Our review of the Northland Events Centre Project

17 May 2011
The Office of the Auditor-General received correspondence in late 2009 raising concerns about the Northland Events Centre project. The text of the Assistant Auditor-General Legal's letter to the Chief Executives of the Whangarei District Council and the Northland Regional Council is reproduced below.

13 May 2011

Mark Simpson
Chief Executive
Whangarei District Council
Private Bag 9023
Whangarei 0148

Ken Paterson
Chief Executive
Northland Regional Council
Private Bag 9021
Whangarei 0140

As you know, the Office of the Auditor-General received correspondence in late 2009 raising concerns about the Northland Events Centre project. In particular, questions were raised about the business arrangements between the Whangarei District Council and Northland Regional Council, their plans for ongoing management of the centre, and the way in which the Northland Rugby Union’s interests in the development were being managed. We were also aware that relations between the two councils had become strained, and that a significant amount of ratepayers’ money was committed to this project.

We considered that the issues warranted investigation. During 2010, we gathered documents from the two councils, visited the stadium, and spoke with people involved in the project. Our work was deferred for some time in the second half of 2010 because of competing priorities. We completed our review in early 2011.

The attached review summarises the main facts that were relevant to our review, and our conclusions on the major issues.

Given that there has been public interest in these issues, we will publish this letter and the attached review on our website.

Summary of the project

Since 2004, Northland Regional Council (NRC) and Whangarei District Council (WDC) have been working together on a project to build a new regional multi-purpose events centre at Okara Park in Whangarei. The councils completed the Northland Events Centre (the centre) in May 2010. It is now being operated by the new Northland Events Centre Trust (the Trust).

In summary, the main elements of the project, as recorded in the councils’ 2009–19 LTCCPs and the various legal agreements, were as follows:

  • Capital costs: NRC was responsible for contributing $13 million to the capital costs. WDC was responsible for contributing $3 million. Central government contributed $2.5 million.
  • Design and building: Both councils helped design the centre. NRC was responsible for project managing the building phase in consultation with WDC.
  • Purpose of the centre: The new centre was intended to be "multi-purpose". This meant it had to meet the Northland Rugby Union’s requirements – because the rugby union was likely to be one of the major users – but the centre also had to be suitable for a wide range of other sporting codes and community events. This was essential, not only to ensure that the centre would meet the needs of the wider community, but also to ensure that it was financially viable.
  • Ongoing operating costs: The aim was to ensure that the centre could be operated on a cost-neutral basis, and it has been designed with that in mind. Any operating shortfall would be the sole responsibility of WDC.
  • Ownership and ongoing management of the centre: The centre was to be operated by an "independent trust" established by WDC, with WDC assuming ownership if the trust failed.

Our conclusions

In summary, at this stage the project appears to have been a success in practical terms. We were told the building phase generally went well: there was open communication between the councils and any issues that arose were resolved without major incident. The two councils took appropriate steps to manage the financial risks during the design and building phases, and it is clear who is now responsible for managing the ongoing risks of an operating shortfall. The centre was built on time and within budget. We understand both councils are satisfied that the completed centre meets their requirements as a multi-purpose venue.

We acknowledge that these are significant achievements, given the inherent difficulties of collaborative activities and construction projects of this scale.

However, we have identified some aspects of the project that we consider could have been managed better. In our view:

  • WDC should have consulted more with NRC before changing its mind on the arrangements for the ongoing ownership and management of the centre, given that this was a joint project and NRC was raising most of the capital costs from regional ratepayers. Although WDC was finally responsible for the future management of the asset, NRC also had commitments to its ratepayers that needed to be acknowledged.
  • The Northland Rugby Union was entitled to be compensated for the interests it surrendered to enable the redevelopment of Okara Park to proceed, but we were not satisfied that WDC had sufficient information to show that the $2 million figure it had agreed with the rugby union represented fair value for its interests in the site.
  • WDC tried to manage perceptions about conflicts of interest for its councillors who have links to the Northland Rugby Union, but its approach of delegating relevant decision-making to its chief executive did not work well and needs to be reconsidered.

We carried out most of the work on this investigation during 2010. The local authority elections in October 2010 have resulted in significant changes to the membership of both councils. We hope that the members of the new councils will support the facility that their predecessors have built and will take account of the findings in the attached review for the future management of the Northland Events Centre and for any other development projects they embark upon.

We record our thanks to the management and staff of the two councils, who have co-operated fully with our work during the last year.

