Part 24: Our overall conclusions

Inquiry into the Mangawhai community wastewater scheme.

Summary of what we found

24.1
Two important practical conclusions are set out in Parts 2 and 19 of this report:

  • In Part 2, we concluded that KDC was correct when it decided that Mangawhai needed a reticulated sewerage system and that its process for assessing the need and making that decision were sound.
  • In Part 19, we concluded that the sewerage system that has been built is functioning well and has appropriate capacity for growth. It is too soon to assess whether the scheme is achieving the environmental goals and improving water quality in the Harbour.

24.2
The Parts between those two tell a story of poor governance, poor decision-making, and inadequate management of both the organisation and the project. We have identified deficiencies in the way KDC managed the overall project, contracted with the various parties, financed the construction of the scheme, took ownership of the assets, and much more. Parliament and the High Court are considering the extent of KDC's legal failings – for example, in the way it set and collected rates to fund the scheme.

24.3
KDC was also affected adversely by events outside its control. For example:

  • The late amendments to the Local Government Act 2002 prevented the initial proposal from proceeding.
  • The financial failure of the proposed contractor's parent company meant that the Council had to abandon well-advanced negotiations.
  • The effect of the global financial crisis on the New Zealand property market and development activity reduced KDC's projected income from rates and development contributions.

24.4
The result was that the project took a long time to complete, the costs increased significantly, and many people lost confidence in KDC.

24.5
Was there corruption or theft? During the inquiry, many people raised with us their concern that the cost increases could result in part from corruption in the contracting process or misappropriation of KDC funds. Throughout our work, we have actively considered whether there was evidence of possible criminal activity. If we come across such evidence, our practice is to refer the information to the relevant law enforcement agencies for investigation. In the 21 months of our work on this inquiry, we have not found any evidence suggesting criminal activity or warranting such a referral. Instead, we have found a great deal of information that explains how the costs increased through a series of poor decisions and inadequate management. It is extremely difficult to "prove a negative" conclusively, so we cannot definitively state that there was no wrongdoing of this kind. However, we are satisfied that the cost increases resulted from the combination of failures that we have described in this report.

24.6
The problems with the way the wastewater project was run drew attention to some underlying problems in the way KDC was being run. It is now apparent that KDC as a whole had weak systems in many areas and lacked in-house capacity to deal with its range of responsibilities effectively.

24.7
It took some time for these problems to become apparent. A new Council was elected in late 2010, and new senior management staff were appointed in 2010 and 2011. Between them, they commissioned external reviews of the financial management systems and the rates, which provided firm evidence that there were significant problems within the wastewater project and KDC more generally. As we discussed in Section D, KDC's auditors did not identify these issues earlier.

24.8
Eventually, however, the Council and others began to understand the extent of the problems and several accountability processes began to operate. For example:

  • The Auditor-General agreed to begin this inquiry to independently assess what happened.
  • The Minister intervened and ultimately replaced the Council with Commissioners.
  • Ratepayers received considerable information after making requests under the Local Government Official Information and Meetings Act 1987.
  • The MRRA eventually began judicial review proceedings to seek a clear ruling on the legality of a number of KDC actions.

24.9
Between these various processes, and the ongoing work of the Commissioners and KDC staff, a great deal of effort has now gone into understanding what happened and how the problems can be fixed. That work is continuing.

The underlying causes

Lack of capability

24.10
This report has identified numerous failings in the way KDC planned and managed this project. The common theme, throughout all of the particular issues, is the question of capability.

24.11
Governance capability: This project spanned 14 years, during which time various mayors and councillors came and went as part of the electoral cycle. We spoke with some (but not all) of these people as part of this inquiry. We have no doubt that the individuals took their responsibilities seriously and brought useful skills and perspectives to the role. However, there is always a risk that an elected council in a small area will not include all of the skills needed for effective governance of an entity with significant legal and financial responsibilities. Several elected members volunteered that "you don't know what you don't know" and that they were very aware of how much they depended on the advice provided by KDC staff and external advisers.

24.12
Time and again, our work throughout the public sector shows how important it is for members of a governing body to have the confidence and ability to test and challenge the advice they receive and to maintain an overall view of the entity's direction and risks.

24.13
Management capacity and capability: The former Chief Executive explained to us that, when he arrived at KDC, there was a conscious policy that the organisation needed to shrink. Throughout the business, there was a systematic move to contract out much of the work so that KDC was a very lean organisation. For example, engineering services were contracted out to a private company and KDC had only one in-house engineer to oversee engineering matters across all of its functions.

