Part 7: Inquiries since July 2008

Local government: Results of the 2008/09 audits.

The overall picture of our inquiries work

In our last two annual reports to Parliament,60 we have noted that the inquiries function of the Office is coming under increasing pressure. The volume of requests has increased and, more significantly, the scale and complexity of the issues we are being asked to consider has also increased. In particular, in 2008/09, our work was dominated by a number of large and high-profile inquiries that we were asked to carry out by public entities or by their responsible Ministers.

In this Part, we discuss:

The number of requests for inquiries we receive

In 2008/09, we received a total of 271 requests for inquiries, and carried forward 27 from the previous year. We completed responses to 254 requests and carried forward 44 to the next year. A significant volume of our overall inquiries workload continues to be generated by the local government sector. More than 150 of the 271 requests received and 170 of the completed responses related to local government matters. Of the matters that resulted in inquiry work by us, more than 70% were in the local government sector.

Focus on the Local Authorities (Members' Interests) Act 1968

We have also carried out several significant inquiries and noted an unusual level of work related to the Local Authorities (Members' Interests) Act 1968. The question of whether councillors have financial or other conflicts of interest in decisions made by their local authority has become a more significant part of our work. In particular, during the last year or more, we investigated possible breaches of the Local Authorities (Members' Interests) Act 1968 in the Thames-Coromandel District Council and Environment Canterbury. We discuss these issues separately later in this Part (Thames-Coromandel District Council, see paragraphs 7.28-7.37) and in Part 8 (Environment Canterbury, see paragraphs 8.12-8.42).

How we approach requests for inquiries

We receive a large number of requests for inquiries each year. Often, we receive a number of requests about the same issue if it is a matter of public controversy. Most requests do not result in an inquiry. Some raise issues that are outside our mandate, have not yet been raised directly with the relevant public entity, or are better dealt with by another organisation. In such cases, we advise correspondents that we cannot assist, and may suggest other steps they could take.

For those requests that we decide are correctly directed to us, we consider each one to determine the most appropriate way to proceed. Factors we consider include the seriousness of the issues raised, whether we consider an inquiry to be in the public's interest, and whether we have the resources to consider the issues.

We classify inquiries into three categories – "routine", "sensitive", and "major" – depending on the seriousness of the issues raised. A routine inquiry involves straightforward issues, and can often be carried out either by a review of documents or through correspondence and discussion with the public entity. It will not usually result in a published report. We always advise the correspondent of our conclusions and the reasons for them, and in some instances we advise the public entity of the matter.

Sensitive and major inquiries involve more complex issues and may attract a broader level of public interest and attention. During these inquiries, we will often review the entity's files and may also formally interview people. We sometimes report the results of these inquiries publicly, as well as advise the correspondent and the entity.

The role of the Auditor-General, and its limits

The correspondence we receive shows that many people do not understand the role of the Auditor-General, and its limits. For example, we get a wide range of requests asking us to:

  • intervene in decision-making by local authorities;
  • injunct or stop activities and contracts;
  • make a judgement about the legality of actions; or
  • review individual decisions with which the correspondent disagrees.

It is often not our role to consider or review the matters raised or we have no power to provide the response that is sought. In such cases, our response inevitably disappoints the correspondent and adds to their frustration.

Therefore, we are working to improve the information we make available about the role of the Auditor-General and our approach to requests for inquiries, so that it is easier for people to understand when we can usefully get involved and why.

Our primary function is to audit public entities. We have some capacity to examine in more detail issues of concern that are raised with us, but there are limits to that capacity. Therefore, we choose carefully which requests for inquiries we follow up. We examine requests to identify whether the issues raised suggest financial impropriety, problems with the organisation's overall governance and management, or other systemic or significant concerns that may be important for the organisation or the sector, or be of general public interest. We do not see the Auditor-General's office as an avenue for resolving individual complaints or concerns about how a public entity has handled a particular matter.

Pressure on our inquiries function and resourcing means that we are getting stricter about which issues we take up, and about not engaging in extended correspondence on routine matters. In particular, we are working to streamline our processes for responding to routine inquiries, so that we can concentrate our efforts on the more substantial issues considered in sensitive and major inquiries.

Recurring issues raised in requests

Challenges to the decision-making process

We noted last year61 that we often receive complaints that a local authority has not complied with the decision-making process set out in the Local Government Act 2002 (the Act). This is particularly common when the authority is making decisions about major and expensive projects, such as infrastructure development. For example, during the last year we have been asked to look at the way in which decisions were made about sewage schemes and treatment plants, aspects of the Dunedin sports stadium development, the Nelson Performing Arts Centre, the Christchurch School of Music proposal, and the Indoor Community Sports Centre in Wellington.

