Part 11: Increasing the scope of the wastewater project
11.1
Because of the decision to purchase the farm and the additional infrastructure that was required, the estimated capital costs of the scheme increased. The Council needed to consider how it was going to fund these increased costs over the long term. The guaranteed maximum price in the 2005 Project Deed was $26.3 million. In October 2006, Beca estimated the costs of the additional infrastructure and the purchase of the farm to be $11.1 million (excluding financing costs associated with purchasing the farm).
11.2
In this Part, we look at the work that was done on possible changes to the scope of the project and the effect on funding. We discuss:
- the 2006 Statement of Proposal put to the community for comment;
- work to review the assumptions about population growth;
- the Council's decision in October 2006 on growth assumptions, scope, and charges; and
- our comments on the decision to change the assumptions and increase the scope of the project.
11.3
In summary, we conclude that:
- The Statement of Proposal put out for consultation in February 2006 estimated the capital costs at $35.6 million, but by October 2006 these had increased to $57.7 million.
- As the estimated capital costs increased, the Council sought to keep the scheme affordable by increasing the number of ratepayers paying for it.
- The data about growth assumptions supporting the increase in the number of ratepayers paying for the scheme was not robust.
- There was no evidence that the Council considered the risk that growth might be slower than its projections, and therefore it had no plans to manage that risk if it eventuated.
- It was not appropriate for the Council to put out a Statement of Proposal for consultation in February 2006 and then make significant changes to the scope of the works and cost of the project by October of that year.
- The Council's focus on the costs to the ratepayer meant that it failed to appreciate the significant increase in the capital costs of the project and the effect on its overall affordability for KDC and the community.
11.4
We have not commented on whether the decision not to consult with the community on the increase in the scope of the project complies with the Local Government Act 2002, because this matter is before the High Court.
The 2006 Statement of Proposal
11.5
On 22 February 2006, the Council considered and adopted the draft Mangawhai EcoCare Statement of Proposal, as well as the draft Development and Financial Contributions Policy, for release as part of its draft LTCCP 2006/16 process. The Statement of Proposal recorded that the estimated capital costs for the project were now $35.6 million, excluding GST but including capitalised interest and fees. The Statement of Proposal attributed the increased costs to general inflationary pressure and the change to EarthTech.
11.6
The Statement of Proposal set out how KDC proposed to fund the works. It noted that "In addition to the capital costs the cost of financing the loan must also be addressed as this was a significant component of the overall cost." The Statement of Proposal did not specify the annual operating costs. The Statement of Proposal included several options for financing the project. KDC's preferred option was to recover operating costs through uniform annual charges, which would also contribute towards the capital costs. Capital costs were to be funded by debt and then recovered using a combination of uniform annual charges, development contributions, and uniform targeted rates.
11.7
The proposed uniform annual charge was $630.00 (including GST) for residential properties and $630.00 (including GST) for each pan for non-residential properties.
11.8
The Statement of Proposal described the uniform targeted rate (previously called the "start-up fee") as being:
… an "availability charge" for services to the property and access rights to the reticulation network, treatment and disposal process. It will also include the physical connection of existing households to the network.
11.9
It was proposed that the uniform targeted rate would be applied to all sections and would be $6,862.50 (including GST), except for sections created before 23 March 2002. For those sections, the SWSS subsidy could be applied and the cost was $2,000.00 (including GST). It was proposed that, for sections created after 23 March 2002, the uniform targeted rate could be paid either as a lump sum or paid off over 25 years. The development contribution would be applied to sections created on and after 1 July 2006 and would be $11,060.00 (including GST).
11.10
Figure 8 illustrates the proposed option.
