Summary

In May 2000, Cabinet agreed to make a once-only payment of $120 million (GST-exclusive) to help the South Island’s West Coast economy adjust to the Government’s policies to end the logging of indigenous forest.

Of this West Coast Economic Development Funding Package (the funding package), $92 million was placed with the West Coast Development Trust (the Trust), and the remaining $28 million was divided equally between each of the 4 West Coast local authorities (Buller District Council, Grey District Council, Westland District Council, and West Coast Regional Council).

We undertook a performance audit of the 5 entities.

We looked at the operation of the Trust and its management and use of its share of the funding package. In particular, we:

• looked at the governance arrangements for the Trust; and
• tested that the distribution of funds by the Trust has complied with its Deed of Trust.

We also examined what each of the 4 local authorities had done with their share of the funding package, and their involvement (if any) in economic development initiatives. We also assessed whether their investment policies met the requirements of the Local Government Act 2002, and whether each local authority had acted in keeping with its investment policy.

Governance of the West Coast Development Trust

The Trust must comply with its Deed of Trust (the Deed). The Deed sets out the Trust’s purpose, functions, governance arrangements, powers, processes, and rules.

The Trust is governed by 12 Trustees, whose role is to direct and supervise the conduct of the Trust’s business. The Trustees have set up several sub-committees to help run the Trust.

The Trustees have appointed an Advisory Body to act as expert advisors in distributing funds (of more than $100,000) to business and community groups. The Advisory Body members have the financial, commercial, and entrepreneurial skills required by the Deed.

A Chief Executive and his staff support the Trustees and the Advisory Body.

Many of the people we spoke to during our audit (including past and present Trustees) consider that there are too many Trustees, and were concerned that there are no skill requirements for Trustees. Trustees will raise this issue during a review by the Trustees and the Settlor (the Minister of Finance) of the Trust’s operations, which is due by mid-2006.

Because all of the Advisory Body members are appointed for a term of 5 years, there is a risk that the whole Advisory Body could change at the same time. Losing, at one time, the experience held by the Advisory Body could result in delays for funding applicants, and inconsistency in decision-making.

Management of the Trust’s investment of its share of the funding package

The Trust has earned about $31 million in investment returns and interest since it received its $92 million share of the funding package. The Deed requires the Trust to appoint investment advisors, prepare a plan for investing its funds, and to invest the funds in keeping with this plan. The Trust has met these requirements of the Deed. In addition, the Trust has established appropriate monitoring arrangements for its investments.

Governance of subsidiary companies

During its first 5 years, the Trust made equity distributions to companies which became part- and fully-owned subsidiary companies. In 2005, the Trust set up, and appointed Trustees as directors of, a holding company through which to manage its subsidiary companies. In our view, because there are no specific skill requirements for Trustees, it is important that the Trustees who act as holding company directors receive training to support them in this role. The Trust recognises the value of such training. Formal reporting from the holding company to the Trust is in place.

The Trust has appropriate procedures for appointing directors to the subsidiaries of the holding company. We noted one failure in the monitoring and reporting of business risks by a subsidiary company’s managers to its directors. The failure led to the Trust being unaware of a significant risk to its investment. The Trust has learned from this experience, and is setting up regular monitoring and reporting arrangements for its subsidiary companies.

Conflicts of interest

We looked at the processes and policies for managing conflicts of interest for the Trustees, Advisory Body members, and Trust staff. All 3 groups were aware of the potential for conflicts of interest, and were declaring conflicts of interest as they arose. A register of declarations of interest is held for Trustees and Advisory Body members, and there is a conflicts of interest policy for staff of the Trust.

Maintaining confidentiality

The Trust is meeting the needs of fund applicants by maintaining the confidentiality of their personal information.

Evaluating the Trust’s effectiveness

The Trust has thought about what the objects of the Trust mean, and has put in place high-level goals that aim to achieve the objects. However, the measures that the Trust has set for assessing progress towards the goals are not specific or measurable enough for the Trust to be able to use them to track its progress. In addition, the Trust does not currently report enough information on its progress towards achieving its goals to be accountable to its stakeholders. The Trust has told us that it will seek to provide this information to the community.

The Trust has made good use of market research surveys to ascertain whether it is seen to be operating effectively for the people of the West Coast.

Meeting the transparency and accountability requirements of the Deed of Trust

The Deed states that the Trust must conduct its affairs in a manner that is transparent and accountable to the people of the West Coast. We considered the extent to which this aspect of the Deed is being met, particularly when the Trust is undertaking projects significant to the region as a whole.

The Trust uses a range of ways to communicate with the community (such as media releases, and its website). It has mostly met the requirements of the Deed to make information available, and it has held public meetings to discuss its annual reports.

