Auditor-General's overview

Inquiry into property investments by Delta Utility Services Limited at Luggate and Jacks Point.

In November 2012, I announced that my Office would carry out an inquiry into property investments by Delta Utility Services Limited (Delta), a council-controlled trading organisation of Dunedin City Council (the Council).

The property investments were at Luggate, near Wanaka, in mid-2008, and Jacks Point, near Queenstown, in mid-2009.

The Mayor of Dunedin asked for the inquiry. I was aware that some Dunedin ratepayers had alleged impropriety about the investments. There were also more widespread concerns that the investments had lost money and would reduce the Council's net worth.

My staff have reviewed:

  • Delta's decisions to invest;
  • how Delta managed the investments;
  • the involvement of Delta's parent company, Dunedin City Holdings Limited; and
  • the Council's actions.

This report sets out my Office's findings and conclusions.

The land at Luggate was sold in August 2013. Delta has sold all of the land at Jacks Point under deferred payment arrangements, with final payment due in December 2014.

Delta lost about $5.9 million on the Luggate investment and has projected a loss of about $2.8 million for Jacks Point. These losses are before tax, and Delta expects that they might yet be offset by tax credits of about $1.5 million for Luggate and about $0.8 million for Jacks Point. If so, the overall loss would be about $6.4 million.

Although Delta carried out a careful process before investing in Luggate, it is difficult, because of the size of the loss, to avoid concluding that the investment was a mistake. Delta's managers and directors who were involved have largely come to the same conclusion.

The Jacks Point investment was a better proposition than Luggate when it was made, but changes to its operations mean that Delta is unlikely to realise all of the broader benefits that were expected when the investment decision was made.

Delta directors regarded the investments as learning experiences for the company. Because of the losses involved, these proved to be expensive lessons. In my view, there was too much focus on the likely profits and not enough consideration of risks of the market slowing or an exit strategy if things went wrong. I consider that Delta should have got independent advice before investing in Luggate and Jacks Point.

My staff found no evidence of impropriety or of poorly managed conflicts of interest in relation to either investment. However, they did identify some breaches of the Local Government Act 2002 and the Companies Act 1993 and instances of Delta using artificial business structures to avoid public accountability.

The extent of the interests and involvement of one of Delta's directors in Jacks Point and how these interests and involvement were managed caused me to pause and think. These interests also concerned the members of the public who contacted my Office. In public office, having multiple roles and interests requires careful management. People with such interests need to behave with the utmost integrity and transparency to avoid real or perceived conflicts and risks to the public entities they serve. Although the overall management and disclosure of conflicts of interest was largely adequate, we identified some instances where there should have been earlier or fuller disclosure for better transparency, and one instance where the director's involvement in both sides of a venture would have been problematic had the venture proceeded.

Since 2004, Delta had sought new opportunities to expand its business, including in Central Otago. Since 2006, the Council had sought higher dividends from the Dunedin City Holdings Limited group. The holding company was told of this shortly before the Luggate investment opportunity. However, the Council had given no direction about how much risk it was willing to take on. Because most of the directors of Delta were also the directors of Dunedin City Holdings Limited, the governance regime that the Council had in place in the Council group did not provide Delta with adequate oversight of, or guidance about, the investments. For these reasons, I consider that the Council and Dunedin City Holdings Limited bear some responsibility for the investments.

Although I make no specific recommendations, this report contains lessons for all involved and for other local authorities and council-controlled organisations.

In his 2011 review of governance issues in the Council's group of companies, Warren Larsen identified many – if not all – of the governance and communication matters that we note in this report. The Council is taking appropriate steps to address those problems.

I intend to publish a separate report later this year that will explore wider governance and communication issues between council-controlled organisations and councils. In the meantime, I trust that this report will provide some useful guidance for all other local authorities – especially those with council-controlled organisations that carry out commercial activities.

I thank the current and former directors and staff of Delta, Dunedin City Holdings Limited, and the Council who helped with our inquiry.

Signature - LP

Lyn Provost
Controller and Auditor-General

14 March 2014

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