Part 2: How the wastewater project began (1996 to 2002)

Did Mangawhai need a wastewater scheme?

2.1
In our discussions with community members, many people asked whether it had really been necessary for Mangawhai to have a reticulated wastewater scheme. Several people suggested that stricter rules on the quality and maintenance of septic tanks would have been able to manage any environmental concerns. Some people suggested that KDC imposed the scheme on the community as part of a "push" for development in the area. Uncertainty about whether the scheme was really needed exacerbated concerns about the cost ratepayers were expected to bear.

2.2
Therefore, we spent some time reviewing the information and events leading to the initial decisions to begin work on a scheme. We looked at what studies showed about water quality in the Mangawhai area and how KDC considered options for improving water quality. With the assistance of an engineer, we also reviewed whether septic tanks were a suitable solution for Mangawhai.

2.3
We found that:

• There was clear evidence that there was poor water quality in the Mangawhai area and that septic tank effluent was the likely cause.
• Septic tanks were not an appropriate way to manage sewage disposal in the Mangawhai area.
• The work KDC carried out in 1998 and 1999 to address the water quality problem was appropriate and included good public consultation.
• KDC's conclusion that Mangawhai needed a centralised reticulated wastewater scheme was soundly based and reached through a good process.

How Kaipara District Council set up the wastewater project

2.4
Having decided that Mangawhai needed a reticulated wastewater scheme, KDC then had to consider the type of contracting approach it would use, how it would manage the project, and how it would fund it. These early decisions shaped the rest of the project, and so we wanted to understand how and why they had been made.

2.5
We considered the initial advice KDC received on how to deliver the wastewater scheme and its funding constraints. We considered how this advice affected the decision to use a PPP approach that the Council made later. We also looked at the Council's initial decisions to select a project manager and about project governance arrangements. We also looked at how KDC decided to proceed with a PPP approach.

2.6
We found that:

• KDC's decisions to contract an expert project manager and to do so by tender were reasonable. Beca preparing the tender documents and then submitting a tender created the risk of a conflict of interest. Beca told us that it took steps to manage this risk.
• KDC did not fully explore all its available options for funding the wastewater scheme. It concentrated on ways of borrowing and PPP arrangements involving private sector financing rather than considering whether it could also increase its revenue to pay for the scheme. As a result, KDC's high-level analysis of the methods available to deliver the project was flawed.
• KDC was unduly influenced by financial considerations and did not fully evaluate its options for the delivery of the project, and their risks and benefits, when it decided to proceed with a PPP approach.
• KDC's record-keeping for the project and its decision-making processes were poor.
• Important decisions appear to have been taken informally.
• KDC does not appear to have fully appreciated the responsibilities it was taking on as the ultimate purchaser of the advisory services and the scheme. The scope of services the project managers would provide under the contract was limited, and KDC needed to ensure that it had enough overview of the project to understand its broader risks and need for additional advice. Instead, it seems to have proceeded on the basis that the project managers would deal with every aspect of the project.
• KDC failed to identify how it was going to manage the project. No group or individual within KDC was responsible for the project. By default, this later became the role of the Chief Executive.

Tender process to choose a construction partner

2.7
By early 2001, the Council had appointed Beca to manage the overall project on its behalf and was committed to exploring the possibility of a PPP. The next step was for Beca to help KDC go to the market to see who might be interested in tendering to build and operate the scheme. This is a major step in any PPP.

2.8
We reviewed the tender process KDC used and the preliminary work that KDC carried out on how it would fund the project.

2.9
We found that:

• The basic process and steps that KDC took to tender for a partner to build and operate the scheme were reasonable and appropriate.
• The substance of the work regularly fell short of what was needed for a PPP project of this nature – for example, there was no clear documentation in KDC's files to demonstrate that the PPP would be more cost-effective than traditional procurement.
• There is a risk that the way the work was carried out increased the price of the scheme and might have made a PPP look more attractive.
• Record-keeping and documentation of decisions were poor. The Council did not pay enough attention to proper process and appropriate lines of accountability when it made decisions.

