Part 6: Our overall conclusions

Summary: Inquiry into the Mangawhai community wastewater scheme.

Summary of what we found

KDC was correct when it decided that Mangawhai needed a reticulated sewerage system and its process for assessing the need and making that decision were sound.

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 Mangawhai Harbour.

The rest of the story is one 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.

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 entity 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.

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

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.

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.

Underlying causes

This report has identified numerous failings in the way KDC planned and managed the wastewater project. The common theme, throughout all of the particular issues, is the question of capability. We identify particular capacity and capability concerns in relation to:

  • governance;
  • management;
  • project management;
  • specialist resources; and
  • procurement.

The other main deficiency was KDC's inadequate focus on its public sector obligations and accountability. Particular concerns included:

  • 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.

There is a tendency to discount such points as bureaucratic, but they are 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 for decisions 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.5

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. 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.

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.

Although the wastewater project has provided Mangawhai with a reticulated sewerage system, it 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.

What we can learn from the wastewater project

In summary, the main lessons from our inquiry are:


  • Public entities should be meticulous about legality.
  • Good record-keeping is the foundation of effective accountability.
  • Workshops can supplement formal council meetings, but not replace them.
  • Contractors need to be tied into public sector accountability mechanisms.


  • Understand the role and stick to it.
  • Common sense is a legitimate governance tool.
  • Understand what assurance is needed and where it will be obtained.
  • Audit committees can provide useful support.


  • There are limits to contracting out.
  • It is important for public entities to maintain appropriate financial management capacity and capability and to stick to their sphere of competence.
  • Project governance and management is important.

PPP arrangements

  • Do not underestimate what is involved in a PPP arrangement.
  • Accounting should not drive the decision to enter into a PPP.
  • Transfer of risk is not an end in itself.
  • PPPs are unlikely to succeed fully if the contract is not for "the complete package".

Lessons for auditors

  • Understand the entity as a whole.
  • Assessing the strength of the management control environment is fundamental.
  • Good and open communication between auditor and entity is vital.

Lessons for accountability agencies

  • Agencies need to talk to one another.
  • It is important to keep an eye on the bigger picture.
  • Do not assume that people are familiar with an agency's role and how it works.

What needs to change

This report covers events dating back to 1996. Many things that we might have commented on as needing to change have already changed in the intervening years. As part of understanding how to prevent such problems arising again, it is worth specifically noting that:

  • KDC has changed. It has been restructured and has new senior management, the elected members have been replaced by Commissioners, it has a new auditor, and it has instituted many internal reviews and implemented new systems.
  • There is much more guidance available for any public entity considering embarking on a PPP arrangement.
  • Reporting requirements for financial and service performance information have developed significantly in the last decade, along with the associated auditing standards.
  • The Minister's powers to intervene in local authorities have been reformed and a more graduated set of responses is now available.

There are a number of matters that will always be difficult for public entities. These need on-going recognition and management, so far as possible. They include:

  • maintaining capacity and capability, particularly for scarce specialist expertise and in remote or rural settings;
  • dealing with the community response when councils make controversial decisions that have attracted strong supporters and opponents;
  • misunderstanding of the assurance provided by an audit meaning that entities do not take appropriate steps to manage their own risks;
  • recognition that the responsible entity always needs to have an opportunity to solve its own problems first, before other agencies can or should get involved.

Finally, our inquiry has raised two questions that we consider warrant further debate in the sector. They are:

  • Do current public sector structures and allocation of responsibilities support effective development and maintenance of infrastructure?
  • Does New Zealand need more effective remedies for holding local authorities to account?

These are policy questions, and they are not new. It is not the role of the Auditor-General to attempt to solve them. However, we suggest that they warrant consideration and debate.

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

page top