We appreciate that it is up to the Trustees to determine how to meet the transparency and accountability requirements of the Deed. However, several people we spoke to during the audit were concerned that the Trust was not meeting the transparency and accountability aspects of the Deed, and believed that Trust meetings should be held in public. Holding meetings in public is a valuable way to ensure public accountability, particularly as the Trust is becoming more heavily involved in regional projects. The Trust has recently resolved to hold a series of public meetings on regional economic development matters. We encourage the Trust to continue with this initiative.

Review of the Trust’s operations

The Deed requires that the Trustees and the Settlor review the operation of the Trust before 30 June 2006. We consider that a periodic review of the Trust’s operations is a useful way to check that the Trust is operating effectively, particularly as the Trust’s activities mature and expand into new areas. In our view, the planned review of the Trust should be repeated in another 5 years.

Distributing funds

Under the Deed, the Trust can distribute funds to applicants. According to the Deed –

… the Trust Fund may be applied and used exclusively by the Trustees for the following general purposes within New Zealand (the Objects), namely:

(a) to promote sustainable employment opportunities in the West Coast region; and

(b) to generate sustainable economic benefits for the West Coast region; and

(c) to support projects which are not the ordinary day-to-day running, maintenance and upgrade of the infrastructure that is normally the responsibility of the local authorities or central government, provided such projects meet paragraphs (a) and (b)…

All distributions must be made for the general purposes set out above (the objects of the Trust) and following the process set out in the Deed.

The Deed allows the Trust to distribute its net income, and up to 5% of the initial funding package, in any one year. The Trust has more than preserved the initial value of the funding package, and the value of the funds distributed has been in keeping with the Deed. The Trust has distributed about $27 million in its first 5 years of operation.

The Trust has strategic and business plans, and policies for distributing funds. We were satisfied that the Trust has satisfactory procedures for processing applications for funding for business investment, and is improving its systems for processing applications for community funding.

Making decisions on distribution applications

We were concerned about some aspects of the decision-making process. The Trust must refer applications for more than $100,000 to its Advisory Body for consideration. The Advisory Body recommends to Trustees whether a funding application should be declined or approved, and may recommend that an application be approved only if, in the Advisory Body’s view, the application meets the objects of the Trust.

The Trustees cannot approve an application for more than $100,000 without a recommendation to do so from the Advisory Body. The Trustees make the final decision on an application, and can either approve or decline the recommendation made by the Advisory Body.

The Advisory Body and the Trustees, when deciding whether to approve or decline an application for funds, have been mindful of the need to comply with the objects of the Trust.

However, this requirement has led to significant debate, because the objects of the Trust are open to interpretation. In our view, the Trust has not adequately defined how the infrastructure clause – item (c) within the objects of the Trust – should be interpreted.

There has also been debate about how applications for community funding fit within the objects of the Trust – particularly whether they promote sustainable employment opportunities, and generate sustainable economic benefits for the West Coast region.

We consider that the Trust is in a position to make a considerable contribution to the well-being of the West Coast region through funding community projects, but it needs to ensure at all times that the projects meet the objects of the Trust.

It could be argued that almost any application for community funding could promote sustainable employment opportunities or generate sustainable economic benefits, given that the funding could attract or help retain employees. However, it is unclear whether this was the intention of the funding package. We consider that this interpretation of the Deed should be clarified with the Settlor.

The Trust has been inconsistently dealing with applications for sponsorship (where funding is provided to an external party, for the primary benefit of that party). The Trust has treated some sponsorship arrangements as distributions (which the Trust must refer to the Advisory Body if the application is for more than $100,000) and others as marketing and promotions (which do not need to be referred to the Advisory Body). In our view, applications for sponsorship should be treated as distributions. Accordingly, sponsorship applications for more than $100,000 should be referred to the Advisory Body. We note that the Trust processed an application for sponsorship for more than $100,000 without the Advisory Body considering it.

Before an amendment was made to the Deed, the Trustees were not able to distribute funds without a recommendation from the Advisory Body. The role of the Advisory Body in making decisions on applications is a critical check and balance to ensure that the Trust is effective in achieving its purpose. While the Trustees have the ability to approve funding that does not exceed $100,000, this does not preclude them from using the Advisory Body for advice on applications under this threshold. We consider that there is value in the Trustees seeking the opinion of the Advisory Body where there is uncertainty whether the objects of the Trust will be met, regardless of the amount applied for.

The Trustees set a minimum distribution amount of $20,000 (which they have recently reduced to $5,000) for business distributions, and $5,000 for applications for community funding. The Trust has approved distributions for less than these amounts. This inconsistent application of policy may result in some potential applicants missing out on funding if they do not apply based on the policy, while others may apply and be approved. This is an unfair situation.

As well as deciding whether an application should be approved, the Trust must determine what terms and conditions are applied to the distribution of funds. One benefit in receiving funding from the Trust is that the Trust may be flexible in setting interest rates, and may make other concessions. The Trust has had no formal process for determining what interest rate it will apply to loans. A draft Credit Policy Manual now provides guidance for setting interest rates. The manual is an improvement on the informal process previously used for establishing loan conditions.