24.14
This approach was a way of managing cost and also a response to the difficulty of recruiting and retaining specialist expertise outside the main centres. However, the challenge with this approach is always to retain enough capacity and capability to be able to manage the contracting relationships effectively, so that the council retains overall responsibility and control of its activities. In our view, KDC became too lean and did not have enough capability to monitor and control all that it was responsible for. This is a risk that many public entities need to consider.

24.15
Project management capacity and capability: Guidance on PPPs places a lot of emphasis on the fact that partnering arrangements require a considerable investment of staff time to provide the necessary direction and control throughout the project. In our 2006 report on partnering, we commented:

3.68 Public entities require a high level of expertise to implement partnering arrangements successfully, and face significant risks without this expertise. It will be vital for public entities to ensure that they have people on their staff with a high degree of commitment and the right level of skills and expertise before entering into this type of arrangement. However, it is likely that most public entities will have to use external expertise to manage specific aspects of the procurement – for example, to provide commercial, technical, financial, and legal advice, and to manage both the procurement process and aspects of contract management once the contract comes into effect.

3.69 The public entity will need to retain overall responsibility for effective project management and the major decisions that will be part of this, and external experts will need to be managed. Therefore, it is vital that the public entity ensures that:

• it has internal experts that have been adequately trained to carry out this role effectively; and

• the terms of reference, timescales, and basis of fees for external experts are clearly defined.

24.16
The Victorian state government guidance that was available at the time of the wastewater project also emphasised the investment in capacity the entity needed to make to ensure good project and contract governance, management, and monitoring.

24.17
KDC employed a consortium of external project managers, who effectively reported directly to the Chief Executive and the Council for most of the project. There was no additional mechanism within KDC for overall governance and management of the project and its wider risks, to provide advice from that broader perspective to the Council. The initial Beca proposal included a structure of this kind, but we do not know why it was not implemented.

24.18
The quality of information that KDC held on the budget, costs, and funding for the project was a particularly striking example of why more coherent oversight and monitoring were needed. We commented in Part 8 that we found no documentation to suggest that there was a system for planning, management, reporting, or budget purposes. The Council does not seem to have tracked in any systematic way what the estimated costs were going to be or how it was going to fund them within the parameters of the available funding sources and KDC policy. Appendix 5 sets out the information that we have been able to bring together to track the changing costs. It is drawn from a range of sources, and many of the amounts are not directly comparable.

24.19
The Council might have been concerned about the overhead costs of additional management and monitoring. In our view, this project is a salutary lesson in the value that management and monitoring arrangements add. Better overall management of the project and KDC's risks could have avoided some of the problems and additional costs that we have described throughout this report. It would also have given the project more visibility within KDC's systems, which might have increased the chances of it attracting attention earlier from the auditor and other external accountability agencies.

24.20
Specialist resources: We have identified in several places throughout this report where we considered that the Council suffered because it did not have access to enough specialist or professional advice. In particular, we consider that the Council needed access to a greater level of financial expertise to embark on and manage a project of this kind. We have also commented on the fact that legal expertise was not systematically used throughout the project as a whole. The project managers provided legal advice about the development of the commercial contract, but any work beyond this was outside their contracted role and had to be specifically requested. This was done sporadically.

24.21
Procurement: Sections A and B describe how KDC carried out the procurement processes to engage a project manager and to select a partner to deliver the wastewater scheme. Our overall conclusion was that KDC followed the right basic steps to go to the market, but the quality of the work at each stage was not adequate. In our view, this reflects the lack of depth in the resources KDC was able to draw on. It effectively had no capacity to test and supplement the advice it received from its contracted project managers.

24.22
Overall, we concluded that KDC was out of its depth in embarking on a PPP of this scale and complexity. On its face, the wastewater project was a reasonable candidate for a PPP approach. However, the Council went into a PPP for the wrong reasons and did not equip itself to manage it properly.

Inadequate focus on public sector obligations and accountability

24.23
KDC is a small organisation where councillors and staff work closely with one another. Because the community they serve is also relatively small, they will often know the members of the community they interact with. In small towns and rural communities of this kind, a level of informality in the way business is done is to be expected.

24.24
However, in our view, this informality should not extend to council decision-making or the way a council operates. It appears that, at least in relation to the wastewater project, KDC and the Council sometimes acted too informally. This informality extended beyond how people interacted with one another to also affect how KDC discharged its basic responsibilities. Our main concerns were:

  • the informal approach to decision-making, with a lack of clarity about who was responsible for particular decisions, the basis on which decisions were being made, and the detail of what was being decided;
  • the use of Council workshops for considering significant information and making decisions;
  • the lack of attention to compliance with internal procedural requirements, such as delegations and Council policies; and
  • the poor state of KDC's records.

