The Auditor-General's work and observations during 2011

Local government: Results of the 2010/11 audits.

This attachment contains short articles on our performance audits and other reports of interest to the local government sector that were published during 2011, namely:

The full reports are available on our website at www.oag.govt.nz.

We end this section with a brief update on local government inquiries during 2011, and our proposed work in 2012 on governance matters involving local authorities and CCOs and on biodiversity.

Performance audits in 2011

Planning to meet the forecast demand for drinking water in Auckland (progress report August 2011)

After the amalgamation of the former Auckland local authorities into the new Auckland Council, Watercare Services Limited (Watercare) became responsible for providing water and wastewater services to people throughout the Auckland region. Watercare became the owner of all the former Auckland local authorities' assets and liabilities for supplying water and removing wastewater.

We have begun a performance audit to determine how effectively Watercare is managing Auckland water services. The audit covers how well Watercare:

serves its customers;
plans to meet demand for water;
manages its assets; and
funds and prices water supply and wastewater services.

The audit also considers whether Auckland Council's governance arrangements for Watercare are efficient and fit for purpose.

In August 2011, because of changes happening in each of these areas, we reported our initial observations and suggestions for Watercare and Auckland Council to consider while work proceeds. We intend to review progress and report further in 2012.

Our interim report is in two parts – a letter to the Auckland Council and Watercare about governance matters, and a report on the other matters entitled Planning to meet the forecast demand for drinking water in Auckland.

Preliminary views

Below, we summarise our preliminary views on the transition to the new regime, and suggest matters for Watercare to consider when preparing its LTPs for managing assets and arranging funding.

Overall, Watercare has responded well to its new customer service role, improving customer services. Watercare seems to address problems promptly and make improvements when it finds out about problems with performance.

Watercare is well placed to create a more detailed strategic plan for water demand management in Auckland, building on work it did in 2008.⁴³

Watercare recognises that asset management planning needs a long-term focus that brings together engineering, financial, economic, environmental, risk, and growth information. This helps it make the best decisions on matters such as replacing assets. Watercare is working on a longer-term asset management plan. Its experience leaves it well placed to do this. We will review this plan when it is completed.

Funding and pricing arrangements

Watercare is required to manage its operations efficiently to keep the cost of water supply and wastewater services to the minimum needed to effectively maintain the long-term integrity of its assets. Important decisions about Watercare's funding and pricing were made before Auckland's councils merged. These decisions included the new water price for the Auckland metropolitan area⁴⁴ and the regime for the infrastructure growth charge. Watercare is working on funding and pricing options for the longer term. Our report includes comments and suggestions. We hope to review Watercare's progress soon.

Reviewing arrangements for governance

The second part of our report is a letter to the chief executives of Watercare and Auckland Council setting out what we consider to be the two entities' emerging arrangements for governance, and what we expect from an effective governance framework.

In the letter, we state that the formal structure that Auckland Council has set up for governing and accounting for Watercare should meet our expectations. We identified two potential risks:

a threat to Watercare's independence, particularly if ratepayers are widely dissatisfied about Watercare's performance on any matter and that leads to increased political concern; and
creating a "compliance burden" by imposing informal requirements should Auckland Council's engagement with Watercare on its day-to-day business become mixed with the Council's governance of Watercare as a wholly owned subsidiary.

We believe that the governance arrangements are robust enough to avoid the first risk. With regard to the second risk, we consider it important that Auckland Council keep the "business partner" and governance roles separate to minimise the potential for additional reporting requirements that go beyond what councillors need to know to govern.

Government planning and support for housing on Māori land. Ngā whakatakotoranga kaupapa me te tautoko a te Kāwanatanga ki te hanga whare i runga i te whenua Māori (September 2011)

Many long-documented problems confront people who wish to build housing on Māori land, including lack of finance, planning restrictions, lack of infrastructure, and legislative constraints.

Our performance audit reviewed how effective and efficient the Government's support for, and regulation of, housing developments on Māori land was, with a view to getting a cross-sector perspective on how to be more effective. We carried out the audit in four regions:

Te Tai Tokerau (Northland);
Tāmaki Makaurau (Auckland);
Tauranga Moana – Mataatua (Bay of Plenty); and
Ōtautahi and Waimakariri (Canterbury).