Figure 8
The Council's preferred funding proposal
| Uniform Annual Charges Cost per annum incl GST | Other Charges Cost incl GST | |||
|---|---|---|---|---|
| Residential | Non residential per pan charge | Uniform targeted rate | Development contribution | |
| Allotment or household unit* created on and prior to 23 March 2002 | $630.00 | $630.00 | $2,000** (one off) | $0.0 |
| Allotment or household unit created between 24 March 2002 to 30 June 2006 (inclusive) | $630.00 | $630.00 |
$472.50 per annum for 25 years (Year 1 charge only) or $6,862.50 (one off) |
$0.0 |
| Allotment or household unit created on or after 1 July 2006 | $630.00 | $630.00 |
$472.50 per annum for 25 years (Year 1 charge only) or $6,862.50 (one off) |
$11,060.00 (one off) |
* A household unit in this context refers to subsequent or additional household units above one household unit for each allotment.
** This included the SWSS subsidy.
Source: 2006 Statement of Proposal, Option 3.2, page 24.
11.11
The Statement of Proposal noted that, after KDC submitted a provisional application, the maximum level of funding possible under the SWSS had been increased from 50% to 90%. The Statement of Proposal advised that KDC had made a revised application to the Ministry of Health seeking an increase in funding.
11.12
The Statement of Proposal referred to the draft Development and Financial Contributions Policy that KDC was also consulting on.
11.13
The Statement of Proposal stated that the various rates and development contributions were payable for each "allotment or household unit". The term "household unit" was defined as being "subsequent or additional household units over and above one household unit per allotment".
11.14
The Statement of Proposal noted that the treated wastewater would be disposed of to land but that the location for this had not been determined. It noted that KDC and EarthTech were also investigating possible reuse options to minimise the amount of discharge required. The Statement of Proposal stated that the estimated capital costs of $35.6 million included provision for disposal and reuse.
11.15
KDC received 271 submissions on its draft LTCCP and heard from 101 submitters. At the meeting on 7 June, the Council adopted its LTCCP with some amendments.
Reviewing the assumptions about population growth
11.16
In late March 2006, around the same time the Chief Executive was putting together the draft offer for the Lincoln Downs farm, he discussed with ABN Amro extending the financing arrangements to cover the additional expenditure on disposal. ABN Amro suggested a repayment regime that followed the increase in the number of ratepayers over time. ABN Amro asked for KDC's projections for ratepayer growth. As a result, the Chief Executive talked to EPS about modelling ratepayer growth.
11.17
The 2005 Project Deed provided that the reticulation network would service 1970 allotments and that the wastewater plant would have capacity for 2500 allotments. However, the 2006 Statement of Proposal provided that the total number of sections to be serviced after 25 years was 3300 and that the then-current number of sections was 2000. The Statement of Proposal therefore assumed that the projected growth rate was 2%, or 55 sections, each year.
September 2006 report on growth assumptions and sizing of the scheme
11.18
EarthTech had been carrying out some work to provide KDC with estimates of the cost for the additional work associated with the increased projected growth rate. In August 2006, EPS used those estimates to model the effect these costs would have on rates and development contributions. They based this modelling on different population projections. EPS noted that:
The modelling demonstrates that the increased costs can be accommodated within the existing rating charges provided the assumptions on the number of ratepayers is increased.
11.19
In an email to KDC's Chief Executive, EPS commented that the figure of 3300 sections after 25 years was conservative, given that there were now 2200 sections. EPS suggested asking EarthTech to use a figure of 3000 sections by the year 2014, which meant an annual growth rate of 7%.
11.20
At its meeting in September 2006, the Council considered a report prepared by Beca and EPS about the sizing and growth assumptions EarthTech used for design purposes.
11.21
EarthTech assessed the current population and estimated past growth rates. The report estimated that the current permanently resident population was 1650. Using previous census data and the estimate of the present population, it estimated that the annual average population growth rate during the preceding five years had been 6.1%.
11.22
EarthTech's work noted that 172 houses had been built between 2001 and 2006. It assessed the subdivision and construction data, and estimated that the growth rate in house construction had been 3% a year during the previous five years. It said that, since 2001, resource consent applications for subdivision had resulted in 875 new lots, although other parts of the report gave different figures. The report stated that "growth has been particularly high during this period and may not continue at this rate".