24.25
We also noted that KDC's contracts with external contractors did not include any provisions about accountability. It is common for contracts with public entities to include provisions specifying how the work of the contractors will be bound into the general public sector accountability processes, such as public access to information under the Local Government Official Information and Meetings Act 1987 and scrutiny by auditors and the Auditor-General if required. These provisions feature in the various model PPP contracts we have seen in guidance material, including the Victorian state government material that KDC and its advisers apparently drew on.

24.26
Overall, we saw little evidence during our work on this inquiry to suggest that KDC paid adequate attention to its obligations as a public entity to explain and account for its actions. In simple terms, we were left with the impression that too much of KDC's work was carried out through informal discussions, meetings, and agreements between the main people involved, rather than by presenting formal papers to formal meetings with formal minutes. This type of approach is dangerous.

24.27
There is a tendency to discount such points as bureaucratic, but we regard them as fundamental to an effective and trusted public sector. In several reports recently, we have emphasised that, in the public sector, decisions have to not only be right but also be seen to be right. The process by which decisions are made also matters, because the use of public money and power has to be clearly and properly authorised. People are entitled to information about how and why such decisions are made. We repeat a comment we made in our report on the Citizenship inquiry: "In our experience, accusations of wrongdoing flourish when there is a lack of information about what actually happened."1

24.28
Good records are the foundation for any accountability process. Records need to be able to explain what happened and why, and can also protect an organisation by providing evidence to rebut unfounded allegations of improper action.

24.29
This point is reflected in the purpose of the Public Records Act 2005, which is "to enable the Government to be held accountable by … ensuring that full and accurate records of the affairs of central and local government are created and maintained".

24.30
The Public Records Act includes the following obligation:

17 Requirement to create and maintain records

(1) Every public office and local authority must create and maintain full and accurate records of its affairs, in accordance with normal, prudent business practice, including the records of any matter that is contracted out to an independent contractor.

(2) Every public office must maintain in an accessible form, so as to be able to be used for subsequent reference, all public records that are in its control, until their disposal is authorised by or under this Act or required by or under another Act.

(3) Every local authority must maintain in an accessible form, so as to be able to be used for subsequent reference, all protected records that are in its control, until their disposal is authorised by or under this Act.

24.31
This is not substantially different to the obligation underlying the previous Archives Act 1957 or the general requirements of good administration. We draw specific attention to the obligations to keep records of work that is contracted out and for all records to be accessible for subsequent reference. In our view, KDC's records fell well short of this standard.

24.32
In our view, accountability, including attention to legality, procedural requirements, and record-keeping, should be at the heart of a public entity's systems and operations.

The consequences for the entity and the community

24.33
Although the wastewater project has provided Mangawhai with a reticulated sewerage system, the achievement of this goal has been accompanied by big financial, political, personal, and social costs. Effectively, much of the community in Mangawhai, and some of the broader Kaipara region, has lost trust in the Council. It is hard to remedy this kind of reputational damage.

24.34
In another inquiry report, we said:

There is a great deal of writing on the importance of voluntary compliance in regulatory systems. In any regulatory context, it is too hard to achieve high levels of compliance through force or coercion – effective systems depend on people choosing to participate and follow the rules. For people to want to comply, they have to trust the system and see it as providing an overall benefit. The evidence this inquiry gathered showed that many … do not have this view … at present…

In our view, the [entity] needs to maintain a clear overall focus on the need to build and maintain trust in the [entity]. To build trust, it needs to behave fairly and reasonably at all times, and make sure that this is apparent to all those interacting with it. It needs to build the values of openness, accountability, integrity, and fairness into all aspects of its work. It is important that the people the [entity] regulates, and who fund its work, are able to see and understand what it is doing and why.2

24.35
Those words apply equally to the relationship between this Council and the community it serves. Parliament has given the Council substantial powers and responsibilities – to regulate, govern, tax, and enforce. Its ability to operate effectively depends on the community's voluntary compliance with its requirements, which in turn depends on trust. The basic social contract of government breaks down when that trust disappears, as the Mangawhai rates strike has made apparent.

24.36
We encounter this situation, when a public entity appears to act without proper regard to its own legal obligations, from time to time in our work in the public sector. Many of the people we met in Mangawhai basically told that us that they would be happy to meet their legal obligations to pay rates again – once it was clear that the Council understood that it had to obey the law when it imposed those obligations on them. We emphasise to public entities that there can be significant consequences when they fail to take their legal responsibilities seriously enough.

Accountability of elected members under section 44 of the Local Government Act 2002

24.37
During this inquiry, many people identified the possible relevance of the powers in the Local Government Act 2002 that enable individual councillors to become personally financially responsible for council losses. Counsel for the MRRA specifically wrote to us to ask us to consider whether these powers should be invoked.

What is the surcharge power under the Act?

