Part 13: Inquiries during 2006/07

Local government: Results of the 2006/07 audits.

During 2006/07, we received about 170 requests for the Auditor-General to investigate the actions of local authorities. The Auditor-General has a mandate to inquire into a public entity's use of its resources, at his discretion. An inquiry usually involves looking into financial, accountability, governance, or conduct issues.

Our mandate does not enable us to consider the substance of decisions made by local authorities, as we do not have authority to “second guess” the judgement of elected members. However, we may decide to look at a council's decision-making process.

In this Part, we discuss some of the larger inquiries we carried out in the local government sector during 2006/07. The reports from the first two inquiries discussed below are available on our website.

Dunedin City Council and Otago Regional Council – stadium proposal

We inquired into the funding arrangements of the Dunedin City Council and Otago Regional Council (the Councils) for a new multi-purpose stadium proposed by the Carisbrook Stadium Charitable Trust (the Trust). In accordance with our mandate, we did not consider whether the Councils should support the stadium project – that is a matter for the members to decide.

We looked into this matter because of the amount of ratepayer funds that were being considered for the proposed stadium, the Councils' relationship with the Trust as a non-council-controlled organisation, and the uncertainty within the region about the nature of the Councils' involvement. We had received several requests for inquiries into the Councils' involvement with the proposed stadium, and the matter was of high public interest.

The stadium proposal

In February 2007, the Trust released a report that recommended building a new multi-purpose stadium in central Dunedin. The Trust expected the stadium to cost about $188 million. The Dunedin City Council was asked to contribute $91.4 million and the Otago Regional Council was asked to contribute $37.5 million.

After consultation, the Dunedin City Council voted in June 2007 to provide funding for the Trust to continue with its feasibility work. The Council's resolution required the Trust to take various steps to confirm the viability of the project by 31 December 2007. The Council funded this work by allocating $11.5 million in 2007/08, with $5.6 million of this depending on the work to take place by December 2007.

The Otago Regional Council decided to put on hold any decision about funding until there was a firm commitment from the Dunedin City Council about its involvement.

What we found

Overall, we found that the Councils' funding arrangements were appropriate for the investigatory phase of the project. We noted that the outcome of the Trust's investigatory phase was uncertain, and neither Council had committed to fully funding the project. We also commented that a formal and robust funding framework would need to be put in place should either or both of the Councils decide to make a firm commitment to fund the construction phase of the project.

The Dunedin City Council had adequately considered whether its initial contribution would enable it to decide on committing further funding to the project. The Council acknowledged that there was a risk associated with its initial contribution. It sought to reduce the risk by considering whether its initial contribution would enable a decision about further funding, whether the overall project costs were credible, and how the Council's $91.4 million contribution could be funded if it decided to proceed.

The Dunedin City Council had appropriate accountability mechanisms and controls in place for this investigatory phase of the project. The Council also had the means to assess whether it was receiving value for money for the investigatory work. These included weekly meetings with the Trust, and controlled release of funding after an invoice authorisation procedure.

The accountability and control could have been enhanced by a commitment in writing between the parties, such as a memorandum of understanding. We also made some suggestions about the adequacy of the Trust's six-weekly reporting system and Dunedin City Council's systems for authorising payments to the Trust.

The Otago Regional Council had decided to put on hold any decisions about substantive funding of the proposed stadium, but had made relatively minor amounts of funding available to the Trust. The funding was provided indirectly through the Dunedin City Council and depended on the Dunedin City Council's arrangements with the Trust. We considered this appropriate for the investigatory phase of the project.

Our expectations should the project proceed

If the project proceeded and the Councils decided to provide funding for it, we would expect to see an enhanced funding framework put in place. This framework would be consistent with the phase of the project and appropriate to the structure of the project. It would require a greater degree of formality in the accountability and control arrangements between the Councils and the Trust.

We would expect to see a comprehensive funding agreement between the parties to protect the Councils in case the stadium project does not proceed as planned after any final commitment is given. We would also expect to see appropriate risk management strategies to protect the Councils, and their respective ratepayers, against construction and operational risks.

