Part 1: Introduction

Governance and accountability of council-controlled organisations.

1.1
Most local authorities use subsidiary companies or other entities such as trusts to conduct commercial and non-commercial activities on their behalf. The Local Government Act 2002 (the Act) introduced the term "council-controlled organisation" to describe these entities. Before that, commercial entities controlled by local authorities were called Local Authority Trading Enterprises or LATEs.

1.2
This report updates our earlier publications on local authority subsidiaries. It offers guidance on how the principles of good governance apply to setting up, operating, and monitoring CCOs.

1.3
Some local authorities also own, or have interests in, subsidiary entities that are not council-controlled organisations, such as electricity lines businesses, port companies, and energy companies. Many of the matters that we discuss in this report are relevant to these other subsidiary entities.

What is a council-controlled organisation?

1.4
The Act defines council organisations, council-controlled organisations (CCOs), and council-controlled trading organisations (CCTOs):

A council organisation is the broadest category. It is an entity in which a local authority has any ownership interest whatsoever.
A CCO is an entity in which one or more local authorities control 50% or more of the voting rights or appoint 50% or more of the members of the governing body. A CCO can be a company, trust, partnership, incorporated society, joint venture, or other similar profit-sharing arrangement.
A CCO that operates a trading undertaking for the purpose of making a profit is referred to as a CCTO. Not-for-profit entities are CCOs.
The definition of CCO excludes port companies, energy companies, electricity lines businesses and their parent trusts, and several other named entities.²

1.5
This report is concerned with entities that meet the 50% ownership threshold – that is, CCOs and CCTOs – rather than other council organisations that do not meet that threshold.

1.6
In this report, we use CCO to refer to both CCOs and CCTOs. However, we use CCTO when a point is specific to a CCTO.

Why we did this work

1.7
The Auditor-General is currently the auditor of 124 council-controlled trading organisations (CCTOs) and 74 non-profit CCOs. The Auditor-General also audits another 95 organisations that are related to local authorities but are not CCOs, including some entities that have been exempted from being CCOs under section 7 of the Act.³

1.8
Successive Auditors-General have had a long-standing interest in the governance and accountability of public entities and their subsidiaries. In 2001, the then Auditor-General published a report on Local Authority Governance of Subsidiary Entities, which updated a 1994 report on Governance of Local Authority Trading Activities.

1.9
That work pre-dated the Act, which introduced an updated governance and accountability regime for CCOs and brought non-profit entities into the CCO accountability regime. It also pre-dated the reform of local government in Auckland, where CCOs now carry out significant activities on behalf of the Council. In addition, the Auckland Council legislation made some changes to the CCO model that apply only to Auckland.

1.10
The statutory framework for CCOs in the Act has been in place for more than 12 years, and the number of CCOs has increased steadily from about 145 in 2002 to 198 in 2015. This document updates our previous publications to reflect the current statutory regime and issues with CCOs.

1.11
We wanted to:

re-examine the principles for good governance of subsidiaries that we proposed in 2001; and
identify and discuss the issues relevant to CCOs that have come to our attention since 2002.

1.12
In carrying out this work, we focused on the need for:

a local authority to have a clear purpose for each of its CCOs;
an effective and efficient system for the local authority to monitor the CCO and for the CCO to be accountable to the local authority, in accordance with the requirements of the Act; and
the CCO to be accountable to its community and for the local authority to be accountable for the CCO's performance.

1.13
The last two bullet points distinguish CCOs from other parent/subsidiary models.

1.14
A local authority might set up a CCO for a range of purposes. There is no "perfect model". The preferable form for a CCO, its directors, and its monitoring and accountability will all depend on the local authority's purpose for the CCO. A CCO set up to manage a community asset such as a museum is likely to look different from a CCTO that manages a business such as an airport.

1.15
We set out to consider the various options and opportunities that a CCO gives a local authority. We do not recommend one option over another. We also wanted to discuss the benefits or problems that might arise, with reference to various issues that have come to our attention in recent years.

1.16
Several local authorities have reviewed their CCO arrangements during the last two or three years. These reviews have led to some restructuring of arrangements, including integrating CCO activities back into local authorities. We did not want to repeat the work done by various consultants in reviewing CCO governance structures. Nor did we want to write about governance generally. Rather, we sought to identify and discuss issues specific to CCOs and to offer our view on them.

How we did this work

1.17
We spoke with elected representatives, current and former board members of CCOs or other subsidiaries, and senior staff from the following local authorities and some of their CCOs:

Auckland Council;
Christchurch City Council;
Dunedin City Council;
Otago Regional Council;
Queenstown Lakes District Council;
Tauranga City Council;
Wellington City Council; and
Greater Wellington Regional Council.

1.18
We considered reviews of CCO governance arrangements that were carried out for:

Dunedin City Council;
Queenstown Lakes District Council;
Tauranga City Council; and
Wellington City Council.⁴

1.19
We also considered our own records, including matters arising during annual financial audits of CCOs and inquiries that involved CCOs. The governance and accountability issues we considered in our inquiry into property investments by Delta Utility Services Limited, a CCO of Dunedin City Council,⁵have contributed to our thinking and work on this study.

1.20
We do not specifically discuss CCOs that have more than one owner. However, the principles and practices set out in this report will apply to those CCOs, although the monitoring and accountability arrangements may be more complex.

1.21
We have not specifically focused on Auckland's substantive CCOs because of their differences, and because the council is reviewing them, although we do refer to Auckland where relevant. We have considered the Auckland CCOs in:

Planning to meet the forecast demand for drinking water in Auckland (August 2011); and
Auckland Council: Transition and emerging challenges (December 2012).

Outline of this report

1.22
The report is structured as follows:

an outline of the principles and statutory framework underpinning CCOs (Part 2);
whether a CCO is the right option (Part 3);
getting the design of CCOs right (Part 4);
appointing directors (Part 5);
accountability and monitoring – the formal requirements (Part 6);
monitoring – having an effective relationship between a local authority and its CCOs (Part 7); and
operating in the local government environment (Part 8).

1.23
We discuss examples of CCOs in Appendix 1.

2 Section 6(4) of the Act.

3 As at September 2015.

4 We list these reviews in Appendix 2.

5: Inquiry into property investments by Delta Utility Services Limited at Luggate and Jacks Point (2014).