust on other occasions. Rongo Wetere was a trustee of the AI Trust, and the 3 members of TWOA’s property committee advising him in recent years were also trustees on the AI Trust.

5.15
In our view, these leases could not have been negotiated on a commercial or transparent basis. This exposed TWOA to a risk that the individuals involved might not have acted solely with TWOA’s interests in mind.

5.16
After the conflicts of interests register was established in 2003, some (but not all) of TWOA’s Council members and senior managers who were trustees of the AI Trust declared their connection. The register did not record what steps, if any, would be taken to manage the conflicts of interest.

Leases

5.17
At the time of our inquiry, the AI Trust owned all or parts of 8 of TWOA’s 13 main campuses (including many of its older and larger campuses). Leases from the AI Trust accounted for about 30% of the value of properties that TWOA rents from others. Most of the leases were longstanding arrangements, and are now charged at commercial rates. More recently, TWOA has purchased land in its own name. Since 2000, there has been only one instance where a site to be occupied by TWOA was purchased by the AI Trust.

5.18
Until recently, TWOA had not formally reconsidered whether it ought to continue to lease its larger campuses, or whether it would be more prudent to own them outright. We expected TWOA to have reviewed this situation from time to time, so it could be sure that leasing continued to be in its best interests. A comprehensive capital acquisition strategy, if one existed, may have covered this. TWOA’s Council has recently considered swapping the Glenview hotel complex for a number of properties it currently leases from the AI Trust.

5.19
We are concerned about the number of large campuses (costing $1.7m in rent payments annually) that are leased from the AI Trust. Our concern here is not that TWOA leases properties from the AI Trust, but that there are so many lease arrangements. This creates an unhealthy dependency on the AI Trust, and could leave TWOA in a vulnerable position if the relationship between the entities deteriorates or ends. Most of these leases expired at the end of 2004 and have not yet been renewed, so are running on informally. TWOA needs to address this situation immediately.

Leasehold improvements

5.20
TWOA has constructed some large buildings on land it leases from the AI Trust. For example, TWOA has constructed a marae-type facility at the Hamilton campus, which cost about $650,000. The land is owned by the AI Trust.

5.21
We are concerned that TWOA has spent so much money erecting buildings on land that it does not own. Under common law, things that are attached to the land (like buildings) are assumed to be the property of the landowner. TWOA could not provide us with any agreements to the contrary; nor evidence of any other formal arrangements covering the value of the improvements that TWOA had made. If the leases are brought to an end, the landowner – the AI Trust – could gain a significant windfall and TWOA could lose the benefit of its significant investments. This is not a prudent way for a public entity to manage its resources.

5.22
Our concerns are heightened by the conflicts of interest between people connected with TWOA and the AI Trust, and the (currently) informal nature of the leases discussed above.

Porirua campus

5.23
As noted above, since 2000 TWOA has made most property purchases in its own name. An exception to this is the site for the Porirua campus, known as Todd Park, which was acquired in 2001. It appears that TWOA initially intended to purchase the site itself (the sale and purchase agreement was initially drawn up in its name), but the property was purchased by the AI Trust and leased to TWOA.

5.24
TWOA could not afford the property on its own, and could not borrow the necessary funds without the consent of the Secretary for Education. The AI Trust could not afford the property on its own either, so TWOA lent $3.1m to the AI Trust. Deliberately or not, structuring the transaction in this way avoided the need to seek the Secretary for Education’s formal approval under the borrowing restrictions in the Education Act 1989.²³

5.25
TWOA’s Council decided to grant the loan, but the documentation for the decision was very poor. This is unsatisfactory, because the decision was unusual. It is not common for a public entity to grant an unsecured loan of this size to another entity.

5.26
The legality of this arrangement was discussed in advance with an official in the Ministry of Education, but TWOA did not get any written assurance or other formal confirmation from the Ministry.

