Part 1: Introduction

1.1
Delta Utility Services Limited (Delta) is a council-controlled trading organisation of Dunedin City Council (the Council). It is a contracting company that provides asset management, electrical contracting, and infrastructure operations and maintenance services in the South Island.

1.2
In 2008 and 2009, Delta entered into two transactions to expand its activities into residential property development. They were:

• Luggate Park – Delta bought a 50% interest in a joint venture to develop land at Luggate near Wanaka for $5.35 million in mid-2008; and
• Jacks Point – Delta bought 9.4 hectares of land at Jacks Point near Queenstown for $8.82 million in mid-2009.

1.3
The combined cost of the investments to Delta was $14.17 million.

1.4
Delta had not previously been involved in property development. However, it expected to provide infrastructure and contracting services to both developments as part of its growth strategy in Central Otago.

1.5
There has been less demand for the residential sections than expected. In 2012, Delta wrote down the value of its interest in the Luggate Park joint venture and the Jacks Point land in its financial statements by $7.5 million (before tax).

1.6
The Mayor of Dunedin wrote to the Auditor-General on 19 October 2012 asking her to investigate Delta's decisions to invest in the residential developments. The Auditor-General also received information and concerns about the transactions from members of the public and a councillor before and after announcing her decision to conduct an inquiry. The investments have been of concern to some people in Dunedin since they became known. The reduction in the value of the investments in 2012 heightened those concerns.

1.7
The concerns and questions raised included:

• Were the investment decisions made for good reasons following appropriate processes? Or were they influenced by connections between the parties involved or tainted by conflicts of interest?
• Did the Council and its holding company, Dunedin City Holdings Limited (the holding company), know about the decisions and approve them?
• Was Delta paid for contracting work that it did for the two developments? Or did Delta acquire some of the land in lieu of being paid for work?

1.8
Many of those who contacted us did not appear to know all the facts and details of the investment decisions.

1.9
In November 2012, the Auditor-General decided that an inquiry into the way that Delta made the decisions was warranted. A thorough review of the facts would provide assurance about the financial results of the investments and what had taken place. Appendix 1 sets out the terms of reference for the inquiry. Other commitments meant that we were not able to start work until March 2013.

1.10
Separate to this work, we are carrying out a study of governance matters in council-controlled organisations. We chose the Council as one of several councils to talk to for that work. We expect that the governance aspects of the inquiry and assurance work for Delta's property investments will contribute to that broader governance study.

How we carried out our inquiry

1.11
In carrying out our inquiry, we met with:

• the directors of Delta when both investments were made (Ray Polson, Ross Liddell, Norman Evans, Michael Coburn, Paul Hudson, and Stuart McLauchlan);¹
• staff members from Delta involved in the investments before and after they were made (the former chief executive and former chief financial officer, and the current chief executive and chief financial officer);
• the (now former) chief executive of the holding company; and
• Jim Boult, on behalf of the other companies involved in the Luggate Park joint venture.

1.12
We also met or spoke with;

• the Mayor of Dunedin, Dave Cull;
• the former Deputy Mayor, Councillor Syd Brown;
• Paul Orders (former chief executive) and Sandy Graham (group manager corporate services) Dunedin City Council;
• the former Mayor of Dunedin, Peter Chin;
• former Council officers who had some knowledge of the Delta investments (Jim Harland and Athol Stephens); and
• two Dunedin ratepayers who had contacted us with concerns and information.

1.13
We also reviewed a lot of information that Delta held about the two transactions and information that the holding company held.

1: We also met former Delta director John Gilks, who resigned as a director of Delta and the holding company at the end of May 2007 before the final decision to invest in Luggate was made. George Douglas, who resigned as a director of Delta in December 2008, was not available when we met the other directors. However, we gave him the opportunity to comment on a draft of this report.