Requests of this kind are sometimes from lobby groups that are opposed to the development, or even from councillors who are unhappy with the majority decision of the council. Although the concerns with the decision and the process may be genuine, in practical terms, people often hope that asking us to inquire may stall or stop the process. That is rarely the result, because the Auditor-General has the power only to inquire and report, and has no power to intervene. Moreover, inquiries into such issues take time, whereas the project is usually driven by its own more complex timetable and continues to proceed.

Only a court can rule conclusively on whether the authority has complied with the detail of the legislation. We note that the requirements of the Act's decision-making provisions have been tested in the courts several times recently and that the case law is not yet settled. The Local Government Act 2002 Amendment Bill also proposes amendments to the relevant provisions. It is not the role of the Auditor-General to make detailed or definitive rulings on the application of these provisions to particular facts.

When we do inquire into such matters, our focus is on the practical question of whether we can see sound administrative and decision-making processes operating, and whether we have any doubts about overall compliance with the legislative requirements.

Non-financial conflicts of interest

The other major theme running through the requests for inquiry that we receive is conflicts of interest. We discuss financial conflicts of interest and the specific rules in the Local Authorities (Members' Interests) Act 1968 in Part 8. Here we discuss allegations that elected members are participating in decisions in which they have a non-financial conflict of interest. The suggestion of a conflict of interest can arise for a number of reasons, including because the councillor:

  • is a member of, or employed by, another organisation (and so may have a conflict of roles);
  • may have relatives in relevant roles; or
  • may have strong political views on the issue (suggesting bias or predetermination).

Concerns of this kind are regularly raised with us by members of the public, local authority staff, and other councillors. Sometimes it is clear that there is a political dimension, for example, if the councillor in question is opposing the position of the correspondent on the issue. In other cases, the question is raised with us because there is a genuine technical concern about the legal risk to the decision-making process that is being created by the possible conflict of interest. And sometimes, the concern is simply from a member of the public who thinks that the involvement just cannot be right.

In legal terms, judgements about the existence, significance, and effect of non-financial conflicts of interest are complex and highly fact-specific. In particular, they involve balancing the realities of a political decision-making forum and process (an elected local authority) with the procedural expectations that have developed in administrative law to ensure fair and proper decision-making.

Although the Auditor-General has a specific formal role with financial conflicts of interest in the local government sector, we do not have any special role with non-financial conflicts of interest. In our successive good practice guides, we have traditionally offered some guidance on the general issues that public entities should be thinking about, and the general principles that apply. However, we have no enforcement role and cannot give formal rulings.

In our experience, most council staff are able to provide informed and practical advice to councillors on these issues. If staff have major concerns about a particular current or potential issue, we encourage them to get specific legal advice rather than to seek general guidance from us. That said, we understand that, at times, staff find it helpful to talk an issue through in general terms. In such cases, we are happy to act as a sounding board, and to provide general comments on the approach being developed.

General behaviour of elected members

Another recurring theme in the correspondence we receive is concern about the general behaviour of elected members. The conduct in question is not usually related to any particular activity or expenditure, but is a more general concern. Examples include concerns about elected members who may be disclosing confidential information inappropriately, refusing to co-operate with ordinary council processes and systems, deluging council staff with unreasonable requests for information, refusing to take advice on legal risks they are creating for the council, or simply perceived as rude or abusive.

The nature of democracy in the local government sector is that local authorities are made up of a mix of people with a range of styles and political beliefs. They do not always get on with each other. It can be challenging for a group of elected individuals to become a coherent and well-functioning governance and decision-making body, despite their differences. It requires a measure of give and take on all sides, as the group settles into agreed processes for allowing different perspectives to be aired without undermining their ability to get business done.

The Act requires each local authority to adopt a code of conduct for its members that sets out the expectations on such matters. The local authority can amend the code of conduct. The aim is that each local authority agrees on the set of rules that will regulate the behaviour of its members at a personal and political level. Some codes of conduct include mechanisms for investigating breaches and applying sanctions. These sanctions also operate at the political level. In general, we do not see it as appropriate for the Auditor-General to get involved in matters of personal and political discipline. Councillors are elected members – if a ratepayer is unhappy with the general behaviour or attitude of a councillor, their primary recourse is the ballot box. Accordingly, we will usually decline requests to inquire into the general behaviour of elected members.