11.23
The report provided to the Council stated that:
- The treatment plant was designed with an initial capacity for 3000 permanent residents and a maximum summer peak of 8100 people for 28 consecutive days.
- This capacity would be enough until 2014 if the annual population growth rate was 7.8%, and until 2024 if the growth rate was 3.5%.
- The area to be used for irrigation and storage on the Lincoln Downs farm had a lower capacity of 2200 permanent residents and a maximum summer peak of 5940 people for 28 consecutive days.
- The storage and irrigation area would reach capacity in 2014 if the population grew by 3.5%, but it would be possible to create additional capacity.
11.24
Beca and EPS recommended that the Council accept the proposal designed by EarthTech, adopting the 2014 nominal flows as the basis for designing the storage dam and irrigation network on the farm. The Council accepted these recommendations at its September meeting. EarthTech then submitted its applications for resource consent.
October 2006 report on growth assumptions and charges to ratepayers
11.25
In October 2006, Beca and EPS provided a report to the Council called Discussion paper on rates and charges. The paper explained the effect that the proposed changes to the scope of the project would have on the various charges to ratepayers.
11.26
The report set out what the proposed changes in the scope of the project were. These included:
- servicing 3000 sections (rather than the 1216 sections provided for in the 2005 Project Deed), which created an estimated additional capital expenditure of $4.9 million;
- purchasing the farm and constructing the transfer pipeline, storage dam, and irrigation network, which created an estimated additional capital expenditure of $11.1 million; and
- connecting all existing properties, which created an estimated capital expenditure of $2.35 million.
11.27
Other costs had also increased, such as KDC's project management costs, finance costs, and construction price increases and inflation. This brought the estimated project costs to $57.765 million. The Statement of Proposal that the Council approved in June 2006 had estimated the capital cost at $35.6 million.
11.28
The report also assessed the assumptions about current population and growth. The report stated that the original position the Council adopted was based on a starting number of 1200 sections and assumed a growth rate of 2% each year over 25 years, which resulted in 3300 sections after 25 years. Beca and EPS noted that increased development within the drainage district had resulted in 2784 sections that either were in existence at that time or had submitted resource consent applications.
11.29
We note that the figure for current sections in this report was not the same as the figure used by EarthTech or the 2200 figure EPS gave in its email in August 2006. Beca and EPS stated in the report that there were 1216 current sections (the same as in 2001) and 80 miscellaneous developments, as well as what they refer to as 1488 existing developments. They noted that some of the resource consent applications for those existing developments might not be granted. They also discussed that there was possible development immediately outside the drainage district boundaries. We could not establish why different figures were used or which figures were correct.
11.30
Beca and EPS then modelled the effects of the increased costs of the project on the various charges to ratepayers. It used forecast section numbers after 25 years of 4000, 4500, 5000, and the original estimate of 3300.
11.31
The model assumed that all annual uniform charges would increase by 7% – that is, from $648.90 (including the Consumer Price Index (CPI) increase from the 2006 Statement of Proposal figure) to $697.50. The model also assumed that development contributions would increase by 14% – that is, from $11,391.80 (including the CPI increase from the 2006 Statement of Proposal figure) to $12,937.50.
11.32
The model then provided different figures for the uniform targeted rate depending on the number of sections present after 25 years. Using the status quo projection of 3300 sections, the uniform targeted rate needed to be $17,276.28. Projections of 4000, 4500, and 5000 resulted in a lower uniform targeted rate.
