Part 10: Finding a disposal site for the effluent

10.1
In August 2005, the Council decided to sign the contract documents and commit itself to the arrangement with EarthTech and ABN Amro. However, it did so with a major issue still unresolved. There was no certainty about how or where the effluent would be disposed of. From the initial community consultation in 1999, the Council had a clear position that disposal should be to land, not water. However, none of the sites that had been considered so far were acceptable.

10.2
In this Part, we explain what was done to secure a disposal site and the consequences of those decisions. We cover:

• who was responsible for finding a disposal site;
• EarthTech's work on possible sites;
• the Council's decision to buy the farm at Lincoln Downs;
• reports on the suitability of the farm for wastewater disposal;
• increases to the purchase price;
• how KDC paid for the farm; and
• our comments on this process.

10.3
In summary, we conclude that:

• When the Council signed the contract documents in 2005, the disposal site had not been identified. This created a significant risk for the project and left KDC in a weak bargaining position when purchasing a site.
• The costs for disposal were estimated in the contract signed in 2005 as being $361,000, but ended up costing an estimated $14 million.
• The Council should have resolved the disposal site issue before it signed the contractual documents in 2005.

Who was responsible for finding a disposal site?

10.4
In the early project documents, the risk of finding a disposal site was allocated to the promoter. The 2005 Project Deed stated that the treated effluent was to be disposed of to Mangawhai Park, and there was provision for this in the guaranteed maximum price. However, Schedule A also noted that "this option will not proceed and Council will work with the Promoter to identify a suitable alternative site".

10.5
As we discuss below, the documents in KDC's files indicate that EarthTech was actively looking for a disposal site until KDC made the draft offer to purchase the Lincoln Downs farm.

10.6
We discussed this issue with KDC's former Chief Executive. He told us that none of the three original tenderers had identified suitable disposal sites, and so the Council agreed to find a suitable disposal site. This understanding continued with EarthTech. We could find no record of this decision in the Council's minutes. The shift in responsibility for a major project risk does not appear to have been taken into account in the contract documents. There were risks and potentially increased costs in taking back the risk of identifying a suitable disposal site.

EarthTech's work on disposal site options

10.7
In late 2005, EarthTech commissioned some work to identify options for disposing of treated effluent from the wastewater scheme. The commissioned report assessed five locations for disposal and identified the Mangawhai Golf Course and Mangawhai Park as the two preferred options. Preliminary technical studies on the two sites identified potential adverse environmental effects. The Golf Course looked more promising, but more work was needed to decide if it was a feasible option.

10.8
By March 2006, EarthTech had prepared its own report assessing treatment and disposal options for the wastewater scheme. EarthTech identified four potential disposal sites: farmland, the Mangawhai Golf Course, Mangawhai Park, and the Mangawhai sand spit. It evaluated each site against a variety of criteria and then assessed the treatment levels required for the different sites. The report concluded that "The only sustainable disposal options that are likely to be readily consentable are those involving irrigation at a farm property."

10.9
EarthTech recommended treating the effluent at the wastewater treatment plant at Mangawhai Park, then pumping it to a farm in Brown's Road for irrigation. At that stage, EarthTech had not identified a suitable farm property, although it had considered two properties, including one at Lincoln Downs that was then for sale.

Kaipara District Council offers to purchase the Lincoln Downs farm

10.10
In early March 2006, EarthTech provided a draft of the assessment report to EPS. EPS gave the draft to KDC's Chief Executive on 10 March. EPS noted that, if KDC wanted to purchase the Lincoln Downs farm, it needed to move swiftly. Apparently, an agreement to sell the property to developers was close to being finalised.

10.11
On 24 March 2006, there was a meeting between staff from EarthTech, EarthTech's consultants, KDC's Chief Executive, and staff from Beca about disposal options. The minutes record that EarthTech would investigate and report on the "environmental and viability issues re council-owned farm option" and that there were other parties interested in the farm.

