Part 1: Introduction

Inquiry into the Mangawhai community wastewater scheme.

Map of Mangawhai's location - click to see a larger version.

In this Part, we explain:

  • why we began this inquiry;
  • the scope of our work;
  • how we have carried out this inquiry; and
  • other events that took place while this inquiry was under way.

Why we began this inquiry

Mangawhai is a small harbour on the east coast of Kaipara district, south of Whangarei. It has a small community of permanent residents. However, because it is a popular holiday destination, its population grows significantly during the summer. As the local authority for the area, the Kaipara District Council (KDC)1 has had to consider wastewater disposal for Mangawhai. Since 1996, the need to construct a community wastewater scheme for Mangawhai has been a significant issue for KDC.

The wastewater scheme has also caused significant concern in the community for many years. Concerns have included KDC's financial management and planning for the scheme, the significant increase in the total cost of the scheme, and the lawfulness of KDC's decision-making processes and the development contributions and rates used to fund the scheme. At various points in the life of the scheme, individuals and groups in the community asked several organisations to investigate different issues.

By the end of 2011, KDC had accepted that there were problems and was carrying out several reviews of the scheme, including legal and financial reviews. KDC decided that a full and independent investigation was needed. In February 2012, it asked the Auditor-General to carry out an inquiry into its decision-making, financial, and contract management processes for the scheme. By this stage, it was apparent that there were probably widespread problems with the project and possibly with KDC's more general financial and management systems.

On 28 February 2012, the Auditor-General announced that we would carry out an inquiry. We released final terms of reference for this inquiry on 16 March 2012, after consulting with KDC, some community representatives, the Minister of Local Government, and the Department of Internal Affairs. Appendix 1 sets out the terms of reference in full.

Scope of this inquiry

The main purpose of the inquiry has been to examine KDC's development, implementation, and oversight of the Mangawhai community wastewater scheme since the project to construct it began. We have looked at all 16 years of the project's active life – from 1996 to 2012 – including:

  • KDC's planning and decision-making;
  • the governance, management, and contracting arrangements;
  • KDC's financial management, monitoring, and reporting;
  • the funding for the scheme; and
  • the overall suitability and cost-effectiveness of the scheme that has been constructed.

However, the problems with this project also raised other questions. Therefore, the terms of reference announced that the inquiry would also consider the roles played by KDC's auditor and other relevant agencies.

The inquiry has not considered questions of legality in any detail. One of the reasons KDC asked us to inquire was that it recognised that it had probably not complied with relevant legislation in setting several rates over the years. It needed to resolve those questions about the basis for its actions itself, without waiting for this inquiry to conclude. In any event, the Auditor-General cannot provide a definitive view on legal questions. Ultimately, these are questions for the courts.

During our work, two other processes began to assess legal questions:

  • KDC initiated a Local Bill to address irregularities that occurred in the way in which it had set and assessed rates and as a result of its late adoption of the 2010/11 Annual Report and 2012 Long-Term Plan (LTP).
  • The Mangawhai Ratepayers and Residents Association (MRRA) filed judicial review proceedings in the High Court seeking declarations on the legality of many of KDC's actions during the project.

When we wrote this report, these issues were in the process of coming before the High Court and the House of Representatives for consideration. It would not be appropriate for us to comment on legal questions that these other processes are examining.

How we carried out the inquiry

Staff in one of the Auditor-General's business units, the Office of the Auditor-General (OAG), carried out the inquiry, with assistance from external advisers as needed. The inquiry was overseen by the Assistant Auditor-General Legal. The Auditor-General's other business unit, Audit New Zealand, was not involved in the inquiry other than to provide information to enable the inquiry to review its work at KDC in recent years.

How we reviewed what Kaipara District Council has done

To review KDC's work during this project, we brought together a team of our staff with relevant skills and contractors with specialist expertise. The contractors who helped us were Richard Kirby (engineer), John Crawford (engineer), and Rod Titcombe (former local authority chief executive).

This team considered all of KDC's files on the project and on associated decision-making to identify relevant information. A former councillor also gave us all of her papers from her time in office so that we could see what other information had been provided to elected members. We also reviewed the files and information held by Beca Steven (Beca), a division of Beca Carter Hollings & Ferner Limited, which advised KDC throughout the project. Given the length and complexity of the project, this review of documentation was a substantial exercise that took some months.

Early in the process, we had initial meetings with some of the main people involved in the project. Once we had completed most of the document review, we carried out more detailed interviews with people who had been involved, including current and former elected members, KDC staff, and staff from Beca and other companies involved in the project.

