Part 3: Our recent work in the local government sector

Local government: Results of the 2014/15 audits.

3.1
In this Part, we discuss our recent work looking at various governance and accountability structures, and some of the local government-related inquiries we have carried out.

3.2
For local authorities, 2014/15 was an important year. They faced the three-yearly requirement to produce long-term plans – an important accountability obligation – and to consult communities on those plans. We discuss briefly our review of the long-term plans.

3.3
During 2014/15, we published several reports on our Governance and accountability theme. The reports that will be of particular interest to local authorities include:

3.4
All these reports are available on our website. In this Part, we summarise them briefly.

Governance and accountability of council-controlled organisations

3.5
Council-controlled organisations (CCOs) have been part of the local government sector since the Local Government Act 2002 first came into effect. Under the Local Government Act 1974, they were called local authority trading enterprises. CCOs can provide local authorities with many advantages and benefits, but they can also present challenges and costs.

3.6
In 2001, we published a report on Local Authority Governance of Subsidiary Entities, in which we identified some principles that contribute to the good governance of local authority subsidiaries. Those principles can be summed up as:

having a clear purpose;
having effective accountability and monitoring mechanisms; and
appointing the right people.

3.7
Our October 2015 report, Governance and accountability of council-controlled organisations, revisits those principles and confirms that they remain relevant. We have added one more principle: a CCO's success depends on establishing an effective working relationship, based on mutual respect and trust, between the CCO and the local authority. An effective relationship goes beyond statutory requirements and requires ongoing commitment from both parties. How well the other principles are applied can largely depend on this.

3.8
CCOs operate in a political environment and are accountable to the community for their use of community assets or ratepayer funds. We have seen how important it is for local authorities to carry out their statutory functions well, because it provides the foundations for an effective relationship.

3.9
We encourage all local authorities with CCOs, and those considering setting up CCOs, to carefully consider the observations in our report.

Reviewing aspects of the Auckland Manukau Eastern Transport Initiative

3.10
Section 104 of the Local Government (Auckland Council) Act 2009 requires the Auditor-General to review the service performance of the Auckland Council and its CCOs from time to time.

3.11
In 2014/15, we decided to review Auckland Transport's governance, accountability, and programme management arrangements for the Auckland Manukau Eastern Transport Initiative (AMETI).

3.12
AMETI is a package of transport improvements. The programme has a long history and is scheduled to be finished in 2028.

3.13
Consistent with our governance and accountability work programme theme, we wanted to determine the effectiveness of AMETI's governance, accountability, and programme management arrangements, because of how important these are to effective service delivery. Local authorities are often responsible for large and complex projects, so our review and observations should also be useful to other local authorities.

3.14
Our report made 12 recommendations to help Auckland Transport strengthen AMETI's governance, accountability, and programme management arrangements. Our recommendations highlight:

the importance of Auckland Transport focusing on the health of relationships with stakeholders and on the benefits delivered to date, as part of its monitoring and reporting on delivery of projects to achieve intended programme outcomes;
the need to clearly define the expected benefits and report regularly to funders on the benefits realised;
the value of having clearly defined roles and responsibilities to ensure that current technical assessments and quality assurance processes are effective and support record-keeping and institutional knowledge for the duration of the programme's delivery.

3.15
It is important that strong systems and processes support decision-making, sustain programme delivery, and help to build and maintain important strategic relationships for all projects.

Effectiveness of governance arrangements in the arts, culture, and heritage sector

3.16
Public entities in the arts, culture, and heritage sector play an important role in ensuring that all New Zealanders have access to the arts and their heritage, and in supporting and developing artists and arts organisations. Many of these entities act as guardians for some of New Zealand's most important tangible and intangible heritage and creative output.

3.17
We looked at six entities' governance arrangements²² to determine their effectiveness. These arrangements play an important role in maintaining freedom of artistic expression and ensuring that personal interests do not unduly influence the preservation of heritage.

3.18
To help our review, we prepared criteria for evaluating five aspects of effective governance arrangements:

strategic direction;
leadership and culture;
monitoring and review;
risk management; and
internal controls.

3.19
We found that all six entities had effective governance structures and that each Board took its governance role seriously. We found some areas where the entities could strengthen their engagement with external stakeholders and improve their risk-management awareness and processes.

Principles for effectively co-governing natural resources

3.20
We looked at a selection of co-governance and co-management arrangements in the environment sector to identify issues and challenges for those involved and principles for the arrangements' success.

3.21
This is an evolving area and formal agreements often follow informal arrangements or long negotiations, sometimes with little consideration for the arrangements' long-term implications and sustainability.

3.22
We reviewed the governance and management of six natural resources or environmental projects and two smaller examples. They were:

Waikato River Authority;
Tūpuna Maunga o Tāmaki Makaurau Authority (Auckland);
Te Waihora Co-Governance Agreement (Lake Ellesmere, Canterbury);
Rotorua Te Arawa Lakes Strategy Group;
Ngā Poutiriao o Mauao (Tauranga);
Maungatautari Ecological Island Trust (Waikato);
Ngāti Whātua Orākei Reserves Board; and
Parakai Recreation Reserve Board.