File management

The Trust uses “client” files to hold information about funding applications and distributions. The Trust’s client files did not contain all the information we expected – for example, many files did not contain the original application or the checklist used to process the application. While the minutes of Advisory Body and Trustee decisions on applications were frequently not in the files, Trust staff were able to provide these on request. Information on monitoring whether the terms and conditions of distributions had been met was also often missing from the files.

The Trust’s draft Credit Policy Manual outlines the documentation that must be kept in the client files.

Monitoring distributions

Trust distributions are usually subject to conditions – such as providing the Trust with regular financial reports and updates on progress towards achieving key performance indicators (KPIs). Where funding depended on KPIs, there was good monitoring and reporting of whether KPIs were achieved.

However, in some instances, funding recipients were not complying with the conditions agreed when the funding was approved. The Trust acknowledges that it has not been monitoring distributions as closely as it would like, and has now appointed more staff to keep up with this growing workload.

For the most part, the Trustees we spoke to were satisfied with the amount and quality of monitoring information provided on distributions.

Accessibility of the fund to the community

The Trust has contracted independent market research surveys of applicants. The results of these surveys show that applicants generally found the application forms easy to use, and Trust staff helpful. However, some surveyed applicants and others we spoke to considered that applying to the Trust was a difficult, expensive, and lengthy process. The Trust believes that, because of the nature of the applications it handles, it must research and properly consider applications. This takes time.

Some people we spoke to considered that the Trust could be more active in attracting new applicants. Having recently appointed more staff, who are introducing new initiatives (such as a business plan template for use by applicants, and encouraging local accountants to bring new business to the Trust through their clients), we consider that the Trust can now be more active in attracting applications for funding.

Management of the funding package by the local authorities

The $7 million share of the funding package provided to each of the 4 local authorities in the West Coast region was given unconditionally. Each local authority chose to use or invest its share of the funding package in different ways.

Each of the 4 local authorities had an investment policy as required by the Local Government Act 2002. These policies differed in their approach to investing, and also the extent to which the policy met the requirements of the Local Government Act 2002.

While each local authority’s investment policy outlined the investment objectives and the mix of investments allowed, none of the 3 district councils outlined procedures for acquiring new investments (as required by the Local Government Act 2002).

The investment policies for 2 of the 3 district councils did not comprehensively cover the procedures by which investment performance is to be reported to the Council. Despite this, each local authority has established procedures for regular reporting on investments to the Council for monitoring purposes.

We did not find any significant instances where the local authorities had breached their investment policies.

The local authorities’ approaches to the use or investment of their shares of the funding package have ranged from conservative to high-risk loan financing of business enterprises. The councils that invested in equities and became directly involved in providing economic development loans have suffered large actual or opportunity cost losses to their share of the funding package.

Buller and Westland District Councils opted to lend funds directly to businesses. These district councils have each had to make provisions to write off about 40% of the value of the economic development loans they made.

Grey District Council opted to take a facilitation approach to economic development – for example, through its support of Grey Regional Opportunities Workshop (GROW), and by funding the development of an industrial commercial property site.

West Coast Regional Council has not been involved in economic development initiatives.

The local authorities have learned from their involvement in direct loans to private enterprise business ventures to promote economic development, and investment in equities:

• The local authorities that adopted higher risk approaches for their share of the funding package have now resolved to adopt more conservative approaches to investing.
• All 3 district councils have reduced or ceased their direct involvement in economic development.

Our recommendations

We recommend that:

1. the Settlor and the Trustees of the West Coast Development Trust amend the Deed of Trust to stagger the appointment dates for Advisory Body members;

2. the West Coast Development Trust prepare more specific, measurable, and time-bound performance measures to determine and report on progress towards achieving its high-level goals;

3. the West Coast Development Trust provide more information in its annual report on progress towards achieving its high-level goals;

4. the Trustees and the Settlor of the West Coast Development Trust carry out another review of the operation of the Trust in 2011;

5. the West Coast Development Trust seek further legal advice on, or clarify with the Settlor, the interpretation of the infrastructure clause of the Deed of Trust;

6. the West Coast Development Trust clarify with the Settlor the interpretation of the Deed of Trust, and determine whether, and under what circumstances, community funding distributions meet the objects of the Trust;

7. the West Coast Development Trust treat sponsorship as a distribution;

8. the West Coast Development Trust consistently apply its policy on minimum distribution amounts. If the West Coast Development Trust considers that exceptions to the policy are appropriate, it needs to specifically state in its application and guidance documents that exceptions may be considered;

9. the West Coast Development Trust include all relevant information about funding applications and distributions in its client files;

10. the West Coast Development Trust increase its monitoring of successful funding applicants to ensure that the terms and conditions of funding agreements are met; and

11. Buller, Grey, and Westland District Councils revise their investment policies to meet the requirements of the Local Government Act 2002.

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