We note that the Dunedin City Council voted on 17 March 2008 to commit funding to the Trust for the stadium.

Queenstown Lakes District Council

We inquired into decision-making processes followed by the Queenstown Lakes District Council and the council-controlled organisation (CCO) that it established to provide regulatory and resource management services for the district. These services were being provided through a contract with Civic Corporation Limited (CivicCorp).

The CivicCorp contract and service delivery review process

The Council contracted CivicCorp in 1998 to provide regulatory and resource management services until 2003, and later renewed the contract for a further five-year term.

The Council had some concerns about CivicCorp's performance under the contract, which were compounded by a substantial increase in the number of resource and building consent applications being received. From 2004, there were discussions and negotiations between the parties about alleged breaches of the contract.

In 2006, the Council and CivicCorp began to discuss " life after the contract". It had become clear that the contract would not be renewed in 2008, and that CivicCorp would consider an early end to the contract. The parties reached an agreement in principle to look at the possibility of the Council purchasing CivicCorp.

While the Council was discussing performance issues under the CivicCorp contract, it also started to review how it wanted to deliver regulatory and resource management services. Several service delivery contracts were due to expire in 2008. The review had been signalled in the Council's 2004-14 Long-Term Council Community Plan.

The review resulted in the Council deciding to consider forming a CCO to deliver regulatory and resource management services. After consulting with the public about establishing a CCO for this purpose, the Council decided in March 2007 to form a CCO to provide regulatory and resource management services.

In June 2006, the Council started negotiations to purchase CivicCorp. The Council was concerned that CivicCorp would be unable to continue to deliver services through to June 2008 because of staffing difficulties.

In December 2006, the Council approved the components of the purchase price and authorised the Chief Executive to enter into an agreement to purchase CivicCorp, as agent for a company to be formed and conditional upon the outcome of the CCO process and due diligence checks. This decision was approved in March 2007 after the conditions were fulfilled.

Acting in its capacity as sole shareholder, the Council asked the CCO to purchase CivicCorp. The CCO board resolved to do so and purchased CivicCorp in April 2007. The companies merged into one, and are now known as Lakes Environmental.

What we found

The inquiry focused on:

  • the Council's decision-making process for the delivery of regulatory and resource management services, including the service delivery review by the Council in 2005 and 2006, and its consultation and decision-making processes when establishing the CCO; and
  • the decisions by the Council and the CCO about the purchase of CivicCorp, including the process for determining the price.

Overall, the Council and the CCO followed good and appropriate processes.

We made some specific comments on certain aspects of the process leading to the purchase of CivicCorp:

  • The negotiations to purchase CivicCorp were conducted by expert advisers, on behalf of the Council, under conditions of strict confidentiality. This adversely affected the Council's ability to consult with the public on the option of purchasing CivicCorp. The Council was able to rely on its awareness of community views gathered through the earlier service delivery review process and the consultation process to establish the CCO. However, if the Council had been able to be more explicit about the option of purchasing CivicCorp in the statement of proposal about forming the CCO, then it might have received more views from the community.
  • Some of the Council's assessments that decisions were not significant were made on the basis that the CCO, not the Council, was purchasing CivicCorp. We questioned whether this analysis adequately acknowledged the substance of the Council's actions and involvement. However, assessing those decisions as significant to the Council would not necessarily have required further consultation.
  • The extent to which the Council considered the community's views when making decisions that led to the purchase of CivicCorp could have been clearer.

The Council's purchase of CivicCorp raised interesting questions about applying the consultation requirements in the Local Government Act 2002. For a local authority, there is a tension between being open and transparent in its actions and obtaining community feedback on commercial and sensitive transactions.

A local authority must structure its decision-making processes for significant and complex decisions − including commercial decisions − to ensure that it understands the views of the community at each stage of the decision-making process. This does not require a local authority to use any specific consultation process or procedure. However, getting the views of the community in the early stages of a decision-making process can inform later decisions.