5.27
There was no written business case for, or assessment of, the decision to grant a loan, and TWOA sought no other professional advice. The loan and its terms were not properly recorded in writing until more than 2 years later, when the parties signed an “acknowledgement of debt” document. Until then it was not clear if and when the loan had to be repaid, and what (if any) interest would be charged and when it was payable. Again, most of the signatories to the lease and loan documents had conflicts of interest because they were involved in both organisations.

5.28
Our appointed auditor and other advisers have previously criticised this transaction, and its poor documentation.

Glenview hotel complex

5.29
TWOA bought the Glenview hotel complex in Hamilton in 2003. TWOA’s management of construction on the site, and renovations to the complex, contributed to the capital budget over-spending that TWOA experienced in 2004.

Purpose of the acquisition

5.30
TWOA told us that it bought the site so it could build a library. TWOA decided that, as a large tertiary education institution, it was essential to establish a library. TWOA had been looking for a site for some time. Attempts to find other sites, or to enter into sharing arrangements with other tertiary education institutions, had proved unsuccessful.

5.31
A secondary benefit was that the property provided opportunities for conference facilities. The complex could be used for intensive short courses, for video-conferencing between campuses, and for administrative meetings. The accommodation could be used by people attending short courses, and for large TWOA functions and conferences. Some of TWOA’s administrative staff could also be located in office space in the complex. When not being used for TWOA activities, the conference and accommodation facilities could be made available to the public or other corporate clients, to earn additional revenue.

5.32
The site contains a bar, which is leased to a commercial operator. We have no particular concerns about TWOA owning a bar, because it is an incidental part of the complex.

5.33
The proposal for a library had been under careful consideration for a long time, and was the subject of several reports and analyses. We do not question TWOA’s need for a library. However, the choice of a hotel and conference centre site for the library is surprising. In our view, the business case for choosing a hotel site and for engaging in a major hotel and conference centre renovation project was not sufficiently robust, given the size of the project. TWOA could not provide us with any documents showing that the conferencing and accommodation proposal had been thoroughly assessed before the decision to purchase was made.

5.34
When negotiating the price, TWOA did not have appropriate and reliable valuation advice. The vendor provided the only written valuations TWOA saw that were close to the price ultimately agreed. The independent valuation that TWOA obtained was based on the site being used wholly as a library, so it came up with a much lower figure.

Managing the renovation costs

5.35
The Glenview hotel was purchased for $5.1 million in July 2003. TWOA’s Council approved in advance the decision to purchase, and the price.

5.36
During 2003 and 2004, TWOA spent $9.3 million:

constructing the library on part of the site;
adding more accommodation, and conference and office facilities; and
upgrading the existing accommodation.

5.37
The works finished in 2005, and all parts of the complex are now operational. The works have been carried out to a modern, comfortable standard.

5.38
In our view, TWOA poorly planned and controlled the construction and renovation project. When the purchase was being considered, a brief written feasibility analysis used an indicative figure of $900,000 as the cost of “fitout”. The Council resolutions approving the purchase of the property mentioned only the purchase price, and there is no evidence that it considered at that time the further costs it might have to commit to.

5.39
By August 2003, the project managers had determined the cost “to complete renovation and fitout of the facility” as $2.9 million. The Council noted this figure and gave “in principle” approval to “the extensions to the Glenview International Hotel”. However, the papers from that time explicitly discussed only the library, office space, and conferencing areas (and did not mention the ground works, new accommodation areas, or improvements to the existing accommodation). The people we spoke to insisted that the figure of $2.9 million related only to the library, office space, and conferencing areas.

5.40
In December 2003, reports mentioned that increased capacity needed to be catered for, and so “extra carparking was developed, and accommodation facility expansion is being investigated”. It does not appear that this extra work was carefully costed; nor that it was explicitly considered and approved by the Council. Rather, the senior managers involved just added it to the project. By early 2004, total cost figures of more than $6 million were being mentioned to the Council.

5.41
The costs significantly over-ran all earlier estimates. The total cost was at least $9.3 million. A recent valuation indicates that the value of the whole complex is now $10 million, considerably less than the $14.4 million or more spent on acquiring and renovating the complex.