10.12
KDC's Chief Executive emailed an EarthTech employee on 29 March 2006. The email says that the solicitor acting for the vendors had advised him that KDC had to get its offer in by the end of 30 March 2006. However, the vendors were prepared to accept an offer that was made subject to due diligence. The Chief Executive's email notes that:

Speaking to my Councillors today they are very keen to proceed with the purchase of this farm for a land based disposal. They see long term strategic advantage.

10.13
There is an email in KDC's files dated 30 March 2006 from EPS to Bell Gully, providing Bell Gully with information to prepare an offer of $4.7 million to purchase the farm. The email states, "As discussed, [the Chief Executive] understands that for [EarthTech] to purchase the … property would be difficult due to overseas purchase issues and is therefore happy for Council to make a direct offer on the following basis…" We assume that the reference to "overseas purchase issues" is a reference to the controls on overseas companies purchasing farm land in the Overseas Investment Act 2005.

10.14
In KDC's files, we found a copy of the draft agreement for sale and purchase of the farm prepared by Bell Gully on 31 March 2006. There were no copies of the correspondence between Bell Gully and the solicitor acting for the vendors in KDC's files, so we could not establish whether this agreement was provided to the vendors. The draft agreement was made subject to the "approval of the relevant finance committee" of the Council after the due diligence period. The approval or refusal by the Committee was a matter within the "Committee's absolute and unfettered discretion".

10.15
The draft offer included a purchase price of $4.75 million. It is unclear how KDC decided on this amount, because it had not had the property valued at that time. The LIM report obtained by KDC in October 2006 recorded that the capital value for the property was $3 million, with improvements of $800,000. It was also unclear how KDC would fund the purchase of the farm.

10.16
The Chief Executive emailed a copy of the draft agreement to the Mayor and Councillor Tiller on 4 April 2006. He noted that "[The vendors] seem to have accepted the offer subject to due diligence." A later email from Bell Gully in July 2006 notes that "The contract was only ever agreed ‘in principle' but they would not sign until the roading issue was resolved." We discuss the roading issue further in paragraphs 10.28-10.29 and 10.34.

10.17
KDC's former Chief Executive told us that there was a workshop with the Council where he received instructions to purchase the farm. ABN Amro would provide the financing to keep the total financing of the project inside the contract. There were very few records of workshop presentations in KDC's files generally, and we were unable to find any copies of workshop presentations about the purchase of the farm. As a result, we could not confirm these matters from KDC's files.

The Council provisionally approves the purchase

10.18
At the Council meeting on 24 May 2006, the Chief Executive presented a paper to the Council about the disposal site issue. The paper referred to work EarthTech had carried out on the disposal site options. The paper noted that the sand spit, Mangawhai Park, Mangawhai Golf Course, and another property (which was considered for irrigation only) had disadvantages. The Lincoln Downs property did not have these disadvantages.

10.19
The minutes of the meeting refer to EarthTech having provided a "confidential technical report" supporting the recommendation to purchase the farm. The report was not in KDC's files. We do not know what the report was or whether it was actually provided to the Council.

10.20
The Chief Executive's paper advised that a conditional agreement for sale and purchase had been signed and attached a copy of the draft agreement. The minutes record that the Council approved in principle the purchase of the Lincoln Downs property as the final disposal site, subject to a full report being provided to the Council to enable it to finally approve the purchase. The full report was to address:

• the technical acceptability of the site;
• the use of the rest of the property; and
• how the purchase would be funded.

10.21
The draft Statement of Proposal on the wastewater scheme, issued for community consultation in February 2006, noted that the exact location of the disposal site was still to be determined and that both KDC and EarthTech were "investigating possible reuse options to minimise the amount of discharge required". It explained that the process would be completed as part of the preparation for the application for resource consents.

10.22
On 24 May 2006, the Council knew that it had a conditional agreement to buy a particular property. It knew the proposed purchase price and that there would be additional capital expenditure to make the disposal site feasible. There is no reference to this updated information in the LTCCP that was adopted on 7 June 2006.

Reports on the suitability of the Lincoln Downs farm

10.23
In June 2006, EarthTech prepared a report on disposal options that included work that consultants had carried out for it. The report considered three disposal options – the Mangawhai Golf Course, the sand spit, and farmland – and concluded that disposal to:

• the Golf Course was neither practical nor sustainable;
• the sand spit would be difficult to obtain consent for, and the wastewater would be likely to discharge across the beach above low-tide levels; and
• the Lincoln Downs farm land was the "primary consentable option".