In September 2011, we reported our findings to Parliament.

The audit process

We looked at the work of many public entities, including:

the Housing New Zealand Corporation;
Te Puni Kōkiri;
the Department of Building and Housing;
the Māori Land Court; and
local authorities.

We assessed how the entities effectively inform and advise Māori, and identified the challenges facing Māori in securing approvals and funding. We met many other interested parties, including the Māori Trustee.

As part of our audit, we reviewed the initiatives set up to support Māori housing:

Kāinga Whenua loans;
the Māori Demonstration Partnership; and
Special Housing Action Zones.

At the time of the audit, the Housing New Zealand Corporation administered Kāinga Whenua loans and the Māori Demonstration Partnership fund. The financial products available for building houses on Māori land are extensions of earlier programmes designed for different population groups and needs. For example, the Kāinga Whenua loans are an extension of the Welcome Home loan scheme, and the Māori Demonstration Partnership Fund is an extension of the Housing Innovation Fund.

Our findings

Owners of Māori land want to use their land to build high-quality, healthy houses and strengthen their communities. Most Māori who wish to build on Māori land do not fulfil those aspirations. Government help has produced mixed results, with support for Māori housing involving multiple agencies. Building a house on Māori land is challenging. Central and local government do not co-ordinate their work, and initiatives are ineffectively targeted and disconnected.

The quality and consistency of advice that agency staff provide varies. Many staff do not know and understand enough to be able to advise and guide adequately.

Banks are reluctant to accept Māori land as security for a loan, and state lending programmes are not tailored to the specific financial circumstances of Māori households and organisations. For example, most eligible applicants cannot afford Kāinga Whenua loans and, at the time we published our report, only one loan had been made.

We found that, although local authorities' planning for Māori land has been restrictive, they are increasingly acting to allow housing on Māori land that more than one person owns. Some local authorities have specific consulting arrangements and planning regulations that are meant to make it easier for Māori to build housing on their land. Some local authorities are taking on a leading role in bringing different agencies together to support in a more co-ordinated way those Māori who want to build houses on their land.

Our recommendations

Our report included six recommendations to the Department of Building and Housing and other agencies involved in supporting housing on Māori land. These include:

co-ordinating better the work of agencies, with one organisation being a single point of contact for Māori;
ensuring that staff are appropriately expert and knowledgeable to provide high-quality information and advice;
making district plans more flexible to allow housing to be built on Māori land;
getting local authorities to better support owners of suitable land who wish to build housing;
targeting financial help better; and
helping Māori organisations that wish to build houses.

Regional hui

After publishing our report, we organised hui in each of the four case-study regions included in our audit. The purpose of these hui was to present the findings of our report to agencies, whānau, hap , and iwi interested in housing on Māori land. The hui was a forum for people to discuss the report's implications and to consider how our recommendations could be acted on locally.

Response from the sector

Local authorities in the case-study regions have responded positively. The Department of Building and Housing is considering how to build our recommendations into the social housing reform programme. The Productivity Commission will include a section on housing on Māori land in its upcoming report on affordable housing.

Managing freshwater quality: Challenges for regional councils (September 2011)

In September 2011, we published the findings of our performance audit on how four regional councils manage freshwater quality.

This was a significant audit. The report has attracted much interest and the four regional councils – Waikato Regional Council, Taranaki Regional Council, Horizons Regional Council (which covers Manawatu-Whanganui), and Environment Southland – have been considering its recommendations.

When planning our audit, we were aware that there was a lot of work looking at freshwater quality, including the work of the Land and Water Forum. However, we thought that it would be useful to provide an independent view of how effectively the four regional councils manage freshwater quality.

Together, the four regions cover nearly one-third of the country's land area. The regions have different sizes, topography, landscapes, soils, and river gradients. We chose the four councils based on water quality trends and pressures in their regions and looked at all aspects of how they were managing freshwater quality.

To work out whether the four regional councils were maintaining and enhancing freshwater, we looked at whether they:

understood well the state of, and trends in, freshwater quality in their regions;
were responding appropriately and effectively to any deterioration in water quality; and
were improving their plans and policies in good time.