Yours sincerely

Nicola White
Assistant Auditor-General, Legal

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Introduction

  1. Planning for a multi-purpose events centre at Okara Park in Whangarei began in 2004 and spanned three council terms. In 2006, Northland Regional Council (NRC) and Whangarei District Council (WDC) agreed on a proposal for developing the Northland Events Centre (the centre). The construction phase began in December 2008 and was completed in May 2010.
  2. In late 2009, the Auditor-General received several letters about the project and the local media began reporting on concerns. The concerns included that:
    • there was no contractually binding business plan between the two councils for future ownership, operation, and maintenance of the centre, and that inadequate financial provision had been made for the costs involved;
    • the project had been “captured” by rugby interests, and that therefore the centre would not be truly multi-purpose as stipulated in the councils’ long-term council community plans (LTCCPs);
    • some WDC councillors had conflicts of interest in relation to the Northland Rugby Union (the rugby union). Of particular concern was an agreement between WDC and the rugby union in which WDC agreed to recognise that the rugby union had an interest valued at $2 million in the completed centre; and
    • there were tensions between WDC and NRC that were affecting the project.
  3. Because of the amount of ratepayer money involved and the evidence of wider community concerns, we decided to investigate.
  4. We have concentrated on events during the 2007–10 term of the councils. We have not assessed the actions of the previous councils, except to understand the historical context.
  5. The four main issues we looked at were:
    • the basis on which ratepayer funds had been committed to the project;
    • the arrangements made by the two councils for the ongoing management and funding of the centre;
    • whether any councillors at WDC had conflicts of interest in relation to the rugby union and, if so, how these were managed; and
    • the role of the rugby union in the project – in particular, the basis on which WDC had agreed to recognise the rugby union’s interest in the completed centre.
  6. We did not examine:
    • the decision-making processes leading to the original decision to build the centre;
    • funding arrangements for the building phase of the project; or
    • any issues relating to the construction contract or managing the building of the centre.
  7. We asked both councils to provide us with copies of correspondence, papers, and council minutes about the centre, as well as copies of any legal agreements. We also visited both councils and spoke to each chief executive, a member of each council, and relevant staff. Both councils have commented on drafts of this review.
  8. The rest of this review sets out a brief history of the project, followed by our findings on the four main issues we looked at. The Appendix sets out a more detailed history of the project, including the various commitments made by the two councils, as set out in their LTCCPs and legal agreements.

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The history of the Northland Events Centre project

  1. The Appendix sets out the history of the project in detail. We summarise the main points here.
  2. WDC owns the Okara Park site, but leased it to the Northland Rugby Union (the rugby union) in 1993 for a nominal sum. The lease was due to run until 2028. The rugby union had exclusive possession and control of the site, subject to some obligations to make it available to other sporting codes at specified times. WDC owned, and was responsible for maintaining, the major assets at the site. The rugby union was responsible for maintaining the playing surface, owned the stadium lights, and made various capital improvements during the course of the lease.

Development of a proposal: 2004–07

  1. By 2004, some maintenance work was overdue and the stadium needed to be upgraded to meet new minimum requirements. Interested organisations began to consider options for redevelopment. Key dates in the development phase were:
    • 2004: A multi-agency steering group developed a proposal for a multi-purpose stadium. Initial consultation showed that there was interest in the idea but concern about the cost.
    • August 2005: The rugby union approached WDC with a proposal for a scaled-down project. It entered into a Heads of Agreement with WDC under which the rugby union would take the lead in redeveloping the site.
    • 2006: After extensive discussions between the councils and the rugby union, both councils included information about the project in their LTCCPs – including information about the cost, funding arrangements, and proposed future management by an independent trust.
    • 2006–07: The rugby union obtained the necessary resource consents for the project. Appeals to the consent were resolved after mediation.

Revised arrangements: 2008–09

  1. Progress stalled in 2007 while the resource consent appeals were resolved. By 2008, the rugby union was having financial difficulties, so the arrangements for the development needed to be revisited. The key steps were:
    • August 2008: A new approach was developed, under which WDC and NRC would fund a considerably scaled-down building project and an independent trust would manage the centre. The rugby union would be a tenant of the trust. The existing lease and Heads of Agreement with the rugby union would be cancelled. Assurance was given that the rugby union’s financial interests in the site would be recognised in future arrangements.
    • October 2008: WDC approved a separate loan of $300,000 to the rugby union, on the condition that the rugby union cancelled the Heads of Agreement, surrendered the existing lease, and assigned its rights under the resource consent to WDC.
    • December 2008: WDC and NRC signed a Funding and Development Agreement, setting out their roles and responsibilities in the project as a whole.
    • December 2008: WDC wrote to the rugby union with an assurance that the future lease of the facility to the rugby union would place the rugby union in a "no worse off position" than the 1993 lease.
    • January 2009: WDC and the rugby union signed formal agreements for the loan, cancellation of the Heads of Agreement, and surrender of the lease.

Construction: 2008–10

  1. In late 2008, the two councils formed a joint working party to manage the tender process for the construction contract and agreed that NRC would manage the building phase. Key events in that phase were:
    • February 2009: The construction contract was awarded and building began.
    • June 2009: A Deed of Assignment was signed between the two councils, the construction company, and Enterprise Northland to enable payments to be made through Enterprise Northland.
    • Mid-2009: Both councils published new LTCCPs with updated information about the project.
    • December 2009: WDC and the rugby union signed a deed to recognise that the rugby union had effectively contributed the value of its earlier site improvements to the redevelopment project, that these were valued at $2 million, and that this contribution would be recognised somehow in future arrangements for the new centre.

Development of ongoing operating arrangements: 2009-10

  1. As building proceeded, WDC began to develop its plans for managing the ongoing operation of the centre. The intention had always been for an independent trust to operate the centre, but the details had not been worked out in the early stages of the project.
    • During 2009, WDC decided that it would retain ownership of the centre (rather than transfer it to a trust), and that it would establish the trust on its own (to manage the centre), without NRC’s involvement. WDC did not discuss this change in approach with NRC.
    • In December 2009, WDC formally rescinded its earlier decision to place the centre in a trust, formally decided to retain ownership, and approved the draft trust deed and deed of indemnity for trustees.
    • In May 2010, WDC executed the Trust Deed to establish the Northland Events Centre Trust (the Trust).
    • In September 2010, the building contractor handed the completed centre to NRC in keeping with the construction contract.
    • In January 2011, NRC resolved not to transfer ownership of the completed centre to WDC until our review was completed.