11.33
Beca and EPS recommended that the Council adopt the assumption that 4500 sections would be present after 25 years. This assumption resulted in the following rates and development contributions:
- uniform annual charges, $742.50;
- uniform targeted rate, $8,650.00;
- uniform targeted rate (before 23 March 2002, with the subsidy), $3,850.00; and
- development contribution, $12,375.00
11.34
Beca and EPS noted that there were some risks in using a population projection of greater than 3300. They noted that there was:
… some potential that growth rates over time will not achieve the projected number. The risk should be managed by regularly reviewing the growth rates and the level of Rates and Charges received and adjusting the Rates and Charges as required.
11.35
The uniform targeted rate figure for allotments or household units from before 23 March 2002 assumed that the SWSS funds would be applied to the uniform targeted rate for "allotments or household units established prior to 23 March 2002". The rates and development contributions also included an increase to reflect the annual increase in the CPI. The Beca and EPS report noted that the LTCCP and the Development and Financial Contributions Policy would need to be amended.
The Council's decision on growth assumptions, scope, and charges
11.36
The Council was provided with the Beca and EPS report to consider before the Council's October 2006 meeting. The Council attended a workshop on the day of the meeting, where the Chief Executive and project team gave a presentation. The Council minutes included an outline of the presentation, which shows that the Council was taken through:
- the revised estimated capital costs of the scheme;
- a breakdown of three different growth scenarios and the corresponding effect on rates and charges; and
- four different rates and development contributions proposals using projected section numbers of 3300, 4000, 4500, and 5000.
11.37
There is no reference in the Council minutes to any discussion about the risks to the funding of the scheme if the growth projections did not eventuate or how those risks could be mitigated.
11.38
At the workshop, the Council decided to increase the growth projection to 4500 sections. By doing so, they would be able to divide the now-higher project costs between more ratepayers and so keep the uniform targeted rates at a level similar to that set out in the out in the June 2006 Statement of Proposal. The recommended rates and development contributions (GST inclusive) differed slightly from those in the Beca and EPS report and were as set out in Figure 9.
Figure 9
Changes in rates and development contributions between June and October 2006
| Charges | Previous GST inc rates & charges (publicly advertised) | Proposed GST inc rates & charges |
|---|---|---|
| Uniform annual charge | $630.00 | $697.50 |
|
Uniform targeted rate
(with SWSS subsidy)
|
$2,000.00 | $4,290.40 |
| Uniform targeted rate | $6,862.50 | $9,090.40 |
| Development Contribution | $11,060.00 | $12,937.50 |
Sources: 2006 Statement of Proposal, Option 3.2, page 24, Council workshop minutes, figures from Beca representatives' presentation.
11.39
The Council also resolved to:
- adopt the Beca and EPS report; and
- endorse an amendment to the Project Deed and authorise the Chief Executive and Mayor to execute the amendment, which included extending the commencement date to 26 March 2007. (The deed amendment referred to in the minutes was not in KDC's files, so we could not establish exactly what change in the scope of the works had been agreed.)
11.40
One of the effects of these resolutions was that sections that were not previously affected by the wastewater scheme would now be required to connect.
11.41
A Beca staff member who reviewed the population numbers for the development contributions model commented in an email in November 2006 to Beca and EPS staff that she had some reservations about the 4500 figure that had been adopted. She stated:
While we accept that there has been recent rapid subdivision in Mangawhai we also note that at least some of this is likely to have been instigated as a response to the proposed Wastewater project (people subdividing before the contribution requirements apply) and secondly, it corresponds with a period of rapid economic growth, which appears (at least in the medium term) to be easing. In this respect, we consider the range of 3,410 and 4,400 provide an upper and lower projection with perhaps a midpoint scenario the more probable.
11.42
Beca told us that the development contributions model was designed to be updated over time with actual data, to forecast funding requirements. It told us that it was decided not to carry out remodelling at this point but to wait until actual data was available.
11.43
We discussed the issue of the growth projections with KDC staff. One KDC officer told us that there had been an increase in applications for subdivision consent while the development contributions policy had been suspended, with developers seeking to avoid being levied before the policy was reintroduced in July 2006.