We considered whether what the regional councils were doing was improving freshwater quality.

The National Institute of Water and Atmospheric Research Limited (NIWA) advised us on how suitable the regional councils' scientific monitoring networks are and on the state of, and trends in, freshwater quality.

During the audit, we gave each regional council individual reports. In September 2011, we presented an overview report to Parliament. In that overview report, we included a self-assessment tool for other regional councils to test their performance against our audit criteria. Our overview report focused on what has proved most difficult for regional councils to manage – non-point-source discharges from:

surface runoff of nutrients, chemical pollutants, and bacteria from rural and urban land areas to waterways;
farm animals in waterways; and
contaminants from livestock farming and septic tanks leaching through soil into groundwater.

Our overall findings

We found that all four regional councils have areas of declining freshwater quality, and their responses to these areas of decline varied. All four understood well the state of freshwater in their regions. However, the two regional councils whose regions are seeing the most intensification of land use (Southland and Waikato) are not managing non-point-source discharges adequately. The regional councils are not doing enough to reduce known risks to freshwater quality. Both regional councils are trying to tackle the challenges of non-point-source discharges and their cumulative effects, but there is much work to be done.

The other two councils (Taranaki and Horizons) are doing better but also have areas where freshwater quality is at risk. Taranaki and Horizons regional councils are well placed to reduce risks to freshwater quality.

Regional councils cannot manage freshwater quality alone. Strong collaboration – from central government policy to regional councils and dairy sector representatives working together strategically and on the farm – encourages us.

All four regional councils are implementing programmes or policies to respond to areas of poor or declining freshwater quality. Although it can take many years to make changes to regional plans, some regional councils are introducing innovative, scientifically based policies to manage freshwater quality.

With regard to enforcing compliance, we were concerned that councillors in all the regional councils were involved either in deciding whether the regional council should prosecute or in investigating a case after a decision to prosecute had been made. There are strong and long-standing conventions against elected officials becoming involved in decisions to prosecute. We recommend that all decisions about investigating such matters and enforcing compliance be delegated to regional council staff.

The report's effect and results

In September 2011, we published the overview report with recommendations to all regional councils and the Ministry for the Environment. The four regional councils have responded to some of the recommendations in their individual reports that we gave them during the audit.

The report attracted considerable attention. Responses to the report have been generally favourable, although one notable exception (Federated Farmers) asked why we would look at this topic. The audit was challenging but worthwhile. Our use of NIWA and consulting extensively on our draft report helped us to understand the complexities of freshwater science. The part of the report about councillors being involved in prosecution decisions attracted much attention and comment. Regional councils have been reconsidering their approaches to this, and some are using the self-assessment tool.

We will follow up the recommendations to other regional councils and the Ministry for the Environment in about two years. It will be a good opportunity to consider the effect of the new National Policy Statement on how regional councils manage freshwater quality.

The Emissions Trading Scheme – summary information for public entities and auditors (August 2011)

In August 2011, we published guidance information on the ETS. Our guidance, The Emissions Trading Scheme – summary information for public entities and auditors, provides background information on the scheme and gives public entities and auditors our views about how to account for and audit ETS matters. We hope this document will inform entities and their auditors about relevant ETS obligations and opportunities, particularly as there are critical deadlines that public entities might need to factor into their financial decision-making and planning in 2012.

The ETS is relevant to local authorities. As well as price increases for fuel and energy, some local authorities and their CCOs will take part in the scheme because of forestry interests or operating landfills.⁴⁵

Those who set accounting standards have given no guidance on accounting for ETS. We considered that we had to inform public entities about the accounting policy options for ETS transactions. Our report provides public entities with information about how the ETS works and how it affects accounting and auditing requirements.

Waste and the Emissions Trading Scheme

In 2013, when the waste sector enters the ETS, many local authorities will become participants through their operation of waste disposal facilities. (Under the Climate Change Response Act 2002, the operator of a waste disposal facility must take part in the ETS. We expect that most, if not all, solid waste disposal facilities that local authorities operate will meet this definition.)

In September 2010, the Climate Change (Waste) Regulations 2010 were finalised and these provide much of the detail about how the ETS will apply to waste disposal. The deadline for operators of waste disposal facilities to register as ETS participants was 31 January 2012.