Given the depth of community concern, it was also important for us to understand the questions and perspectives of Mangawhai ratepayers. We asked for public submissions when we published the terms of reference and received many responses. Representatives from the inquiry team spoke to a community meeting of about 500 people in Mangawhai in June 2012. We also spent three days in Mangawhai in July, meeting with 93 individuals and groups to hear their individual concerns and perspectives.

Members of the inquiry team also made several visits to KDC's offices, Mangawhai township, the treatment plant, and the disposal site.

All of this work provided us with a great deal of information about the history of the project. We then spent some months analysing this information and preparing a draft report.

In keeping with our standard practice and legal obligations, we provided drafts of sections A, B, and C of this report to those who had been closely involved and who, for natural justice reasons, had a right to see the report before we finalised it. Our legal obligations meant that this process of seeking comment was carried out in confidence. Therefore, it did not include seeking comment from the MRRA or ratepayers more generally.

The parties who received these draft sections were:

  • KDC (the Commissioners and Chief Executive);
  • KDC's previous Chief Executive, who held that role throughout the period we have examined;2
  • Beca;
  • representatives from the former company EPS Consultants (International) Pty Ltd (EPS), which worked on the project with Beca;3 and
  • Water Infrastructure Group (formerly EarthTech).4

We asked these parties to comment on whether we had accurately established the facts, to comment on whether our draft analysis, conclusions, and comments were reasonable, and to provide us with any further information they held that supported their comments. We initially allowed the parties one month to comment, but extended this to two months at the request of several of the parties. We regarded this request as reasonable given the length and complexity of the draft sections.

All but one party provided us with substantial comments. Some parties also provided us with information and documents that we had not found.

The representatives of EPS did not provide us with full comments. They advised us that they had significant concerns about the draft sections and that they held further information that was relevant to the inquiry. EPS was an Australian company and its representatives are still based in Australia. We could not compel them to provide this information to us, because our statutory powers do not extend outside New Zealand.

We spent some time negotiating with the EPS representatives about the basis on which we might see the information in their files and receive more detailed comments from them. We offered to travel to Australia to review their files ourselves, to contribute to the costs (including time) involved in retrieving information and providing us with comments, and to extend the time frame further. However, the EPS representatives also wanted us to meet the legal costs they had incurred in preparing the initial response, to satisfy themselves that our advisers were "appropriately skilled and unbiased", and a commitment that we would negotiate and agree with them any changes to the text they would provide. We did not regard these requests as reasonable or appropriate.

By this time, we had spent more than a year on this inquiry. We decided that we could not spend any more time or money trying to gather further information. Instead, we decided to proceed with the information we had been able to gather and to ensure that the report was clear about any gaps in our information.

We carefully considered all of the comments we received and revised the draft sections on this basis. We provided a further draft of the relevant sections to all of the parties, including the EPS representatives, and asked for any further comments and supporting information. All parties provided us with further comments.

We considered the further comments we received and adjusted the report as necessary, before proceeding to finalise the report for printing and publication.

How we reviewed the audit work

The Auditor-General's different roles can come into conflict if an inquiry has to consider the adequacy of the work another part of the organisation has done. In this inquiry, we needed to consider the audit work that appointed auditors within Audit New Zealand, which is a business unit of the Auditor-General, had carried out. KDC was aware of this conflict when it asked the Auditor-General to inquire.

We engaged an independent person, Mr Neil Cherry,5 to review the audits of the relevant annual reports and LTPs. Appendix 6 includes the terms of reference for that work. Mr Cherry received logistical support as needed from the inquiry team but worked independently to carry out the review and form judgements, with the support of a peer reviewer. We engaged Des Pearson, a former Auditor-General in Victoria, Australia, to provide peer review support to Mr Cherry. Mr Cherry sought comment from Audit New Zealand and relevant staff on a draft of his report before finalising it and providing it to the OAG. Mr Cherry's final report is summarised in Section D and included in full as Appendix 6.

How we reviewed the work of the accountability agencies

We also looked at how the different agencies that people contacted responded to the concerns that those people raised. The relevant agencies were ourselves (the OAG), the Office of the Ombudsman, the Minister of Local Government and the Department of Internal Affairs, the New Zealand Police, and the Serious Fraud Office.

The Deputy Auditor-General led this part of the work. Neither she nor the staff member who assisted her had had any significant involvement in responding to correspondence on Kaipara issues.

