Part 4: Building and implementing the wastewater scheme (2007 to 2012)
How construction was to be managed
4.1
We looked at what the contract documents set out for how the construction process was to be managed, including the tools that were available to KDC to oversee the construction work. We then considered how KDC ensured that the tools that it had were used on its behalf.
4.2
We found no evidence that KDC monitored how the tools in the contract to manage its risks were being used while the project proceeded. KDC does not appear to have:
- received the information it needed to assure itself that the design was appropriate for its needs before construction began (so it could not be certain that what was to be built and paid for was suitable); or
- received the monthly monitoring reports from the Project Director in EPS (so it had no way of monitoring the progress of construction or of understanding whether modifications would lead to additional financing costs).
4.3
We also found that the contract documents did not cover all the works to be carried out, which was to have financial consequences for KDC. We discuss this further below.
Events during construction
4.4
Construction of the wastewater scheme officially began with a ground-breaking ceremony and open day on 14 January 2008. The construction phase ended with the official opening of the system on 16 January 2010.
4.5
There were very few documents in KDC's files about the construction of the scheme. The construction of the scheme was under the control of the Project Director, in EPS. We did not have access to EPS' files in Australia, so were unable to assess how that role was carried out during the construction period. Our findings about how well KDC managed its responsibilities are based on the information in KDC's files, the files that we were able to review at Beca, and the information provided to us by EarthTech.
4.6
We considered how the work carried out during the construction was managed, including how well KDC controlled what was being built, and whether EarthTech built what it was contracted to build. We looked at the process that was used for making modifications to what was agreed to be built under the contract documents, and how information on those modifications and their cost effects were provided to Council. We also looked at how the work to connect residences to the scheme was carried out and the quality of the community liaison during the construction period.
4.7
We conclude that:
- KDC had very weak control over the construction and what was built. It appears that what has been built is not the same as what is in the Project Plan in the contract.
- Modifications to the scope of the works were agreed to by EarthTech and the Project Director, but it is not clear that the Council knew about, or agreed to, these modifications.
- KDC tried hard to communicate with residents about the scheme, but the communication was not particularly effective.
Funding and financing changes during construction
4.8
During this period Council made further changes to the level of rates and developments contributions it proposed to use to fund the project. KDC also decided to use interest rate swaps to manage its interest rate risk during construction. Because of the changes that were made to what was to be built after the contract documents had been signed in December 2007, the timetable for construction could not be met. This meant that the financing arrangements, which were dependent on that timetable also needed to change. In addition, a swap that had been used to manage Council's interest rate risk during the period up until the end of construction needed to be broken.
4.9
We reviewed the changes to the funding for the project that Council agreed to make, and the changes that were made to the financing for the project during the construction period.
4.10
In summary, we concluded that the Council managed the financing of the project very poorly. The Council took no steps to get any independent advice about whether the debt financing was appropriate and competitive with what was available in the market. The Council's understanding of the financing arrangements was so poor that it failed to appreciate that changes to the scope of works would have financial consequences. The Council should have had much stronger oversight of the funding for the project, including the debt financing.
4.11
We have not discussed the issues that KDC had with the rates that it levied in this period. Clearly, there were problems with the rates levied for the wastewater scheme, and the rates were defective. We have not discussed these issues in this report because they are discussed in detail in the Validation Bill being considered by Parliament and are also the subject of judicial review proceedings in the High Court.
The Council takes possession of the assets
4.12
KDC took possession of the wastewater scheme after construction. The Project Deed set out a process that was to take place before Council took possession. This process was to check that the scheme had been constructed in accordance with the Project Deed and was capable of being operated for its purpose and in accordance with all consents. We refer to this process as the "commercial acceptance process". The commercial acceptance process was an important mechanism that KDC had to ensure that when it paid for the scheme, the scheme had been built as intended by the parties and was fit for purpose. We looked at what the Project Deed required for the commercial acceptance process, and then compared this to what happened.
4.13
The Project Deed provided that commercial acceptance was to occur in two stages. That is, KDC would take ownership of part of the scheme once construction of that part was completed. It would then take ownership of the other part of the scheme at a later date, once construction of that part had been completed. KDC had agreed to this because it had been told that it would save money on the financing costs. Because of the delays to the construction timetable caused by the additional work on the modifications, commercial acceptance did not occur in two stages. Instead, it occurred on a single date.
4.14
We found that:
- Commercial acceptance was given by the Project Director on KDC's behalf even though significant elements of the wastewater scheme were not complete and the scheme had not been proven to work. There was no evidence that KDC was told this before it paid the purchase price.
- The changes to the dates for commercial acceptance did not save KDC money. Rather, they ended up costing KDC significantly more than it would have saved. Modifications appear to have been agreed without regard for the effect that they would have on the dates for commercial acceptance.
How the wastewater scheme is operating now
4.15
We looked at how the wastewater scheme is operating now, and received assistance from two engineers, including a wastewater engineer to carry out this part of the work. We looked at what the Project Deed says about how the scheme is to be operated, and how KDC is managing the contract. We also considered what the monitoring by NRC showed about how the scheme is operating. One of the issues we considered was the operation of the disposal site and whether it would have capacity to take all projected flows of wastewater.
4.16
We found that the wastewater scheme is now operating effectively. However:
- KDC did not actively manage the contract until very recently.
- Part of the disinfection process in the wastewater treatment plant has failed to work. This has resulted in changes to the operation of the plant and has required EarthTech and KDC to get the resource consents amended.
- The farm does not have enough land to dispose of all future flows of treated wastewater. KDC needs to assess how it will dispose of the treated wastewater in the future.
Our overall comments on construction and implementation
4.17
The Mangawhai community now has a reticulated wastewater system that is operating effectively. After initial "teething problems", any practical problems appear to be occasional and relatively minor. The treatment plant is big enough to cope with expected population growth.
4.18
Northland Regional Council has not been able to provide us with any data to show whether the water quality in the Mangawhai Harbour is improving yet. It may take some time for water quality to improve. KDC needs to work with Northland Regional Council to ensure that this monitoring is done, so that the community gets information about whether the scheme has achieved its purpose.
4.19
However, it is clear that KDC did not monitor and manage the construction process adequately.
4.20
We were very concerned to see how loose the contract monitoring and management were and how little attention KDC paid to the steps built into the contract to protect the Council from the risk that the scheme would not be constructed properly or would fail to operate as intended. It is largely because of the quality of EarthTech's work that the scheme operates well and has had few performance issues in the last four years of operation, rather than contractual processes designed to protect KDC.
4.21
We also have significant concerns about the way in which funding and financing matters were dealt with. In KDC's files, we found no systematic monitoring and reporting of the overall costs of the project against a budget. We are also very concerned about the way in which KDC entered into swaps and transactions.
4.22
The relevant parties were clearly all working hard to construct the scheme but made little effort to be clear about exactly what was being built and at what cost. This type of approach is not acceptable for a major public sector project. The PPP context did not remove the need for the Council to be in control of the overall project and for it to be able to publicly account for what was being done.
4.23
Given the level of community concern about the project and its affordability, the need to account to the community for exactly what the money was being spent on and why should have been a priority for the Council and its advisers. The poor records and informal decision-making show that this was not so. We did not anticipate that we would effectively have to reconstruct many of the records of financial transactions and other decisions from scratch while we carried out this inquiry. In our view, the information held by KDC was totally inadequate.