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Issue 1: How the project was funded

Funding the construction of the new centre

  1. From the outset, the proposal was always to share the redevelopment costs between the two councils. NRC would fund most of the building costs for what would be a regional asset, and WDC would be responsible for the centre’s finances once it was operating.
  2. The final agreement was for NRC to contribute $13 million to the capital costs. It raised these funds through a regional Recreational Facilities Rate. WDC provided the site and contributed $3 million to the capital costs. Central government also contributed $2.5 million. The final agreement was that, once completed, the new centre would be operated by an independent trust, with WDC ultimately responsible for any operating shortfall.
  3. These funding commitments were appropriately explained to the community in the relevant LTCCPs. We understand that this aspect of the project has proceeded relatively smoothly.

Ongoing funding of the centre

  1. An operating deficit is an obvious risk in a project of this type. Both councils considered that risk during the planning and design stages of the project, and acknowledged it in their LTCCPs. Steps were taken to manage the risk. For example, one of the reasons for incorporating office space into the centre’s design was to offset the risks of under-using the venue as an events centre. The councils commissioned a report, which concluded that the centre had the potential to be cost neutral once it was established.
  2. The councils originally made specific provision to cover any operating losses in the initial years, with a proportion of NRC’s contribution to the project ($500,000) earmarked to cover any operating shortfall in the initial period of operation. However, by the time the 2009–19 LTCCPs were published, this position had changed and it was agreed that WDC would be solely responsible for any operating shortfall.
  3. This agreement was recorded in the Funding and Development Agreement (signed in December 2008) and reflected also in the Deed of Assignment (signed in June 2009). As far as we are aware, no disputes about this have arisen between the councils.

Conclusion

  1. The funding for building the new centre proceeded smoothly. From the outset, the two councils were clear with each other and with their ratepayers about how they intended to fund the project. They are to be commended for building the centre within budget.
  2. We have no reason for concern at this stage about the centre’s ongoing funding. The Appointed Auditor will monitor the situation during the annual audit of WDC and the Trust, as part of our normal work.

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Issue 2: Setting up a trust to manage the centre

  1. Both councils’ LTCCPs for 2006–16 record that the centre will be operated by an "independent trust". NRC’s LTCCP states that the trust will also own the centre. By implication, this was WDC’s understanding as well, with WDC’s LTCCP stating that WDC would assume ownership of the centre if the trust failed. In January 2009, a WDC meeting paper recorded the intention to hand the completed centre to an independent trust "for ownership and operation".
  2. By the time the 2009–19 LTCCP documents were published in June 2009, the position had shifted. Both councils’ LTCCPs still record that the centre would be operated by an independent trust. However, NRC’s LTCCP notes that operating and maintaining the centre would be the responsibility of WDC, together with the trust – which suggests an enhanced role for WDC in managing the centre. Neither council’s 2009–19 LTCCP specifically refers to ownership.
  3. The councils did not record their agreement about the trust in either the Funding and Development Agreement or the Deed of Assignment. Therefore, there was no formal agreement between the councils setting out how this trust would be formed, what the terms of such a trust would be, or what was meant by "independent".
  4. NRC told us that it had assumed that the Local Government Act 2002 process for establishing a council-controlled organisation would be followed. An internal NRC working document in mid-2009 assumed this to be the case. However, WDC did not follow this process. We note that the proposal for an independent trust had been referred to in successive LTCCPs. These process questions were not explicitly discussed.
  5. Therefore, it is uncertain what the councils were committed to achieving, in particular what was meant by "independent". There has been friction between the councils because of differing views about how involved NRC should be in establishing the trust and in decisions affecting control of it.
  6. When we asked the councils what they meant by "independent", both told us that the primary concern was to ensure that such a trust was independent of the centre’s users, in particular the Northland Rugby Union (the rugby union). This was to counter concerns that the centre would not be genuinely multi-purpose. A secondary reason was to ensure that the centre was independent of the councils, in the sense that the councils would not control it, either individually or collectively.
  7. Our review of early drafts of the trust deed and associated correspondence from 2006 shows that, in the early stages of the project at least, there was a shared understanding that both councils would be involved in deciding the terms of the trust deed. Both were to have some degree of ongoing control over the trust – for example, the right to appoint or remove trustees, to approve major operational decisions, or to make significant changes to the trust deed.
  8. However, at some point in the evolution of the project – we assume after the rugby union withdrew in 2008 – WDC decided to establish the trust on its own. A formal WDC resolution in January 2009 about WDC establishing the trust made no mention of any NRC role. In December 2009, WDC also decided it should own the centre itself rather than transfer it to the trust.
  9. We understand that WDC did not consult NRC about these decisions. Nor did WDC respond to requests from NRC in late 2009 that NRC be given:
    • an opportunity to review the terms of the trust deed before it was signed; and
    • a right to have some ongoing input, on behalf of the ratepayers from the region as a whole, to safeguard the ratepayers’ contribution to a regional and multi-purpose facility.
  10. NRC told us it was not specifically concerned that NRC was not one of the settlors of the Trust. However, as the major funder of the project, it was concerned that it did not have any formal means of monitoring the Trust’s management of the centre. Therefore, it had no formal means of ensuring that the commitments it had made to its ratepayers in its LTCCPs would be met. Options it suggested included representation on the interview panel when appointing trustees and a right to be consulted before the Trust Deed was amended. NRC was also concerned that there should be public monitoring and reporting of the Trust’s activities.
  11. WDC told us it wanted unilateral control of the trust because it was solely responsible for any operating deficit. It pointed out that, in the early stages of the project, $500,000 of NRC’s $13 million contribution to the project was to cover any operating deficit in the initial years of operation. However, the position later changed. The 2009–19 LTCCPs do not indicate how NRC’s $13 million contribution was intended to be split.
  12. WDC told us that, from its perspective, this change, along with the other changes relating to the ongoing ownership and management of the centre outlined in paragraph 24, reflected the evolution of the project from one of joint responsibility to one where NRC had effectively restricted itself to an initial financial contribution. WDC did not think it was appropriate for parties not carrying responsibility for any operating deficit to have a role in managing the centre.
  13. However, in our view, it had always been clear that WDC would carry ultimate responsibility for any operating deficit. It is not clear to us why unilateral control of the trust became an issue for WDC at a relatively late stage of the project. Nor is it clear why WDC was unwilling to consult NRC about its change in approach or to discuss alternatives that might satisfy the interests of both councils.
  14. The main aim in putting the centre in an independent trust was to ensure that the centre did not become "captured" by a single user or interest group – in particular by the rugby union. WDC has included several provisions in the Trust Deed to protect the multi-purpose status of the centre. However, there has been some media comment implying that WDC has been "captured" by rugby interests and suggesting some scepticism about whether WDC is genuinely committed to the multi-purpose use of the centre. We consider that this perception links to the next issue: how potential conflicts of interest have been managed.