10.24
Although the farm was the best option, the report noted some problems:

• The specialist advice to EarthTech was that the irrigation capacity of the farm was limited. The maximum irrigable area on the farm was about 50 hectares, because the bush area on the farm was not suitable. However, the projected needs were:
• In 2015, 110ML of storage capacity and 60 hectares of pasture for irrigation; and
• In 2027, 153ML of storage capacity and 91 hectares of pasture for irrigation.
• A geotechnical report advised that the proposed dam site would need significant engineering work to make it suitable for storing the treated wastewater.

10.25
The report also noted that, if disposal was to farm land, the scheme would need to include increased disinfection at the treatment plant, a transfer pipeline, a storage dam, and an irrigation network. The estimated capital cost for this option, including the purchase of the farm, was $10 million.

10.26
KDC's former Chief Executive told us that the Council saw the report. Again, we were unable to confirm this from KDC's records.

10.27
As we set out in the next Part, in September 2006 the Council considered a paper from Beca and EPS on growth assumptions and sizing of the scheme. That paper noted that the reuse site was predicted to reach capacity in 2014 if the population growth was 3.5%. The paper set out that, when capacity was reached, additional storage volume and additional irrigation area could be constructed. The paper also noted that additional reuse agreements could be entered into with users.

The purchase price increases

10.28
In August 2006, the Council considered a paper from the Chief Executive setting out that the vendors were seeking to increase the purchase price for their land. The vendors had been subdividing another part of their land, and the subdivision consent issued by KDC required that the vendors upgrade a road that had not been constructed to the appropriate standards. The vendors' consultants estimated that the upgrade to the road was going to cost $332,721.90.

10.29
The Chief Executive's paper set out that the vendors maintained that the road upgrade "increased the value of the property the Council was buying by providing high quality access right around the property. Consequently they were now asking for this amount to be added to the purchase price." The Chief Executive stated that "The [vendors] in the past have said if they cannot get the money they require from the land they will withdraw from the sale, something they can do." The purchase price was now $5,113,396.90. This included the original purchase price, the additional $332,721.90 requested, and other fees of $30,675.

10.30
At its meeting on 23 August 2006, the Council agreed to the revised purchase price, subject to due diligence being completed.

How Kaipara District Council paid for the farm

10.31
The Chief Executive asked Beca to investigate whether the farm land KDC was purchasing could be subdivided, so that KDC could sell land that it did not require for irrigation or the dam site. Beca investigated this possibility and advised in September 2006 that the costs of developing the subdivision were likely to be more than the sections could be sold for.

10.32
EPS had been discussing the need to extend the financing facilities for the wastewater scheme with ABN Amro. In September 2006, the Chief Executive received a proposal from ABN Amro for revised financing, which included funds for purchasing the farm. ABN Amro required KDC to provide a copy of the valuation of the farm and a copy of the sale and purchase agreement. In an email to EPS, the Chief Executive noted that KDC did not have a sale and purchase agreement or a valuation at that time.

10.33
KDC had the farm valued later in October 2006. It estimated that the capital value of the land and buildings was $4.1 million, more than $1 million lower than the amount the Council had agreed to pay.

10.34
The Council agreed to execute the agreement for sale and purchase at its meeting on 22 November 2006. There was no record in KDC's files of any papers on this issue being provided to the Council at the meeting. KDC's former Chief Executive told us that "The Council was fully informed on these matters. A purchase would not have been authorised if this information was not available and the Council satisfied." KDC signed the final agreement for sale and purchase in December 2006. The final purchase price paid was less a sum of $302,721 kept by KDC for roading works that the vendors had not completed and a bond of $151,630 for those works.