This inquiry has highlighted that local authorities enter into long-term contracts without always considering in detail what will happen when the contract ends. Contracting out a specialised function, such as the delivery of regulatory services, can mean that internal expertise and knowledge is lost. This can lead to difficulties when the contract comes to an end. In the CivicCorp example, this was problematic because the limited market to supply regulatory services in the district reduced the options available to the Council.

Council staff with a personal interest in matters before their Council

We carried out an inquiry into a local authority after receiving information that some senior staff members at the Council were personally involved in matters being considered by the Council. We reported back to the Council, and include some wider points of interest from that inquiry in the paragraphs below.

The inquiry was about staff members who were shareholders and/or directors in companies that had various applications before the Council. The staff members had not initially declared any conflicts of interest, even though in some instances the applications were coming through their section of the Council. No steps were taken to formally manage the conflicts. However, the staff members did try to ensure that they were not involved in decisions being made by the Council about these companies.

We discussed conflicts of interest in our report to the Council. General guidance on conflicts of interest is set out in our good practice guide, Managing conflicts of interest: Guidance for public entities.

The potential for conflicts of interest arose because the staff members were involved in companies that had applications before their employer. The risk increased because some of the staff worked in the sections that dealt with such applications. It also raised the risk of perceived impropriety on the part of the staff members concerned.

In this instance, staff involved in the companies decided not to tell other Council staff or councillors about their involvement because they did not want to receive any special treatment. They also thought that the matters should be judged on their merits. While we accepted that the staff members made their decision in good faith and with no improper motive, it was the wrong decision. The staff members should have declared the conflict at the outset so that it was openly acknowledged, and an appropriate response could have been agreed on and documented.

We expect senior staff members to recognise the need to ensure that a conflict of interest is documented. It is important that senior staff provide leadership in all areas involving questions of probity and appropriate conduct.

In our view, this judgement by staff illustrated a need for further guidance for staff members on such matters. Therefore, we suggested that the Council prepare clear policies and procedures for staff on how conflicts of interest should be managed, and train staff on the topic.

Conflicts of interest are less likely to cause problems when they are appropriately managed. An important aspect of managing conflicts of interest is being open and transparent about them. Members of governing bodies and officials should identify and disclose conflicts of interest as soon as they arise, then they or the entity should consider what action (if any) is necessary to avoid or reduce any effects of the conflict.

Once an interest has been declared, the decision about how to manage it will need to be reviewed if circumstances or the conflict change. A public entity should keep a written record of any disclosures of interest, and update the record as necessary if the nature of the interest or the approach for managing it changes.

We found no evidence that the Council employees used their positions to advance the interests of the companies they were involved with. We were satisfied that the staff members did not obtain any information in their role as employees that they used for their own advantage. We also did not find any evidence of attempts by the Council staff involved in the companies to influence the decision-making processes.

We understand that Council staff will, at times, be engaged in transactions with their Council in a personal capacity − for example, when applying for a building consent or resource consent. It is inevitable that conflicts of interest will arise. In our view, any conflicts that could arise from an interest in a resource consent application from a Council should be able to be managed with reasonably straightforward measures. Identifying and managing conflicts of interest of this kind should be routine business for a Council. However, these judgements must always be made in the context of the particular issue, the organisation, and the community.

Although these situations will always create some risk for the organisation, most conflicts of interest should be able to be managed adequately and with minimal disruption to usual processes. Noting the connection, ensuring that people do not process their own applications, and documenting that for the public record reduces the risks that conflicts of interest create for an organisation.

In our view, a public entity should require its staff to declare any personal interest that may affect, or could be perceived to affect, their impartiality in any aspect of their work. Declarations provide the basis for deciding the steps needed to manage any actual or potential conflict of interest. The most typical options involve excluding the staff member from the entity's work on a particular matter. It is important to complete the process by documenting it, because this is the step that responds to the risk of an adverse public perception. If the record shows only that a conflict existed, but not that any steps were taken to manage it, then the organisation risks criticism.

This inquiry highlighted that transparent and documented management of conflicts of interest is not only important in principle, but also protects public entities and their staff . Dealing with such issues in secret is likely to undermine public trust in the organisation and its processes.

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