Conclusion

  1. In our view, the disagreement about what role each council should have in managing and operating the centre has been exacerbated by the lack of clarity and formal documentation of the proposed arrangement. Some of the issues might have been avoided if a formal agreement, however "high level", had been in place from an early point.
  2. We acknowledge that a collaborative project of this type involves an element of good faith, and of addressing issues as they become important. In our view, NRC was entitled to place some reliance on the public commitments made by WDC in its LTCCP and on the course of dealings between the parties. These would have led NRC to assume it would be consulted about the terms of the trust and would be given some say in the centre’s management.
  3. We consider that WDC should have consulted NRC before changing its position about the ongoing ownership and management of the centre. There might have been options that would have enabled NRC to have an ongoing role in monitoring how the commitments made to ratepayers were met. The result now is that WDC is in a position to ensure that the commitments made by the councils in their LTCCPs are met, but NRC is not.
  4. Allowing the regional council a role in the oversight of the Trust might also have reduced concerns that the Trust would not be truly independent of rugby interests.

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Issue 3: How conflicts of interest were managed

  1. One of the concerns raised with us was that WDC had become "captured" by rugby interests and that, as a result, the multi-purpose status of the centre was at risk. Therefore, we considered:
    • whether any elected members of the 2007–10 WDC had potential conflicts of interest in relation to the Northland Rugby Union (the rugby union);
    • what decisions, if any, had come before WDC in relation to the rugby union and the centre project; and
    • what steps, if any, had been made to manage any actual conflicts of interest.

Councillors’ links with the Northland Rugby Union

  1. Three members of WDC had links with the rugby union. Councillor Phil Halse is a life member and former chairman of the rugby union. Councillor Sharon Morgan is a former director. Councillor Warwick Syers is a former chairman of the rugby union and a former director of the New Zealand Rugby Union. WDC told us other councillors may have an association with rugby through having played the game or through ongoing club affiliations. For example, Councillor Greg Martin has previously held roles coaching age-group teams. However, no other 2007–10 councillors had current links with the rugby union or had been involved in management or governance roles with affiliated rugby clubs.
  2. The only matter to be formally considered by WDC involving the rugby union was the $300,000 loan in October 2008. Councillors Morgan and Syers abstained from that vote and Councillor Halse was absent.
  3. The other major decision in relation to both the rugby union and the centre was the agreement, signed in December 2009, recognising that the rugby union had an interest in the completed centre. That decision was made by WDC’s chief executive acting under delegated authority, not by WDC.

Delegating decision-making by WDC to its chief executive

  1. We were told that WDC delegated negotiations with the rugby union to its chief executive wherever possible. WDC told us the reason for this was that it was aware that many of its councillors were perceived to be "supporters" of rugby, having played the game or through ongoing club affiliations. This delegation removed them from detailed involvement.
  2. In our view, this approach has backfired because it has meant that negotiations with the rugby union were carried out almost entirely behind closed doors, leading to concerns about a "secret deal". With hindsight, it increased rather than decreased suspicion within the community that the centre would ultimately be "captured" by rugby interests.
  3. Clearly, there are situations in which it is not appropriate for the details of council business to be made public – for example, where there is the need to protect the privacy of individuals or where matters are commercially sensitive. WDC did not tell us that this was the case here. Therefore, in our view, it might have been preferable for the matters to be discussed openly by the council, with appropriate declarations of interest (for example, in the same way WDC dealt with the loan to the rugby union). Alternatively, reports could have been provided, so that the details of the transaction with the rugby union were, as far as possible, a matter of public record.
  4. WDC told us that, at the time of finalising this review, the appropriate mechanism for recognising the rugby union’s interests had not yet been determined, but could be in the form of a strata title over part of the centre’s structure. Negotiations are under way with the rugby union and are being conducted on WDC’s behalf by its chief executive. It is intended that this process will be completed under the chief executive’s delegated authority rather than coming before WDC for approval.