Similarly, we do not have any role in providing guidance on or inquiring into compliance with council standing orders. These are internal matters for councils to deal with.

Requests from sitting councillors about current issues

A final theme to note is that we are regularly approached by elected members raising concerns about decisions made by their own council. In general, we expect elected members to be able to raise their concerns directly with the council rather than involving us. They have access to the chief executive for administrative and management matters. Policy questions and other matters are debated around the council table, and they have an opportunity to voice their concerns in that forum. It will not usually be appropriate for us to revisit an issue that has already been debated and decided on at the council table.

Thames-Coromandel District Council leasing arrangements

We were asked to inquire into aspects of how the Thames-Coromandel District Council (the Council) managed leasing arrangements for a block of land on Moewai Road, Whitianga. The Council leased the land to Mr Sieling before he was elected to the Council in 2007. Our inquiry considered how the Council had managed the lease for the land and had handled Cr Sieling's interest in the lease.

The Council's management of the lease

Most local authorities have extensive land holdings. Our findings from this inquiry reinforce the importance for all local authorities to have effective systems and processes to manage their land well on behalf of their communities.

Our expectation, and the expectation of any ratepayer, would be for a lease of land to be formally documented as soon as possible after any agreement was negotiated. A formal lease agreement provides clarity about the terms and conditions of the lease of the land that had been agreed by the two parties.

We found and reported62 that the Council had not effectively managed the land, because it did not formally document a lease agreement or have arrangements in place to manage its interests in the land. The lack of a formally documented lease agreement caused confusion when council staff provided advice to the Council about possible and best uses for the land. Council staff were proposing alternative uses for the land without recognising that Cr Sieling had legally enforceable rights and obligations effectively equivalent to a lease.

The handling of Cr Sieling's interest in the lease

It is important that any conflicts of interest are identified and managed appropriately, to ensure that fairness, transparency, and objectivity are maintained.

As a councillor, Cr Sieling received the full agenda papers for the Council Service Delivery committee meeting, outlining proposals for alternative uses for the land.

We considered the reasonableness of the administrative process followed by the Council for distributing council agenda papers. The Council's administration systems did not adequately support the management of conflicts of interest, because council staff did not consider whether to withhold agenda papers about the land from Cr Sieling.

At the meetings to discuss the land, Cr Sieling took steps to declare a conflict of interest and remove himself from discussions about the land in his role as a councillor. However, Cr Sieling did make a presentation at the public forum of the Council's Service Delivery Committee, advising the Committee that he had a lease on the land and wanted to continue this arrangement. Our guidance for members of local authorities about the law on conflicts of interest states that:

Having declared a pecuniary interest and left the formal confines of the meeting, you are entitled, as a private citizen, and consistent with the rights of any member of the public, to address comments to the meeting from that area of the room where the public is able to be present.63

Our Office discussed this matter with Cr Sieling. He noted that he was of the view that discussing the matter in the public forum was the only way he could prevent his rights as a private citizen from being overridden by the Council's actions. He knew that the Council had been provided with incorrect or incomplete information and believed that speaking publicly was his only option to correct the situation.

In our view, Cr Sieling handled his interest in the land in a reasonable manner.

Auckland Regional Council: Management of the LA Galaxy event at Mount Smart Stadium

In December 2008, the Auckland Regional Council (the Council) hosted an exhibition football match between the Los Angeles-based LA Galaxy team (which included international football star David Beckham) and an Oceania "All Stars" team at Mount Smart Stadium.

The Council organised and promoted the event and took on all of the financial risk, rather than entering into a risk-sharing arrangement with the LA Galaxy team or a promoter. The event resulted in a loss to the Council of $1.88 million because far fewer people bought tickets to the match than the Council had expected.

In December 2008, after receiving a request from the chairman of the Council, the Auditor-General agreed to review the Council's handling of the event. The Auditor-General decided an inquiry was warranted because of the size of the loss, and because there was public interest in how that loss came about. We completed our inquiry and reported our findings publicly in January 2010.64

We concluded that, despite the efforts of the council officers involved, the loss occurred because the LA Galaxy/Oceania "All Stars" match was the wrong event, at the wrong time, for the wrong price.

Our inquiry focused on the governance of Mount Smart Stadium and its position in the Council's structure and operations, and on the Council's systems for monitoring and overseeing large events such as the LA Galaxy/Oceania football match.