3.23
Our report identified key lessons for those involved in co-governance and co-management, as well as principles to consider when setting up and operating co-governance and co-management environmental projects.

3.24
Successful arrangements come from effective relationships. All parties to a relationship need to value it and prioritise building an effective relationship. This takes time and commitment. Building and maintaining mutual trust and respect need constant attention to achieve good environmental outcomes.

3.25
We identified five principles that contribute to successful co-governance and co-management of environmental arrangements. Parties need to:

build and maintain a shared understanding of what everyone is trying to achieve;
build the structures, processes, and understanding about how people will work together;
involve people who have the right experience and capacity;
be accountable and transparent about performance, achievements, and challenges; and
plan for financial sustainability and adapt as circumstances change.

Matters arising from the 2015-25 long-term plans

3.26
Our December 2015 report, Matters arising from the 2015-25 local authority long-term plans, was the second of two recent reports on the long-term plan process. The first was our report Consulting the community about local authorities' 10-year plans, which included our observations from our audits of local authorities' consultation documents.

3.27
Our report on the consultation documents said that, overall, local authorities responded well to the new consultation requirements. However, the quality of the documents varied and opportunities for improvement remained.

3.28
Our second report sets out the main findings and observations from our audits of the 2015-25 long-term plans. It includes comments on the new requirement for local authorities to produce infrastructure strategies, presents the financial trends that emerge when the long-term plans for all local authorities are considered together, and discusses the effect of demographic changes on the ability of local authorities to effectively plan for the needs of their communities.

3.29
An ageing population is a significant matter for New Zealand. As a population ages, its needs for community services will change. Infrastructure needs will also change. As people move into retirement and on to fixed incomes, affordability becomes more of an issue.

3.30
Also, some local authorities expect their population to gradually decline, while other local authorities are facing strong growth. Both scenarios will affect the services required.

3.31
Local authorities face many challenges as they seek to address the effects of demographic and population change while continuing to provide affordable, sustainable local services.

3.32
We saw a range of initiatives in the long-term plans, particularly to do with economic development. These initiatives were not always linked to changing demographics. In general, we saw little discussion about how local authorities intend to respond to potentially changing requirements for services and infrastructure beyond the next 10 years.

3.33
It is important that local authorities are transparent in their proposals for adapting to a changing environment, so that their communities − who will pay for these proposals − can contribute to the decision-making process. The new requirement for long-term plans to include 30-year infrastructure strategies is a positive step towards having more transparency and accountability in local authorities' plans for maintaining and replacing their assets.

3.34
As part of local authorities' asset management planning, we noted that individual local authorities need to consider whether the capital expenditure they have forecast for renewal or replacement is adequate.

3.35
We compared the renewal expenditure to depreciation on the basis that depreciation is a reasonable estimate of the consumption of the service potential inherent in the asset. Our analysis showed that the proportion of renewal expenditure to depreciation varies.

3.36
This does not necessarily indicate that renewal or replacement expenditure will be inadequate. It may be that the depreciation rates established for accounting purposes do not accurately reflect actual consumption of the assets or that the assets are in a phase of their (long) life cycles where renewal and replacement does not yet need to be considered.

3.37
Local authorities need to understand the reason for the variance and ensure that they have robust information about their assets and that the depreciation rate being used is appropriate.

3.38
Overall, local authorities have risen to the challenge of effectively planning for how they will provide services into the future. However, there is still room for improvement.

Inquiries

3.39
The Auditor-General is able to inquire into concerns about how public entities use resources. This can include financial, governance, and management matters. Parliament funds this discretionary function and, from 2014/15, has given us additional funding for inquiries work. We have used this funding to set up a dedicated inquiries team.

3.40
We get inquiry requests from members of Parliament, public entities, and members of the public. Many of the inquiry requests are about local government, including requests under the Local Authorities (Members' Interests) Act 1968. Under this Act, we have a specific role to help local authorities and councillors manage financial conflicts of interest.

3.41
Our decision to inquire into a specific matter is discretionary and takes into account a number of considerations. This includes the seriousness of the issue, whether we have the resources and technical skills to consider the matter properly, and whether the issue could be better addressed through other avenues.

3.42
In 2014/15, we received 281 inquiry requests, which is 100 more than in 2013/14. Most of the increase was about central government matters. The number of requests about central government doubled and the number of inquiry requests about local government matters increased by about 50%. Some of the increase was because 2015 was a long-term plan year.

3.43
Both of our most recent significant inquiries into local authorities have been about managing conflicts of interest. This remains an important challenge for local authorities and elected members. We discuss these two inquiries – into Queenstown Lakes District Council and Ashburton District Council − in more detail in paragraphs 3.52-3.59.