Conclusion

  1. We did not find any evidence that any members of WDC had acted inappropriately in their role as councillors in relation to the rugby union and the centre project.
  2. However, we do have concerns about whether the decision to delegate authority to WDC’s chief executive was the right approach to managing the perceived conflicts of interest.
  3. We encourage WDC to reconsider the way it manages further negotiations with the rugby union and will be asking our Appointed Auditor to monitor how this matter progresses. Values of transparency and fairness are upheld when the community can scrutinise its council’s decision-making. WDC should ensure that the basis for any final decision on this matter is clearly recorded and available to the public.

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Issue 4: How the Northland Rugby Union interests were recognised

  1. In 2008, WDC and the rugby union agreed that the rugby union was entitled to an interest of some kind in the completed centre, in exchange for the surrender of the rugby union’s interests in the Okara Park site. Those interests were valued at $2 million. The agreement was formally recorded in a deed dated December 2009.
  2. The deed records that:
    • by agreeing to demolish some of the facilities at the Okara Park site, the rugby union had effectively contributed its interest in these facilities to WDC; and
    • the rugby union’s contribution, valued at $2 million, would be recognised, somehow, in the new centre.
  3. The deed does not record what the improvements were, or explain how the valuation of $2 million was reached. WDC also told us that the $2 million did not relate solely to the value of improvements at the site but also included compensation for surrendering the 1993 lease. We noted that the rugby union had already been compensated for the surrender when WDC approved a $300,000 loan to the rugby union in October 2008 (see paragraph 12). However, WDC told us that its purpose in granting the loan was to expedite the process by which the lease was forfeited. It was never the intention that the loan would fully compensate the rugby union for its interests in the Okara Park site.
  4. To help resolve this, we also reviewed the audited financial statements for the rugby union for the financial years ending 31 December 2005, 2006, 2007, and 2008. The auditor’s reports for those years show that the auditor consistently questioned the basis on which the rugby union was valuing assets, because they were not depreciated in the usual way. In 2005 and 2006, the concern related to the value of the light towers installed by the rugby union. In 2007 and 2008, the concern extended to the value of the stadium’s sealed areas and leasehold improvements. The audit reports note that proper application of the financial reporting standards on depreciation would have resulted in the carrying value of the assets reducing by $129,763 in 2007 and $126,800 in 2008. The audit opinions for both years were qualified on this issue. In the 2009 financial statements, the rugby union changed its approach to depreciation and the qualification was removed.
  5. We asked WDC to explain how the figure of $2 million had been agreed and the apparent anomalies in the legal documents. We also asked WDC whether it had taken account of the auditor’s comments about the rugby union’s failure to depreciate the assets.
  6. WDC told us that the figure of $2 million had been agreed in negotiation with the rugby union. It was based on the combined value of:
    • the improvements that the rugby union had made to the site; and
    • the surrender of the 1993 lease.
  7. WDC told us that the improvements were valued at $1,279,843. This correlates with the value attributed to them in the rugby union’s Schedule of Fixed Assets for the year ended 31 December 2009. WDC did not respond directly to our question about whether it had taken account of the failure to depreciate the assets, but told us that:

    … regardless of the book value, Council had committed to provide a total of $2M compensation in the form of title over some of the assets in the redeveloped complex.

  8. WDC also told us that the surrendered lease was valued at $720,157. WDC acknowledged that the 1993 lease had already been surrendered as a condition of the $300,000 loan and that the lease was not specifically mentioned in the 2009 deed. However, it said (in effect) that the compensation the rugby union had received at the time of granting the loan (that is, forgoing of interest on the first $100,000 tranche of the loan) represented only partial compensation. Regardless of the forfeiture of its rights (which included cancelling the 2005 Heads of Agreement for a revised lease) and the valuation of the assets, WDC told us it had made a clear commitment to provide the rugby union with compensation of $2 million.
  9. In reaching the figure of $2 million, WDC told us that it had relied on "staff’s expert opinions and experience in managing assets of this nature". The advice included "opinion from qualified and practising accountants and experienced asset managers".

Conclusion

  1. These responses to our questions go some way towards explaining how the agreement with the rugby union came about and how the figure of $2 million was reached. However, they do not entirely satisfy our concerns. There is no doubt that the rugby union was entitled to compensation for the interests it surrendered when it agreed to relinquish control of the Okara Park site. It is possible that those interests are fairly valued at $2 million, and we accept that there is an element of commercial negotiation in this kind of agreement. However, we do expect public entities to be able to show how they assess the value of assets and how they set their negotiating parameters. In this instance, WDC was not able to adequately show how it had satisfied itself that $2 million was an appropriate value.

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Appendix: The history of the project

Phase 1: Development of a proposal (2004–07)

Site leased to the Northland Rugby Union

A1
The Okara Park site is owned by Whangarei District Council (WDC). Before the Northland Events Centre (the centre) was built, the site was leased at a peppercorn rental to the Northland Rugby Union (the rugby union) under a lease dated 14 July 1993 (the lease).

