Central plains water scheme

Several people have written to the Auditor-General with concerns about the central plains water scheme. We have considered the issues and conveyed the following information to interested parties on 24 August 2006.

Central Plains Water Limited and the Central Plains Water Trust

I refer to your letter of [date]. We have now had an opportunity to fully review the contents of your letter and consider how best to proceed.

Several other people also wrote to us about the central plains water scheme, raising similar issues to the ones you raised.

The 2 main sets of concerns were about:

• Central Plains Water Limited ("CPW Ltd") being granted "requiring authority" status by the Minister for the Environment; and
• the role and operations of the Central Plains Water Trust ("the Trust"), including alleged conflicts of interest of members of the Trust.

We have carefully considered the issues raised in your letter and in the letters sent to us by others, to determine whether we wish to inquire, under the Auditor-General's inquiries function (as contained in the Public Audit Act 2001), into any of the issues raised.

However, we have decided not to undertake an inquiry into this matter for the reasons discussed below.

Despite that, we make some general comments about the conflict of interest issue, which we hope may be of assistance to all concerned.

Requiring authority status

Our correspondents raised concerns about:

• whether CPW Ltd should have been granted requiring authority status;
• whether CPW Ltd's proposed project has changed since obtaining that status in ways that are impermissible or improper; and
• whether CPW Ltd is carrying out its obligations (especially for consultation) properly.

To the extent that these issues concern the actions or omissions of CPW Ltd, we are unable to investigate. Our mandate is limited to "public entities", as that term is defined in the Public Audit Act. When it was first established, CPW Ltd was a public entity. However, once its shares were sold to landowners within the scheme's area, CPW Ltd ceased to be a public entity for the purposes of the Public Audit Act.

In respect of the Minister's decision to grant CPW Ltd "requiring authority" status under section 167 of the Resource Management Act 1991, we note that:

• we do not have the ability to overturn the Minister's decision or make a legal determination about its lawfulness;
• there are no indications that the Minister has not complied with his statutory obligations, and it is not our role to second guess the Minister's judgement on a discretionary decision of this nature; and
• the main regulatory decisions about the merits of the actual project are yet to be made, and other, more appropriate, mechanisms exist for members of the public to participate in, and contest or appeal, those decisions.

Granting requiring authority status to an entity does not constitute overall approval to a project. Nor does it approve particular details of a project, or require a project to be undertaken in a particular way.

It seems to us that many of the concerns being raised about the scheme are more suitable for debate when the relevant regulatory decisions are being made about the designation, outline plan, resource consents, and acquisition of land. All of those decisions will have statutory participation and appeal rights for interested parties.

The Trust's role and conflicts of interest

In this area, some correspondents have expressed concerns about the role and operations of the Trust, including:

• whether the Trust is giving effect to its objects, and in particular whether it is properly protecting and representing community and environmental interests and acting as an effective watchdog over the scheme; and
• the apparent close relationship between the Trust and CPW Ltd, including conflict of interest concerns over the fact that most of the trustees have become (or unsuccessfully attempted to become) shareholders in CPW Ltd and the fact that the boards of the Trust and CPW Ltd have overlapping membership.

We are not well placed to assess broad issues of whether the Trust is properly giving effect to its objects or is protecting the environment. Such questions are wide ranging, and involve matters that are the subject of legitimate political or policy debate. Moreover, questions about whether a charitable trust is generally acting consistently with its objects or other terms of its trust deed are primarily the responsibility of the Attorney-General and/or the Charities Commission. Questions relating to whether the Trust is acting to protect the environment and related community interests may fall more properly within the domain of experts in the environmental field, such as the Ministry for the Environment or the Parliamentary Commissioner for the Environment.

However, we thought it may be useful to add some general comments about the conflict of interest issue, and how that may affect the Trust. From what we know about the present situation, it is not apparent that any improper act is likely to have occurred, or is likely to occur. Nevertheless, this issue has been the subject of some media comment, and the topic of conflicts of interest is one where we have previously undertaken work.

We hope that the following general comments about conflicts of interest may be of assistance to interested members of the public, and to the Trust and other entities involved.

Conflicts of interest

In the public sector, a conflict of interest exists when a person's duties or responsibilities to a public entity could be affected by some other separate (and usually private) interest or duty that they may have. One way of considering whether a conflict of interest may exist is to ask: "Does the issue create an incentive for the person to act in a way that may not be in the best interests of the public entity?"