24.38
The relevant provisions are sections 44 to 46 of the Local Government Act 2002. These provisions are often referred to as "the surcharge power", and versions of this power have been included in local government legislation for many years. The power has been exercised, but only rarely. Effectively, it is a mechanism for making individual elected members liable for losses suffered by the local authority if those losses result from unlawful action that the elected members supported.

24.39
Section 44 provides that, if the Auditor-General is satisfied that a local authority has incurred a loss in terms of the definition in that section, the Auditor-General may report on that loss to the local authority, along with recommendations on recovering the loss and preventing further loss. Copies of that report must be sent to every elected member of the local authority and to the Minister.

24.40
Section 44 states that a local authority is regarded as having incurred a loss if any of the following have occurred and the local authority has not been fully compensated:

  • The local authority's money has been unlawfully expended.
  • An asset of the local authority has been unlawfully sold or disposed of.
  • The local authority has unlawfully incurred a liability.
  • The local authority has intentionally or negligently failed to enforce the collection of money it is entitled to receive.

24.41
Section 45 then provides that the local authority has to respond in writing to the Auditor-General's report within 28 days and provide a copy to the Minister. The response must respond to each of the Auditor-General's recommendations and state what action the authority intends to take. Individual elected members may respond separately. The local authority must then present the original report and all the responses to a public meeting of the authority.

24.42
Section 46 states that, if the Auditor-General has made a report on a loss under section 44, then that loss is recoverable as a debt due to the Crown from each elected member of the local authority jointly and severally. In simple terms, each and every elected member of the authority becomes personally liable for that loss. The Crown can bring proceedings to recover the amount on behalf of the local authority.

24.43
There are defences available to the elected members under section 46. A court cannot enforce recovery from an elected member if:

  • the person did not know about the action or failure leading to the loss;
  • the person knew but protested against the relevant action;
  • the person voted against the action; or
  • the person supported the action, but acted in good faith and relied on professional advice given by an apparently competent and reliable employee or adviser.

Our decision on use of the surcharge power in this case

24.44
This surcharge power is very unusual. It effectively gives the Auditor-General a power to rule that individual elected members have been a party to an unlawful act and are personally liable for the loss that results.

24.45
On the rare occasions that the power has been used, the facts have been reasonably contained and straightforward. There has been little if any room for debate about the legal basis for exercising the power.

24.46
In this case, the facts and the legal position are far from straightforward. This report has described a long and complex saga, involving sophisticated commercial transactions, considerable professional advice, and decisions made by successive Councils over a long period of time. The legal status of some of the more significant decisions and actions is at present before the High Court.

24.47
For the Auditor-General to be able to exercise this power, we would need to be certain that:

  • KDC's losses could be attributed to a particular action or series of actions;
  • the particular action or actions were unlawful;
  • individual councillors effectively supported one or more of those unlawful actions; and
  • it was not reasonable for individual councillors to rely on the advice they received.

24.48
These requirements set a high factual and legal threshold. We do not consider that this case meets that threshold for the following reasons:

  • We cannot confidently attribute KDC's eventual debt (or losses in terms of the Act) to particular actions by the Council. This report describes a long history of cumulative problems and poor decision-making. However, section 44 envisages a reasonably direct relationship between an individual decision and a specific loss.
  • We cannot say with certainty which of the many decisions and actions involved in planning the wastewater project, agreeing to the various contracts, and authorising payments were "unlawful" for the purposes of section 44, if any. These are complex legal questions, and many of them are currently before the High Court in the judicial review proceedings brought by the MRRA. It would not be appropriate for the Auditor-General to pre-empt a ruling by the Court.
  • We have not attempted to identify exactly which individual elected members supported or opposed which decisions during the project. We doubt that it would be possible to establish these facts with any certainty, given the state of the records.
  • As this report makes clear, it has not been possible to establish exactly what advice the elected members received from KDC staff or from external advisers for most important decisions during the wastewater project. This means that it would be very difficult to establish whether it was reasonable for elected members to rely on the advice they received. From the information that is available and described in this report, it is likely that a defence under section 46 would be available to many elected members in relation to some or all of the decisions they participated in.

24.49
Therefore, we do not intend to exercise the discretion in section 44 and make a report to KDC in this case. In our view, this statutory power is suited to relatively contained and simple situations, where there is good evidence available to demonstrate that the threshold for the exercise of the power has been met. In our view, it would not be appropriate to exercise the power in this case, where the facts and legal issues are very complex, are already before the Court, and defences are likely to be available.

1: Auditor-General's overview (March 2013), Inquiry into decision by Hon Shane Jones to grant citizenship to Mr Yang Liu, page 10.

2: Auditor-General's overview (July 2010), Inquiry into the Plumbers, Gasfitters and Drainlayers Board, pages 8-9.

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