A2
The lease was for an initial term of 20 years with a 15-year right of renewal. Therefore, the final expiry date was in 2028.

A3
The lease gave the rugby union exclusive possession of the site, subject to certain obligations to make it available to other sporting codes at specified times. It also gave the rugby union exclusive rights to control and sell any advertising on the site.

A4
The major assets at the site (grandstand, perimeter fence, ticket boxes, turnstiles, and public toilets) were originally owned by WDC. Under the lease, WDC was responsible for maintaining these assets along with maintaining all sealed areas. The rugby union was responsible for maintaining the playing surface.

A5
The rugby union owned the stadium lights. WDC told us that the rugby union also made significant capital improvements to the site, including renovations to the Viking Club Lounge, offices, corporate boxes within the main stand, television camera boxes, terraced seating, and the scoreboard.

The need to redevelop the site

A6
WDC told us that, by 2004, maintenance work at the site was overdue. In addition, the rugby union notified it that the stadium needed to be upgraded to ensure that it would meet new minimum stadia requirements imposed by the New Zealand Rugby Union.

A7
Around the same time, consideration was being given to redeveloping the site. In 2004, Northland Regional Council (NRC) commissioned a study into the feasibility of creating a multipurpose venue (as opposed to a stadium devoted solely or primarily to rugby). A steering group was later established to consider options for the site. The steering group included representatives from NRC, WDC, Far North District Council, and Sport Northland.

A8
The steering group’s preferred option was a multi-purpose stadium, financed by a loan of $23.6 million to be funded by a targeted rate set by NRC, with WDC meeting the net annual operating costs up to a maximum of $300,000. Public consultation showed support for the project, but concern about the cost. As a result, the project stalled.

A9
In the meantime, WDC continued its discussions with the rugby union about upgrading Okara Park to meet the New Zealand Rugby Union’s new minimum stadia requirements. WDC agreed to commit $1.5 million towards the upgrade if the new stadium project did not proceed.

The Northland Rugby Union proposes to lead redevelopment, and signing of the Heads of Agreement

A10
In August 2005, the rugby union approached WDC with a proposal under which the rugby union would take the lead in redeveloping the site. The parties entered into a Heads of Agreement under which:

  • WDC agreed to transfer to the rugby union all council-owned buildings and improvements on the site for $1.00 plus GST;
  • the rugby union agreed to redevelop the Okara Park site (with a contribution of $2.5 million from WDC);
  • the site would be developed to satisfy the New Zealand Rugby Union’s minimum requirements;
  • the rugby union agreed to be responsible for all ongoing maintenance of the new stadium; and
  • the 1993 lease would be surrendered and replaced by a new lease for 35 years (with one right of renewal for 35 years) with an annual rental of $1.00 plus GST.

A11
The parties’ obligations under the Heads of Agreement were conditional on WDC obtaining the necessary resource consents for redeveloping and subdividing the site.

A12
In October 2005, the rugby union presented its proposal to develop the site to NRC, whose response was initially "lukewarm". NRC’s primary concerns were the level of funding required and responsibility for the operating costs. However, discussions continued between the parties on these matters and about creating the independent trust that was proposed to own and operate the centre.

Northland Regional Council’s long-term council community plans

A13
NRC’s long-term council community plan (LTCCP) for 2006–16 records that:1

  • it proposed to establish a “Recreational Facilities Rate” (the Rate);
  • the main portion of the Rate would be used to fund development of the centre;
  • $12.5 million would be contributed towards the capital costs; $500,000 would be contributed to cover any operational shortfall in the initial years of operation;
  • it had sought and received assurances from WDC that:
    • an independent trust would be established by WDC to own and manage the centre; and
    • if the trust failed, WDC would take responsibility for the ownership of the centre; and
  • the centre would be designed to be used by a wide variety of sporting codes and to host a range of cultural and community events. It would also include a conference centre and retail and commercial space.

A14
NRC’s LTCCP for 2009–19 contained a brief summary about the centre2 that is very similar to its statement about the centre in its 2006–16 LTCCP.

Whangarei District Council’s long-term council community plans

A15
WDC’s LTCCP for 2006–16 records that:3

  • an independent trust would be formed to manage developing and operating the centre;
  • the lease currently held by the rugby union would be transferred to the trust;
  • the main source of funds for the centre was a “Recreational Rate” levied by NRC, with additional funds sourced through grants from charitable and other organisations;
  • WDC would contribute $1.9 million for maintenance to upgrade the ground to National Provincial Cup standard in 2006/07, as well as the $600,000 already spent in 2005/06 ($2.5 million in total);
  • WDC would contribute $1.5 million in 2007/08 specifically to fund a conference facility for public use on commercial terms;
  • NRC would commit a total of $500,000 to offset any operating deficit in the initial years of operations;
  • the rugby union would fund any ongoing operating deficit, should it occur; and
  • if the trust failed, WDC would assume ownership of the facility.

A16
WDC’s LTCCP for 2009–19 provided a similar summary of the project, 4 except that it stated that WDC (rather than the rugby union) would be responsible for any ongoing operating deficit.

The LTCCP went on to say:

A consultant’s conservative estimate on the proposed operations of the Centre indicates a small operating surplus, and accordingly no funds have been budgeted in the operational expenditure of this LTCCP for operating losses.