11.44
Beca and EPS' report noted that the LTCCP and the Development and Financial Contributions Policy would need to be amended to account for the changes to the rates and development contributions. It also noted that:
These amendments would publicly notify the community of the Council's intention to see further development in the Mangawhai area (which would then be subject to RMA process).
11.45
The Council adopted the report. However, it set out in the "Reason for the decision" that:
The proposal met the Council and communities requirements for a community wastewater scheme for Mangawhai and is not significantly different to the proposal publicly notified with Kaipara's Future – Working Together (Council's Long Term Council Community Plan).
11.46
The Council did not consult on the increased scope and the increased capital costs of the project, and it is not clear when the residents first knew about the cost of the expanded scheme. We discussed with the Chief Executive and with several of the councillors who were present at that meeting why the Council decided not to consult. KDC's former Chief Executive told us that the Council considered that consultation was not required because it thought the cost to the ratepayer, as set out in the 2006 Statement of Proposal, was not going to increase. One of the councillors confirmed this. Councillors also told us that this was the advice the Chief Executive gave them.
11.47
Several media articles subsequently reported the increased scope and cost, but the Council did not convey any of this information to its community directly.
Our comments on the decision to change the assumptions and increase the scope
11.48
Our overall impression of this stage of the work on the project is that there was considerable confusion. The estimates of figures for current sections, projected growth, capital costs, operating costs, capacity of the scheme, and funding are not stable or consistent. Different numbers appear in different documents written by different people (see our comment in Part 8 on the lack of any overall system within KDC for overseeing the project's management, costs, and funding). By this stage, there should have been consistent and agreed methods for calculating all of these figures, so that changes could be monitored and reported.
11.49
KDC's former Chief Executive told us that growth projections were always based on the applications for consent KDC received. As we set out above, we were unable to reconcile the figures in the different reports. There was no information in KDC's files to suggest that KDC officers reviewed the figures and assessed them against KDC's files.
11.50
EPS told us that numerous growth scenarios were modelled with the Council, including both high and low growth. "Council understood that through this process that a range of assumptions were being made to support each scenario."
11.51
What is clear is that the cost of the project was increasing and that additional funding needed to be found. This was achieved by revising the growth projections so that the cost would be spread over a larger number of future ratepayers and expanding the scope of the scheme so that more properties would be serviced. These changes meant that, although the project was costing more, the immediate cost to individual ratepayers could remain roughly the same.
11.52
We identified several flaws in this work:
- The revised population estimates that formed the starting point for the funding model do not appear to be particularly robust, and the Council did not test them against its own data.
- Council minutes do not show that there was any consideration of the risk that growth would be slower than projected and therefore no plans for how to manage that risk if it eventuated.
- The cost estimates for the various components of the scheme were only indicative at that stage (for example, the cost of house connections ended up being significantly more than estimated at this stage).
- Not enough work was done to ensure that the main funding mechanisms – development contributions and rates – were reliable and enforceable.
- The changes to the project's scope and approach were not being closely monitored and managed from an affordability perspective.
11.53
Affordability of the project had always been a critical issue for the Council and the community. In our view, this meant that the Council should have carefully considered all changes to ensure that they were necessary and affordable. The quality of the work on estimated capital costs and funding in 2006 shows that this was not the case.
11.54
In particular, we do not consider it satisfactory for the Council to have put one set of costs to the community for comment in February 2006 and then immediately started work on how the costs were changing. The costs had already increased significantly by the time the Council adopted the final Statement of Proposal only four months later.
11.55
We attribute this to the lack of any coherent project overview or control of the "big picture". By this stage, it seems that the Council was managing the project day by day and issue by issue.
11.56
The Council's focus on the costs to the ratepayer meant that it failed to consider the overall increase in the capital costs of the project. Had the Council thought of it in terms of an increase of $22 million in capital costs, it might have thought through the decision to increase the scope more fully.