Completed inquiries in 2014/15

3.44
In paragraphs 3.45-3.59, we outline the major local government inquiries that we completed or considered in 2014/15 and in the first half of 2015/16.

3.45
The terms of reference for the major inquiries that are under way, and the completed inquiry reports, are available on our website.

3.46
In 2014/15, we completed 160 inquiries on local government matters. We usually have about 15 inquiry matters open at a time. We also responded to 47 Local Authorities (Members' Interests) Act matters in 2014/15.

3.47
Our general inquiries workload spans a range of local government activity. The inquiry requests that we received were about such matters as:

long-term plans;
activities and decisions of CCOs and concerns about local authority decisions about CCOs, including perceived subsidy arrangements;
spending proposals for significant projects or for projects that the complainants did not consider appropriate for local government, such as promoting a yacht race;
operational matters for infrastructure projects, such as sewerage and wastewater schemes;
financial management and financial prudence, including debt;
matters of ongoing concern to ratepayers, such as rates increases;
amalgamations; and
financial and non-financial conflicts of interest.

3.48
Inquiry requests can be a useful source of information for us and our auditors. They show which local government matters concern people and can help us to plan what work to do.

3.49
In many instances, we ask the requester to contact the local authority with their question or concern. This is especially important where the local authority is consulting on the matter in the long-term plan process. However, it is also appropriate that local authorities have a chance to respond directly to complaints. Sometimes, we did not carry out a formal inquiry but passed the information on to our appointed auditor of the local authority for consideration and any appropriate action during the annual financial audit. We deal with these routine inquiry requests carefully to work out the most appropriate response and best use of the information.

3.50
We tend to get more inquiry requests about the larger metropolitan local authorities. Most inquiry requests come from Auckland, which accounted for 17% of the inquiries about local government matters. This is to be expected, because of the larger population and the stronger interest in local government after the local government reforms. A few smaller local authorities generated more complaints than usual because of high public interest in matters such as proposals to make significant changes to rates.

3.51
A few councillors complain to us about their own councils relatively often. We consider that councillors should generally raise their concerns with the chief executive or their fellow councillors at the council table.

Significant inquiries

Queenstown Lakes District Council: Managing a conflict of interest in a proposed special housing area

3.52
In October 2015, we completed an inquiry into how Queenstown Lakes District Council and its chief executive managed the chief executive's conflict of interest in a proposal for land owned by his family to become a special housing area. We carried out this inquiry in response to concerns raised by some people in Queenstown.

3.53
We considered that the chief executive appropriately disclosed the conflict of interest to the mayor and the senior local authority officers at the relevant time. The mayor and the senior officers sought to appropriately manage the interest, including seeking our views on the proposed approach to managing the conflict of interest.

3.54
We concluded that the approach taken to manage the conflict of interest was reasonable. However, we also said that the Council could have taken steps to address the matter more effectively. These included seeking legal advice to consider whether there were likely to be any impediments to the chief executive's ability to meet his responsibilities under section 42 of the Local Government Act 2002, particularly advising members and leading staff. We concluded that the chief executive's conflict of interest affected his ability to fulfil his core role as adviser to the council and provide leadership to staff.

3.55
Local authority employees have the same rights and privileges as private individuals. These rights and privileges need to be considered in the light of their responsibilities to the local authority. In some instances, a choice might have to be made between those rights and responsibilities.

Ashburton District Council: Allegations of conflicts of interest affecting decisions on a second bridge

3.56
In October 2014, we completed an inquiry into how three elected members of Ashburton District Council managed questions about conflicts of interest.

3.57
The questions arose in the context of the decisions the Council had to make on its project to build a second bridge across the Ashburton River in 2026. We considered the possible financial and/or non-financial conflicts of interest of one elected member who owned property next to the designated area and two other elected members whose family members owned property in the designated area of the planned second bridge.

3.58
The different conflict of interest questions that the three councillors had to consider are a good illustration of the matters that arise in local authorities throughout the country. Deciding whether there is a conflict of interest and, if so, how to manage it is rarely straightforward. In an appendix to that report, we included a summary of the different types of interest and the risks that conflicts create for individual members and local authorities.²³

3.59
We concluded that the decision to designate land for the bridge project did not have a certain or significant enough effect on the value of the property for the elected member to be regarded as having a financial interest. We concluded that all three councillors made reasonable choices about whether to participate in Ashburton District Council's decisions. The final decision about whether to take part in the council deliberations rests with the individual councillor, and there is considerable room for judgement.

22: The Museum of New Zealand Te Papa Tongarewa, Auckland Art Gallery, Govett Brewster Art Gallery, Wellington Museums Trust, Creative New Zealand, and Te Māngai Pāho (Māori Broadcast Funding Agency).

23: We issued guidance on managing conflicts of interest for local authorities (in 2010) and for public entities generally (in 2007). The 2010 guidance covers how to manage financial conflicts of interest, including the ability for a member to apply to the Auditor-General for permission to take part in decision-making on a matter despite having a financial interest and the circumstances and considerations that apply.