Project stalls

A17
The rugby union obtained resource consents for the development in 2006. However, in 2007, the project stalled. We understand this was mainly because of appeals to the Environment Court (which were resolved after mediation).

Phase 2: Revised arrangements (2008–09)

Whangarei District Council negotiates with the Northland Rugby Union to obtain access to the site

A18
It appears that, by 2008, the rugby union was experiencing financial difficulties. It was not clear whether it would be able to act as lead agency for building the new stadium or, indeed, what the rugby union’s role in the project would be.

A19
WDC told us that, to ensure that the project would proceed, it needed to resolve a number of matters involving the rugby union. In a letter to the rugby union dated 6 August 2008, the chief executive of WDC set out the basis on which the centre would be built:

  • NRC and WDC would fund the building; and
  • NRC, WDC, and the rugby union would be the settlors of an independent trust.

A20
WDC also confirmed that the rugby union would be a tenant of the trust, subject to both parties agreeing to the terms and conditions of a new lease, and set out WDC’s requirements for building to start. These were:

  • cancellation of the 2005 Heads of Agreement;
  • termination of the 1993 lease; and
  • unfettered rights to intellectual property in the resource consent obtained by the rugby union for the Okara Park redevelopment.

A21
It appears that the rugby union then sought and received assurances from WDC that it would be compensated for surrendering its interest in the site. According to the notes to the rugby union’s financial statements for the year ended 31 December 2008, WDC had confirmed in August 2008 that it would transfer ownership of the stadium lights and fit-out of the rugby administration offices and facilities to the rugby union once the centre was built. These assets were estimated to have a value of about $2 million.

The Northland Rugby Union seeks a $300,000 loan from Whangarei District Council and withdraws from the project

A22
Around the same time as these negotiations were taking place, the rugby union approached WDC with a request for a loan of $300,000. The purpose of the loan was to fund the rugby union’s continuing participation in the Air New Zealand Cup competition. WDC staff recommended that WDC approve the loan on the condition that the rugby union agree to:

  • cancel the Heads of Agreement; and
  • assign to WDC the resource consent that the rugby union had obtained and all associated intellectual property.

A23
WDC told us that although the provision of the loan was managed as a separate process from the centre project, the conditions related to the loan were designed to ensure that the project could proceed.

A24
In October 2008, WDC resolved to approve the $300,000 loan. In January 2009, the following agreements were signed:

  • a Term Loan Agreement – under which WDC agreed to lend the rugby union $300,000. As part of the consideration for that loan, the rugby union agreed to assign to WDC the resource consents authorising the redevelopment of the site and all related intellectual property;
  • a Cancellation Agreement – under which the parties agreed to cancel the 2005 Heads of Agreement to the extent not already performed (including the new agreement to lease); and
  • a Deed of Surrender of the lease – under which the rugby union agreed to surrender the 1993 lease with effect from 22 December 2008 in consideration for the $300,000 loan and redevelopment of the site by WDC.

A25
Separately, in a letter dated 8 December 2008, WDC gave the rugby union its assurance that any terms and conditions applicable to the rugby union’s lease of the new facility would place the rugby union in a "no worse off position" than its existing lease.

A26
We were told that WDC was aware of the general agreement to recognise the rugby union’s interests, that its councillors had many discussions about the centre project, and there was regular dialogue between the councillors and the chief executive of WDC. However, we were not provided with any evidence that the councillors were aware that the rugby union had a purported $2 million interest in assets and/or its surrendered lease at Okara Park when they approved the loan. Nor did we see any evidence that the councillors were aware, when they approved the loan, that WDC intended to recognise such an interest in addition to the recognition already given in the Term Loan Agreement.

Funding and Development Agreement

A27
In December 2008, WDC and Northern Regional Council (NRC) signed the Funding and Development Agreement.

A28
The Funding and Development Agreement is the "overarching" agreement setting out each council’s roles and responsibilities in relation to building the centre and to the project as a whole. It records the parties’ "firm intention" that building and developing the centre will be kept within the $16 million budget and that both parties:

… have been integrally involved in setting the design and performance requirements for the Events Centre and the selection of the contractor…;5 and

… have satisfied themselves that the completed Events Centre can be operated on a cost neutral basis.6

A29
Under the Funding and Development Agreement:

  • NRC agreed to:
    • appoint the contractor and act as “employer” under the construction contract (in consultation with WDC);
    • provide grant funding of $13 million; and
    • return the site and completed stadium to WDC when building is completed; and
  • WDC agreed to:
    • provide grant funding of $3 million;
    • procure delivery of the site to NRC;
    • finalise the detailed design in consultation with the building contractor, NRC, the rugby union, the New Zealand Rugby Union, and the proposed operator of the centre; and
    • own and operate the centre at its own cost in all respects from completion, without further contribution from NRC.

Phase 3: Construction (2008–10)

A30
In late 2008, after it became apparent that the rugby union was no longer able to take an active role in the project, the two councils formed a joint working party to manage the tender process for awarding the construction contract. The councils also decided that the building phase of the project would be managed “in-house” by NRC rather than by an independent trust as originally planned.

Construction contract

A31
The construction contract was signed in February 2009 by NRC and Argon Construction Limited.