2.10
Our assessment is that KDC was out of its depth in embarking on a PPP and relied heavily on its project managers for guidance.

Discussions with the community when the wastewater project began

2.11
KDC had discussions with the community before the project began. We found that the consultation was good when the Council initially decided that a reticulated scheme was necessary. KDC also took other steps to communicate with the community, including establishing a Community Liaison Group in 2000 as part of the project's governance arrangements and the use of a community forum and public meeting during the tender process.

2.12
We also looked at how the Council communicated with the community, and how it took into account the community's concerns, when the project began. We found that KDC's work to communicate with the community and understand its views during this initial phase of work was reasonably good.

Our overall comments on how the wastewater project began

2.13
In our view, the initial work that KDC did to establish whether Mangawhai needed a reticulated wastewater scheme was carried out well. The work was thorough and careful, and included good consultation with the community. We consider that the decision to begin the project was soundly based.

2.14
Two decisions in this early phase were critical to how the project progressed:

• the preference for disposal of effluent to land rather than water; and
• the decision to use a PPP.

2.15
Although the Request for Proposal (RFP) for tenders to construct the scheme did not rule out disposal to water, it made it clear that stakeholders did not prefer this and that the risk of gaining consent for disposal to water sat with the private sector contractor. The preference for land-based disposal options reflected the community's views and also the restrictions in the regional planning documents. The consequence of this preference was that the disposal options were limited early in the project.

2.16
The tendering process failed to produce a tenderer with a disposal site that was acceptable to the Council. As a result, KDC had no reliable information about what a scheme with an acceptable disposal site would cost or whether such a scheme would be cheaper than the benchmark.² It was risky for KDC to carry on with the tender process without resolving this issue. The disposal site for the scheme was not identified or secured until quite late in the project and added significant costs.

2.17
We do not consider that the decision to use a PPP was well founded. Although there was reasonably well-developed Australian guidance about PPPs available by 2001 and the Beca consortium³ included an Australian company with specialist expertise in PPPs, we do not consider that KDC's work to assess the merits of a PPP was carried out well. The decision was largely driven by financial considerations and the perception that a PPP would keep the debt off KDC's balance sheet so KDC could get around its borrowing restrictions. In our view, KDC should have done more work to consider the full range of options available to it.

2.18
KDC followed the right steps to go to the market for a private sector partner, but the quality of the substantive work at each stage was not adequate. KDC's approach to decision-making was also too informal, so it is not clear who was responsible for making important decisions or why they were made.

2.19
It is also clear that, at this stage, KDC had not given any careful thought to how it might raise revenue to pay for the project. In particular, we saw no consideration of the legal tools available for KDC to raise revenue from ratepayers.

2.20
Our overall view is that KDC had good reasons for believing that it had to do something about disposing of sewage in Mangawhai and that it was trying to do the right thing. However, we consider that it did not set up adequate governance structures for the project, because it did not appreciate what work it needed to do in addition to the work that its project managers carried out. Nor was any group or person within KDC responsible for the project and maintaining oversight of the work of the project managers. As a result, KDC was out of its depth with the financial, legal, and commercial complexity of a project of this type and size. It was overly reliant on its advisers and was not able to effectively assess the information or advice it received.

2.21
We are particularly concerned that KDC appears to have had a weak appreciation of its accountability and legal obligations. The essence of accountability is the ability to explain what is being done with public money, the decisions that are being made, and the reasons for them. Good records provide the foundation for that accountability. KDC's records were very poor and, in some cases, non-existent. We spent a great deal of time working with KDC staff and KDC's contractors trying to locate or recreate important pieces of information.

2.22
That approach to record-keeping is not acceptable. Even when working with contractors, all public entities have an obligation to maintain full and accurate records consistent with normal business practice.

2.23
Local authorities also have to be able to produce that information if it is requested under the Local Government Official Information and Meetings Act 1987 or through any other accountability process. Ultimately, responsibility for these types of operational and administrative systems rest with a chief executive.

2 The benchmark is a figure used for deciding whether a PPP would offer better value for money than KDC building and operating the wastewater scheme itself.

3 The project managers for the scheme were a consortium led by Beca.