Under trust law, there is an equivalent legal principle that expresses the concept of conflicts of interest: a trustee is not allowed to put themselves in a position where their official duty and personal interests conflict (see, for example, Collinge v Kyd [2005] 1 NZLR 847). This legal principle is subject to the terms of the trust deed.

Conflicts of interest cannot usefully be assessed in the abstract. One must always focus on the relationship between the private interest and the particular matter (that is, the question, decision, project, or activity) that is being considered by the public entity. As a result, it is not usually worthwhile to ask, in a general sense, whether the existence of an interest means that person should not remain a member of the entity at all. It will be uncommon for a conflict of interest to be so significant or pervasive that the person will need to consider divesting themselves entirely of one or other interest or role. Rather, the question of whether a conflict of interest exists needs to be considered on a case-by-case basis, having regard to the connection between the person's private or other interest and the particular matter before the entity.

Therefore, the simple fact of applying for, or owning, shares in CPW Ltd is unlikely, of itself, to prevent a person from remaining a trustee of the Trust.

We understand that CPW Ltd was initially established by, or with the involvement of, the Trust before it was sold to landowners within the scheme's area. It appears that, in practice, it has been regarded as a subsidiary or offshoot of the Trust, perhaps intended to pursue the same overall objectives.

In those circumstances, the fact of some common board membership between the 2 entities may be unremarkable. Where a board member of one entity is involved in a second entity specifically to represent the first one, it frequently could be seen as not inconsistent with their role for them to participate in meetings of the second entity in some matters that concern the first entity - especially if that other role gives them specialised knowledge that it would be useful to contribute. This may be seen as legitimate, and mutually beneficial.

Moreover, the trust deed expressly envisages that the Trust will include representatives of "farmer interest groups". Given that CPW Ltd is owned by landowners in the scheme area, it can be expected that some trustees will inevitably be shareholders in CPW Ltd.

Yet, even though the 2 organisations may be related, conflicts of interest could still arise for individual trustees in relation to some of the Trust's decisions from time to time.

For instance, company directors have a legal duty to act in the best interests of their company. Trustees have legal duties to act in the beneficiaries' best interests, to refrain from profiting from their trusteeship, and to avoid allowing their personal interests to conflict with their duties as a trustee. Those director and trustee duties might sometimes conflict at Trust meetings. In addition, a shareholding or directorship could give rise to a personal interest in the company that could be affected, for example, by Trust decisions that might materially affect the company's value or viability (for instance, if the person is a shareholder in the company and the matter is likely to materially affect the company's share price, or if the person is a paid director and the matter is likely to materially affect their remuneration).

The terms of the trust deed are also relevant. In this case, the trust deed makes some provision for dealing with trustees' conflicts of interest. In particular, we note that the trust deed provides that a person is not deemed to have a disqualifying interest merely by being a ratepayer, an actual or potential user of water under the scheme, or an owner of land within the areas of land intended to be served by the scheme.

Overall, the question of whether a conflict of interest exists for a trustee that requires them to not participate in a particular decision of the Trust will need to be addressed and managed on a case-by-case basis, having regard to the particular matter being considered by the Trust. That assessment is primarily for the trustee concerned to make, acting on advice if necessary. This will depend on a weighing of such things as the type and size of the trustee's other interest, the nature or significance of the particular decision or matter, and the degree to which the other interest could affect (or be affected by) the decision or matter in question.

We are not presently aware of any allegation that a trustee acted improperly in relation to a particular decision of the Trust. In the course of our annual audits, we maintain a general alertness for the possibility of conflicts of interest on the part of members of the governing body of a public entity.

Conclusion

Given the level of interest in this subject, we have sent the same general reply to all people who have written to us.

Because we do not plan to undertake an inquiry, we have not considered it necessary to seek the views of the entities concerned before writing to you. However, we think our general comments may be of interest or assistance to them, so we are sending a copy of our comments to the Trust, CPW Ltd, the Minister for the Environment, the Christchurch City Council, the Selwyn District Council, and the Parliamentary Commissioner for the Environment, and we intend to publish the contents of this letter on our website. (I note, though, that we will do so in a way that does not identify you or the other people who wrote to us.)

Thank you for taking the time to write to us.

Yours sincerely

 

Bruce Robertson
Assistant Auditor-General, Local Government