Events while this inquiry was under way

KDC asked us to begin this inquiry because it was becoming apparent that it had some significant problems to deal with. Our task was to look backwards and provide a comprehensive analysis of what had happened to create that situation. KDC still had to continue with its day-to-day responsibilities and find a way to address the problems confronting it. The community also continued to take an active role to ensure that KDC understood the depth of its concerns.

This meant that a great deal happened in Mangawhai and Kaipara while our inquiry was under way, including:

  • Several further problems with past and current KDC actions continued to be identified, including matters of legality.
  • Sections of the community withheld payment of their rates. There were a range of reasons for this action, including to protest against KDC seeking payment of rates that it accepted had been set unlawfully.
  • KDC worked to complete its outstanding annual reports, which involved several information and accounting challenges.
  • The Minister of Local Government appointed a review team to assess how KDC was functioning.
  • KDC prepared and consulted on a Statement of Proposal for its next LTP (based on the information it was intending to present in its annual report). This was poorly received by much of the community.
  • KDC adopted a new LTP that started to chart a path for it to work its way back to a better financial position.
  • All of the elected members resigned as soon as the LTP was adopted, and the Minister appointed commissioners to take their place.
  • The Auditor-General appointed a new auditor and audit firm to carry out the audits of KDC once the detailed work on KDC's overdue annual report and LTP had been completed.
  • KDC prepared a Local Bill asking Parliament to validate past irregularities in its compliance with the Local Government (Rating) Act 2002 and Local Government Act 2002, to stabilise the financial position of KDC.
  • The MRRA filed judicial review proceedings in the High Court seeking declarations that several specified KDC actions were unlawful and asking for relief.

Structure of this report

The events covered in this report span many years and are complex, intertwined, and detailed. Many people are interested in that detail and want to understand exactly what happened. This report is therefore quite long. However, we have structured it into Sections and Parts to make it easy to navigate and have included summaries at the beginning of each Part. The appendices include a summary time line of events and an explanation of the roles of the main parties discussed in the report.

The report is in five sections:

  • Section A – How the wastewater project began (1996 to 2002): This Section covers events from 1996, when work on water quality issues began in earnest, until the conclusion of the tender process in September 2002. By that stage, KDC had set up the project, chosen a public private partnership (PPP) approach, appointed Beca as project managers, and run a full tender process to select the preferred bidder to construct the scheme.
  • Section B – Difficulties getting the wastewater project under way (2003 to 2007): Between 2003 and 2007, KDC had to deal with a range of problems with, and changes to, the project before it was able to finalise arrangements and start construction. This Section discusses the various major challenges, such as having to change the nature of the partnership approach, working out funding, changing the contractor, finding a disposal site for the effluent after the contract had been finalised, and changing the scope of the project and area to be serviced by the scheme.
  • Section C – Building and implementing the wastewater scheme (2007 to 2012): This Section discusses what occurred while construction was taking place, how the scheme was implemented, and how it is now running.
  • Section D – The role played by external agencies: The previous Sections focus on KDC and its management of the project. This Section reviews the role other agencies played, including the auditors (Audit New Zealand), the OAG, and the Office of the Ombudsman.
  • Section E – Lessons to be learned: This final Section brings together our overall conclusions and thoughts on the underlying causes of the problems. We also set out the lessons from this report for all those involved and the sector more generally, and pose some questions about ongoing risks and challenges that warrant further consideration.

Each Section sets out a summary of what happened and the main facts that we have been able to establish, and includes our comments on those events. Each Section concludes with a Part setting out our overall comments on the matters covered by that Section. We bring all of those individual conclusions together in Section E, to reflect on what can be learnt from these events.

1: In this report, we refer to the organisation as a whole as "KDC". We use "the Council" to refer to the formal body made up of elected members.

2: The position title was "General Manager" until December 2000. However, we refer to it as "Chief Executive" throughout this report.

3: EPS Consultants (International) Pty Ltd ceased operations when the project was completed. It was deregistered with the Australian Securities and Investments Commission in 2012. We dealt with two former directors who were closely involved in the work on the wastewater scheme.

4: In July 2008, there were changes in the ownership of EarthTech. Tyco, EarthTech's parent, sold part of that company to AECOM Technology. Tyco retained the part of the former EarthTech company responsible for constructing and operating the wastewater scheme, which became Water Infrastructure Group. To avoid confusion, we refer to this company as "EarthTech", throughout this report, including after it changed its name to Water Infrastructure Group.

5: Mr Cherry is the current chairman of the New Zealand Auditing and Assurance Standards Board, a board member at the External Reporting Board, and a board member of the Australian Auditing and Assurance Standards Board. He carried out this review in his personal capacity.

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