5.42
The construction and renovation project was not thoroughly planned. It grew in piecemeal fashion, as TWOA senior managers decided on additional work. New tasks were added on as they came to mind, or as regulatory requirements and looming deadlines appeared. In our view, TWOA gave little rigorous thought to precisely what should be done, when and how it should be done, what the likely costs would be, and why TWOA was doing it. Little thought was given to monitoring or controlling the escalating costs. The managers involved seemed content to spend whatever was necessary. TWOA’s Council told us that it obtained 2 internal audit reports to help it understand the nature of the costs. TWOA’s Council also said that, by the time management sought approval for particular amounts, the expenses had often already been incurred.

5.43
The most thorough descriptions of the project have been prepared after the event. If TWOA had prepared a thorough and comprehensive business plan and project plan before beginning this acquisition and renovation project, it could have avoided or mitigated many of the problems that occurred. Such plans would have given more clarity and focus to the analysis and decisions about what could reasonably be done, when and how it should be done, and what the total financial investment in the project ought to be.

5.44
In making these comments, we are not criticising the project management firm engaged to undertake most of the works. It was acting under instructions. Rather, we think TWOA showed a lack of planning and rigour.

Operations by the AI Trust

5.45
The AI Trust took possession of the hotel part of the complex (and possibly also the conference areas, although this is not entirely clear) in 2004, and now operates the hotel business on that part of the site. The AI Trust is earning all revenue from and incurring expenditure on that business. However, there is no formal lease or other contract in place yet between TWOA and the AI Trust. The AI Trust does not yet pay rent. In addition, we were told of a proposal to sell the hotel to the AI Trust as part of a “swap deal”, under which properties that TWOA leases from the AI Trust might be sold to TWOA.

5.46
With very little in writing, it has been difficult to establish the details of the current operations and proposed transaction involving the AI Trust and the Glenview hotel complex. To have a significant business arrangement like this operating on such a casual basis is unacceptable for a public entity. The situation suggests that, even as recently as 2004, TWOA had little appreciation of the need to undertake methodical and documented analyses of significant business decisions; nor of the need for particular care and transparency in dealings with related parties (since, yet again, many of the TWOA personnel involved were also trustees of the AI Trust).

5.47
We were told that TWOA arranged for the AI Trust to operate the hotel part of the site because it was not appropriate for a tertiary education institution to be running a hotel business. This supports our conclusion that TWOA did not fully consider, at the time of purchase, what it was going to do with the complex. The rationale for the choice of site and the subsequent messiness might have been better handled had a thorough business case been prepared and carefully assessed before the decision was made to purchase the site.

Property dealings with Rongo Wetere’s whānau entities

5.48
Several recent Te Awamutu property transactions by TWOA involve Rongo Wetere’s whānau entities. They include:

the lease, still in force, of a commercial property at 53 Mutu Street from Wairau Property Developments Limited (one of Susan Cullen’s companies);
the lease, no longer in force, of a residential property at 1131 Bank Street from Wairau Property Developments Limited;
the sharing, no longer in force, of a commercial property at 55 Rickit Road (owned by MO1 Limited) between MO1 Limited and Power Chill NZ Limited (Kingi Wetere and William Wetere’s air-conditioning company); and
the lease of a residential property at 133 Raeburne Street from the Te Whatu Family Trust (William Wetere’s family trust). Ownership of the property has since changed hands.

5.49
All of these sites have been used for a legitimate business purpose. However, we did not find any documentation from the time assessing (or explaining the choice of) each site. Therefore, it was not clear why each particular site was selected over other options (or whether other options were even considered). We were told that the property market was very tight in Te Awamutu, and that there were often few choices available when new sites were needed.

5.50
It was also often unclear who had been involved in suggesting and considering the sites. In particular, we received contradictory evidence about whether Rongo Wetere had made the decision to enter into the 53 Mutu Street lease.

23: Section 192(4)(d), Education Act 1989.

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