The main implication for waste disposal operators will be the cost of emissions. The Emissions Trading Scheme Review Panel expects the ETS to cost landfill operators about $27.50 per tonne of waste, based on a carbon price of $25 per tonne and using the default emissions factor.⁴⁶

Local authorities will need to accurately forecast the ETS cost implications to work out by how much they will have to increase user charges. They will need to consider the appropriate mechanism to increase the charges. These financial implications should be included in the 2012-22 LTPs.

The ETS was reviewed in 2011 by an expert panel, which made recommendations to the Government in September 2011. The panel recommended exempting certain types of landfills from the ETS. The Government is considering its response to the panel's recommendations.

Implications for local authorities

The ETS is likely to affect financial statements in proportion to how significant the scheme is for each local authority. The effects on participants will include accounting for, and valuing, emissions units and, for participants and non-participants, valuing assets more generally.

When we audit LTPs, we will need to consider:

a local authority's forecasts of the effect of the ETS on the waste sector, including the forecast costs of emissions and changes to user charges;
for local authorities with forestry holdings, the local authority's forecasts of the effect of the ETS on the forest sector;
a local authority's forecasts of the effect of the ETS on its input costs over the 10-year period of the LTP; and
a local authority's consideration of how the ETS will affect its community over the 10-year period of the LTP.

In addition, local authorities will need to consider the cost implications of the ETS for their communities and whether this will affect the demand for, or affordability of, their services. The Emissions Trading Scheme Review Panel estimates that the ETS has increased national average household spending on fuel and electricity by $133 a year, with further increases to come after the end of the transitional phase.⁴⁷

We are considering doing more work on the ETS in 2012, by looking at some case studies of public entities in the energy, waste, and forestry sectors that are participating in the ETS.

Local government: Improving the usefulness of annual reports (September 2011)

This year, we commissioned an analysis of how six local authorities publicly reported performance information during the last seven years. This analysis showed that the quality of reported performance information for the six local authorities improved, particularly for the 2009/10 annual report compared with earlier years. However, local authorities can make the content more meaningful for their communities.

The analysis informed our September 2011 discussion paper, Local Government: Improving the usefulness of annual reports. This paper sets out the legal requirements that local authorities must meet when they report their performance, provides examples of improved reporting, and includes recommendations for improvements.

Local authorities are required to report on how well they delivered services to their communities.

A local authority's annual report is a communication tool for providing wider information on what it has done and the services it has provided, and for comparing actual service delivery with forecast service delivery. The information in annual reports and summary annual reports should allow ratepayers, the community, and the wider public to assess how local authorities have managed community assets, and how efficient, effective, and cost-effective they have been.

Useful reporting on performance is always desirable, but it is even more critical in the current economic environment, with the local government sector under significant financial constraints. In addition, because of how diverse the services that local authorities provide are, it is important that they are transparent about costs, standards, effects, and outcomes. Comparing and communicating financial and non-financial performance over time is essential to show that performance has been efficient, effective, and cost-effective.

Our discussion paper recommends five steps to improve reporting of performance:

identify services and results that would benefit from analysing longer-term trends and report that analysis, supported with commentary, in annual reports;
analyse and evaluate service performance and cost, and effect and outcome results to assess and report on cost-effectiveness;
include financial performance summaries for the financial year and longer periods, to reveal performance trends;
use more graphs, diagrams, and other visual material, supported by narrative and commentary; and
report against major financial performance indicators to benchmark and assess performance over time and against the financial strategy.

Better reporting of performance should help local authorities improve their decisions and how they manage. We hope that better reporting will help better inform people about what to expect from their local authorities.

The discussion paper is intended to help local authorities focus on what they are trying to achieve when they measure and report performance. Ultimately, what matters is being able to improve performance and what it achieves for the public.

Managing the implications of public private partnerships (November 2011)

As the Government and public entities look for more creative and innovative delivery of public services, public private partnerships (PPPs) are seen as offering the potential to help with these challenges. Recently, the Government has indicated that it wants to use PPPs as an option to help build infrastructure. The work of Treasury's National Infrastructure Unit to marshal expertise and necessary resources provides good support for these new central government PPP initiatives. Appropriately, the work, supported by two pilot PPP projects, has focused on working out specific policies, governance, and structures to help achieve the Government's strategic objectives and support the growth of the PPP market.