10.35
The deposit of $300,000 (plus $10,000 for ABN Amro's legal fees) was payable in January 2007. KDC had arranged financing from ABN Amro to purchase the farm. The Term Loan Facility Agreement agreed in October 2005 was amended so that KDC could draw down the deposit amount in January 2007. The Term Loan Facility Agreement was amended again in April 2007 to enable KDC to draw down the balance of the purchase price ($4,934,406), the vendor's other fees ($34,509), and ABN Amro's legal fees of $5,625. Interest was payable on the amounts drawn down, and this interest was capitalised into the cost of the scheme.

10.36
The Amendment to the Term Loan Facility Agreement included an acknowledgement by the parties that the amendment was an interim solution to KDC's financing needs and that the parties intended to enter into a future loan arrangement.

10.37
We did not find any papers in KDC's files indicating whether KDC staff or the project managers assessed whether ABN Amro's proposal for providing finance to purchase the farm was competitive with finance available in the local government market. There was also no evidence that the Council discussed the financing arrangements for the farm. As we discuss in paragraphs 12.34-12.43, the arrangements for financing the farm purchase were changed in December 2007.

10.38
Because of the farm purchase, the wastewater scheme required additional works. These included constructing an 11km pipeline from the treatment plant to the farm, adding a UV disinfection process to the wastewater treatment plant, constructing a dam to store the treated effluent, and installing an irrigation scheme on the farm. Although it is not clear from KDC's records, we estimate that these costs and the purchase of the farm (and financing costs for purchasing the farm) added another $14 million to the cost of the scheme.

10.39
We note that the Project Deed signed in September 2005 included $361,000 for disposal costs. The $14 million was additional cost for KDC, which needed to be funded.

Our comments on the purchase of the farm as a disposal site

10.40
The way the Council dealt with the question of a disposal site is a striking example of the poor overall planning for, and project management of, the wastewater project. Our understanding is that it is usual for the disposal site to be the starting point for developing a wastewater scheme. This is because the disposal system affects so much of the design of the rest of the scheme, including the location and specification of the treatment plant and cost. To leave this issue unresolved until after a contract for the rest of the project had been signed created significant risk for KDC. It also left KDC in a very poor bargaining position when purchasing a site because it needed a site urgently and had no other options. We have already commented that, in our view, it also undermined much of the benefit of a PPP contracting approach.

10.41
Beca told us that the disposal site proved to be problematic from the beginning of the project. The issue was constantly raised and was difficult to resolve before the scheme's design had substantially progressed. The Council rejected EarthTech's original proposal of irrigating the treated wastewater to Mangawhai Park, which was adjacent to the treatment plant. As a result, the Council was left with a remote land-based disposal site.

10.42
The 2005 Project Deed suggests that identifying a disposal site was a shared risk, but KDC ended up negotiating and purchasing the Lincoln Downs farm – in part, because of the legal restrictions on its Australian-based partner buying rural land. However, we confirmed that the contract price did not include any provision for actually purchasing land for a disposal site, so there was no double payment of this sum.

10.43
We consider that KDC's processes for making this decision were poor:

• The records are partial at best. For example, the written records do not show whether the Council was given all the information about the limited capacity of the site.
• Decisions seem to have been taken informally (for example, we do not know what formal authority the Chief Executive had to make the initial offer to purchase).
• KDC did not obtain a valuation for the farm until the bank required it to.
• We did not see evidence of appropriate work to consider financing and borrowing options, and the value for money of the proposed financing arrangements.

10.44
We estimate that the total additional cost arising from the purchase of the farm and associated work was $14 million. This was a substantial change to a project that was, at that stage, estimated to cost about $35 million. In our view, the Council should have had information about the full cost of the proposed disposal site before it decided to proceed with the contract. That information should have prompted the Council to stand back and reconsider its approach to the project.

10.45
In particular, the increase in capital cost should have caused the Council and community to reconsider their views on disposal to water or land. There was a strong community preference for disposal to land when that question was considered 10 years earlier, but it was now clear that that preference carried a substantial cost. Ideally, people should have been given an opportunity to comment. However, because the rest of the project was already developed and committed to, the Council did not consider that to be feasible. This highlights that the disposal site should have been one of the first issues determined, not one of the last.

10.46
We comment on the overall suitability of the farm as a disposal site in Part 19.

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