Mount Smart is one of several reserves for which the Council is responsible. However, we found that the Mount Smart operation did not fit well with the Council's other functions and operations, and the Council had not, at the time, considered or agreed on suitable governance and business models for it. Although there was a general view within the Council that Mount Smart Stadium needed to operate commercially, the decision to promote the LA Galaxy event was made without a formal business strategy or a clear policy about the level of commercial risk that the Council was willing to assume.

The Council took on the role of promoter of an event for the first time. The Council understood the nature of the business risk – that all profits or losses would accrue to the Council – but underestimated or even discounted the possibility of a loss.

We spoke to managers of other stadiums and similar facilities, mostly in public ownership. We noted different business models, but common to all was a clear appreciation of the risk involved in events promotion, and a preference to avoid that risk as much as possible.

Our report noted that there is a tension inherent in operating commercially in the public sector. Public officials must ensure that publicly owned assets are used effectively and efficiently for the benefit of the community (which might include earning income from those assets) and without waste or extravagance. The obligation to use the facility efficiently means that the entity cannot decline to carry out commercial activities. Yet business opportunities rarely come without risk. The public sector commercial manager needs to balance the need to exploit business opportunities and take on business risk with the obligations of being a steward of public assets.

We commented that the problem is exacerbated by having several competing facilities in Auckland, mostly also in public ownership. We also noted the proposed establishment of a new council-controlled organisation to operate major facilities and events in Auckland as part of the Auckland local government reforms.

The Council carried out its own review of the LA Galaxy/Oceania "All Stars" event. We were satisfied that the Council had correctly identified the problems with its governance and management of Mount Smart Stadium, and that it was taking appropriate steps to address those problems.

Auckland City Council: Management of footpaths contracts

In May 2009, after receiving a request from the Auckland City Council (the Council), the Auditor-General agreed to carry out an inquiry into the Council's management of its footpaths contracts. Our inquiry was completed, and the findings publicly reported, in February 2010.65

The Auditor-General was aware of, and concerned about, persistent allegations that the Council had mismanaged its footpaths contracts. During the eight-year period that our inquiry covered, the Council's expenditure on footpaths work amounted to more than $190 million. Therefore, the Council's footpaths contracts were financially significant, and the allegations raised questions about the integrity of the Council's processes for managing them and about potential over-payments. The allegations also raised questions about the behaviour and conduct of the Council's staff involved in managing its footpaths contracts.

Our inquiry considered several specific allegations. It also considered the wider strategic and organisational context for the Council's approach to footpaths over an eight-year period and the relevant administrative procedures that were applied. Our inquiry also considered the adequacy of various internal reviews and investigations of footpaths work carried out for, or by, the Council.

Overall, we found that the Council's processes and procedures for managing its footpaths contracts – while still evolving – were reasonable and had been applied adequately. We found no fundamental flaws or gaps in the Council's contract management processes, no apparent evidence of corruption at any level, and no waste. However, in keeping with most large and complex asset management systems, we did find some areas where the Council could improve its administrative processes. Accordingly, we made four recommendations and a number of relatively minor comments and suggestions.

The concerns that were raised publicly had some basis in fact. Our inquiry showed that the concerns were not as serious as they originally appeared, and were dealt with appropriately. For example, the instance of an individual accepting a gift did not compromise the integrity of the 2009 footpaths contract procurement process, and was appropriately dealt with as a personnel issue. We were satisfied that the Council had the necessary controls and procedures to mitigate the potential for this type of situation to happen, and to mitigate any effect if it did happen again.

Our inquiry confirmed that the Council had a reasonable basis for accepting the footpaths measurements that underpinned the payments it made under the footpaths contracts. It had been alleged that measurements were inadequate in some cases, resulting in over-payments by the Council.

Our inquiry also found that the Council's own internal review and investigation of various matters arising under its footpaths contracts had been adequate and reasonable.

60: Annual Report 2007/08, September 2008 and Annual Report 2008/09, September 2009.

61: Local government: Results of the 2007/08 audits, June 2009, Part 5.

62: How the Thames-Coromandel District Council managed leasing arrangements for Council land in Whitianga, February 2010.

63: Guidance for members of local authorities about the law on conflicts of interest, June 2007, page 34.

64: Auckland Regional Council: Management of the LA Galaxy event at Mount Smart Stadium, January 2010.

65: Auckland City Council: Management of footpaths contracts, February 2010.

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