Our November 2011 discussion document, Managing the implications of public private partnerships, is intended to help readers understand the opportunities and challenges that a programme of PPPs brings to the public sector. We hope, too, that it will encourage discussion and informed debate about that programme.

PPPs bring together the public and private sectors in a mutually beneficial and dependent way. However, if more PPPs are entered into, careful attention is needed to encourage innovation and to fully understand and manage the challenges and opportunities that these partnerships present. For the public sector, this means broadening oversight and control of the PPP programme to effectively represent the public's interest.

The Local Government Act 2002 provides for local authorities to work with other institutions, including central government, other local authorities, the private sector, and communities. Until 2010, the Act required a PPP policy to be prepared and adopted as part of the long-term council community plan.⁴⁸ The Land Transport Management Act 2003 allowed public road controlling authorities to enter PPP-style concession agreements with third parties to build or operate roads.

Large infrastructure PPPs have been entered into during the last two decades. Most involve local authorities or transport projects. Apart from the transport projects, there was little central government involvement and no centralised policy or guidance.

Although the use of PPPs is maturing, a sound platform for an ongoing programme of PPPs still needs to be built. There is:

limited understanding among wider stakeholder and community groups;
fragmented expertise and knowledge within the public sector;
limited diversity in the capital markets and funding base; and
only partial guidance and support available for local government.

Public entities are ultimately accountable for delivering public services. They cannot transfer this responsibility to the private sector. A public entity must have robust internal arrangements for deciding to choose to partner in a PPP. Broader oversight and control is needed to effectively represent and, ultimately, satisfy the public's interest. Also, it is essential that public entities involved in PPPs properly establish ongoing relationships and processes with stakeholder and community groups and give adequate opportunity for public scrutiny of performance under the contract.

The discussion document is intended to inform public sector leaders and decision-makers considering partnering with the private sector about the general features of public private partnerships and the factors that are seen as important in sustaining an appropriate "enabling" environment for all PPPs.

Public Sector Fraud Awareness Survey – Findings (November 2011)

The 2009 PricewaterhouseCoopers Global Economic Crime Survey showed that fraud is a fact of business life in New Zealand, with 42% of organisations suffering an economic crime in the previous 12 months, with an average loss of almost $492,000.⁴⁹

To better understand how aware the public sector is of fraud risk factors, prevention, detection, and response mechanisms, we commissioned PricewaterhouseCoopers (PwC) to conduct an online survey of almost 1500 public sector employees. The survey, which was carried out between February and June 2011, focused on four main areas – fraud prevention, fraud detection, incidents of fraud, and fraud response. Schools accounted for about one-third (32.7%) of responses, local authorities about one-ninth (11.7%), and government departments or subsidiaries, one-tenth (10.2%).

Overall, our survey confirms a strong commitment within the public sector to protecting public resources. The incidence of fraud appears to be relatively low, with less than one-quarter of survey respondents aware of any fraud occurring in their organisation in the last two years. This finding supports New Zealand's consistently high rating on the Transparency International Corruption Perceptions Index.⁵⁰

The results of our survey show that the incidence of fraud is lowest where:

a public entity's culture is receptive to talking about and dealing openly with fraud;
the entity communicates about fraud policies and risk; and
incidents of fraud are reported.

The survey showed that effective controls play a major role in minimising fraud risk, with internal controls detecting 45% of all known incidents of fraud.

Despite the Government's drive for more efficient public sector operations (and potential job losses), 94.4% of respondents were confident of keeping their job, despite fewer resources.

Sharing our knowledge about fraud risks can protect the public purse

The survey results show that there are some simple steps that you can take to protect your organisation and the public sector from fraud. Three steps that will go a long way to minimising the incidence of fraud in your organisation are:

regularly raising awareness of policies and procedures with employees;
encouraging staff to report suspicious activity; and
reporting suspected fraud to enforcement agencies.

Using the information we receive as part of our audit process, we will regularly update and, where appropriate, share high-level information we receive about fraud. You can support this by promptly informing your auditor if you suspect that fraud has occurred. By sharing information quickly, we can identify and minimise our risks, limiting possible losses, while working in ways that conform to our values and sense of community.