A32
The construction contract is based on a standard form contract issued by the Institute of Civil Engineers. It records that NRC is to act as employer "in consultation with the WDC". We have not reviewed the terms of the construction contract in any detail as part of our investigation.

Deed of Assignment

A33
The Deed of Assignment was signed in June 2009 by NRC, WDC, Argon Construction Limited, and Enterprise Northland. Enterprise Northland is a charitable trust and a council-controlled organisation of NRC.

A34
The Deed of Assignment does not fundamentally change the arrangements between the parties as recorded in the Funding and Development Agreement and the construction contract. Its purpose was to enable the councils to channel their payments to the construction company through Enterprise Northland. We were told this was for reasons of tax efficiency, because Enterprise Northland is a charitable trust and donations made to a charitable trust are tax deductible (donations made to a local authority are not). The councils told us that they had received legal and financial advice on this matter.

A35
The Deed of Assignment includes the following provisions about the future ownership and operation of the centre:

  • as building works progress, ownership of the centre will pass to WDC as owner of the site;
  • WDC will own, operate, and maintain the centre as a multi-purpose events centre for the benefit of the residents of the Northland region; and
  • WDC agrees to take whatever steps are necessary (so far as legally possible) to bind itself and any future owner of the centre and related redevelopment to this purpose.

Deed recognising the Northland Rugby Union’s interest in the Northland Events Centre

A36
In December 2009, WDC and the rugby union signed a deed in which WDC agreed to recognise that:

  • by agreeing to demolish some of its facilities at the Okara Park site, the rugby union had effectively contributed its interest in these improvements to WDC; and
  • the rugby union’s contribution, valued at $2 million, would be recognised, somehow, in the new centre.

A37
The deed was signed on behalf of WDC by its chief executive under delegated authority.

Phase 4: Development of ongoing operating arrangements (2009–10)

Whangarei District Council develops its plans for the trust

A38
As the construction phase proceeded, WDC began to develop its plans for managing the ongoing operation of the centre. The intention had always been for an independent trust to operate the centre, but the details had not been worked out in the early stages of the project.

A39
At some point during 2009, WDC decided that it would retain ownership of the centre rather than transfer it to a trust, and that it would establish the trust on its own, without NRC’s involvement. It did not consult NRC on its decision to exclude NRC from any role in establishing or operating the trust. NRC periodically asked for such information, but without success.

A40
In May 2010, WDC established the Northland Events Centre Trust (the Trust) to operate and manage the centre. The Trust was registered with the Charities Commission in June 2010.

How the Trust is set up

A41
The objects of the Trust, set out in the Trust Deed,7 are:

  1. The operation and maintenance of a high quality multi-purpose events centre at Okara Park, Whangarei;
  2. To provide a regional sporting, cultural, convention and events centre for use by sports bodies and codes, arts, musical, social and cultural organisations, public bodies and community organisations for the benefit of the public of the Region;
  3. To enable the Events Centre to be used for wide range of activities and events for the benefit of the public of the Region; [and]
  4. With prior consent of the Settlor, to carry out any further purpose that is charitable according to the law of New Zealand.

A42
WDC is the sole settlor of the Trust and has the sole right to appoint and remove trustees. The current trustees include WDC’s chief executive and one WDC councillor. They have each been appointed for one year. The other three trustees are representatives from the local business community. They have been appointed for terms ranging from two to three years.

A43
Among other requirements, the Trust Deed requires the trustees to:

… seek maximum usage of the Events Centre and associated facilities and positively promote multiple uses of the Events Centre at both local and national level;8 and

… administer the Events Centre and the Trust Assets on a prudent and commercial basis subject to the single asset nature of the Trust and endeavour to make it a successful and financially autonomous community asset.9

A44
Generally, the trustees have wide powers but the following transactions require the consent or approval of the settlor of the Trust (WDC):

  • "major transactions" (which includes any licence or lease of the centre on exclusive or preferential terms for a term of more than five years);
  • any permanent sale or transfer of any part of the centre (other than to the settlor);
  • any mortgage or charge over the centre;
  • amendments to the Trust Deed; and
  • application of assets on winding up of the Trust.

A45
The Trust Deed also provides that WDC (as settlor) may not be called on for any debts, liabilities, or commitments of the Trust but may provide assistance to the Trust at the settlor’s sole discretion.

Completion of the project

A46
Construction of the new centre was completed in May 2010. The contractors returned the site to NRC in September 2010, in keeping with the construction contract. In January 2011, NRC resolved not to transfer ownership of the centre to WDC until our review was completed.

1: Northland Regional Council (July 2006), Northland Community Plan 2006–2016: Long Term Council Community Plan, Volume 1, page 119.

2: Northland Regional Council (July 2009), Northland Community Plan 2009–2019: Long Term Council Community Plan, Volume 1, page 10.

3: Whangarei District Council (June 2006), Community Plan: Long Term Council Community Plan 2006–2016, pages 10, 15, 103.

4: Whangarei District Council (June 2009), Community Plan: Long Term Council Community Plan 2009–2019, page 13.

5: Clause 1 of the 2008 Funding and Development Agreement.

6: Clause 4 of the 2008 Funding and Development Agreement.

7: Clause 3.1 of the Northland Events Centre Trust Deed.

8: Clause 4.4(a) of the Northland Events Centre Trust Deed.

9: Clause 4.4(d) of the Northland Events Centre Trust Deed.

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