We are putting together results by sector to help you get more insight into the fraud risks within local government. We will send these results to you soon.

Local government sector inquiries

Alongside the Auditor-General's primary function of carrying out annual audits for about 4000 public entities in the public sector, we are able to inquire in detail into matters of concern that people raise with us. As is usual, most of the inquiry requests we received this year concerned the local government sector, including requests made under the Local Authorities (Members' Interest) Act 1968. We received 215 inquiry requests about the local government sector in 2010/11, and have received a further 94 requests since 1 July 2011.

This year, we did not carry out any major inquiries into the local government sector, but have responded to many routine requests.

The global situation has brought financial matters to the fore of many people's thinking. We have noticed a growing focus in inquiry requests on local authorities' financial management, especially around budgets, plans, and infrastructure projects. These queries tie in closely with our general audit work and our work on LTPs in particular. We expect to see strong interest in the 2012-22 LTPs.

As noted in the Auditor-General's covering letter, the Canterbury earthquakes have affected the local government sector. Canterbury's local authorities must balance the spending, the speed of response required, and the rebuilding work's importance to Canterbury with the need for appropriately consulting the public and making decisions transparently.

We have streamlined our inquiries systems and focus. The information we publish makes it clear that our focus is on the way public entities use their financial, governance, managing, and organisational resources, not on individual complaints or concerns about how a public entity has handled a particular matter. This helps us respond to requests more quickly, although we realise that our refusal to look into individual complaints disappoints some who write to us.

Work ahead in 2012

Our focus in the first part of 2012 will be the audit of the 2012-22 LTPs. We are working on other projects of interest to the sector.

The governance of council-controlled organisations

We have an ongoing interest in how councils and CCOs arrange their governance and accountability. In 2011, the governance of councils and CCOs has been a high-profile concern, of considerable interest to ratepayers. Governance matters often raise questions of interest for the local government sector at large.

We are examining how local authorities and CCOs arrange governance and accountability. Our aim is to report to Parliament and the sector on how well CCOs' framework for governance and accountability is working, in particular on:

strategic direction;
appointing directors;
monitoring performance;
engagement and communication; and
formal and informal accountability mechanisms.

We will look at case studies and then report on common themes that arise. As part of the project, we intend to consider the governance that Auckland Council and its CCOs are arranging.

Biodiversity

In early 2012, we will begin a performance audit of biodiversity management. The focus of the audit will be on how the Department of Conservation identifies biodiversity deterioration risks and whether it targets its resources effectively to achieve the Government's desired long-term outcomes. The audit will consider how DOC is working with other entities (including local authorities) to keep and restore biodiversity. As with the CCO project, we intend to use case studies to see which factors help bring success.

43: The Three waters final 2008 strategic plan provides demand forecasts for water for the Auckland region. The individual network operators that contributed to the Three waters plan have been merged into Watercare.

44: $1.30 per cubic metre, effective on 1 July 2011.

45: Several local authorities with post-1989 forests have registered as participants. They include Wellington City Council, Hawkes Bay Regional Council, Mackenzie District Council, Southland District Council, Ashburton District Council, Marlborough District Council, and Kaikoura District Council, and subsidiaries of Dunedin City Council, Invercargill City Council, and Gisborne District Council.

46: Emissions Trading Scheme Review Panel, Emissions Trading Scheme Review 2011: Issues statement and call for written submissions, March 2011, Ministry for the Environment, Wellington.

47: Emissions Trading Scheme Review Panel, Emissions Trading Scheme Review 2011: Issues statement and call for written submissions, March 2011, page 17.

48: The requirement to have a policy on private partnerships, contained in section 107 of the Local Government Act 2002, was repealed by an amendment to the Act.

49: The results of the 2009 PwC Global Economic Crime Survey were based on responses from more than 3000 companies in 54 countries. In New Zealand, 85 organisations from the private and public sectors took part in the survey and 21% of the New Zealand respondents were public sector organisations. Full results can be found on the PwC website, www.pwc.com.

50: In 2010, New Zealand was rated first equal with Denmark and Singapore. In 2011, New Zealand was rated first.

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