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Video transcript: Topical issues from recent reports and inquiries

Transcript for a video of a presentation about topical issues and lessons from the Office of the Auditor-General's recent reports and inquiries.

Title: Topical issues from recent reports and inquiries

Andrea Reeves (Assistant Auditor-General, Local Government)

Most of my presentation is going to focus on topics arising out of the local government sector, unsurprisingly; given that’s the key area in the office that I look after, and something that I'm really passionate about. I will try and make some of my key messages relevant to the entire public sector, but I'm sure Dave’s messages will resonate with everyone because the inquiries team usually gets dragged into something when something’s gone terribly wrong. I would suggest that you would ignore Dave’s key messages, at your peril.

Local authorities are currently operating under the first year of their 2018/28 long-term plan. I want to reiterate a couple of points that John made in his presentation earlier in the year. In particular, what I want to acknowledge is the significant task that local authorities go through; in preparing their long-term plan.

We think there is significant benefits in having a long-term plan. The benefits of being transparent with your communities about the goals that you're pursuing, the timeframes that you want to achieve those in, and the consequences in trade-offs that you need to make along the way. We think there's a lot that other public entities could learn from the long-term planning process that local authorities have to go through.

As an office we’ve spent considerable time looking all 77 local authorities’ long-term plans. It was only 77. Kaikoura was exempt from preparing a long-term plan last year. We’ve looked at what are the key things coming out of those plans. What are the key messages that are coming out and highlighted? There are four key messages that I want to give you today. I usually waive a report around about now, but you should all have one of these little cards on your table that will direct you to the website we our key reports are.

I haven’t lugged our 90 plus page document around with us. The first key message is that the 2018/28 long-term plans reflect significant capital expenditure for the sector as a whole. Increases in capital expenditure is certainly not new for the sector. Ever since we’ve been preparing long-term plans and auditing those, we’ve seen increments in capital expenditure forecast in every single year.

What is different is the step change and the scale of the change that is actually expected. As a result of that that is providing councils with numerous funding challenges. Particularly those councils that are facing growth. They are starting to reach the upper limits of the debt limits that they’ve set in place. Those debt limits tend to mirror those that are set by the local government funding agency.

Faced with that, you’ve got really high capital expenditure. Councils are starting to reach their debt limits. As a result, some councils are starting to look towards more innovative funding tools. Some are starting to set up special purpose vehicles and we are watching that closely with interest. To see in particular what is the structure of these special purpose vehicles? How are they going to be accounted for? How are they going to be disclosed? We don’t question policy decisions, but we’re really, really interested in how these things are going to transpire.

Another recent example where we wrote to a council, we identified one local authority that was looking at making a policy decision around borrowing for the sole purpose of reinvesting funds in a couple of investment funds. With the intent of making quite a significant return. Now obviously that council was entitled to make that decision, however what we wanted assurance of and wrote to that council noting we had an expectation for, was that they were going to go through appropriate due diligence because of the inherent nature of the risks that were involved.

The council has subsequently decided not to pursue that policy. It’s something that we are maintaining a very close eye on in terms of the ways in which local authorities are starting about how do they address some of those funding challenges?

The second thing that comes out of the long-term plan reports is that councils are really starting to feel the impacts of climate change, or communities are starting to feel the impacts of climate change. In our analysis of all the 2018/28 long-term plans we saw that councils were acknowledging that they were going to be challenged by many of the issues arising as a result of climate change, but most councils were deferring making any deliberate decisions about what it would actually mean for their districts and regions. Simply because there was too much uncertainty. Actually, it does make little sense for all 78 local authorities to be scrambling around and thinking about, what are we going to do and starting to factor that into their long-term plans.

What we have highlighted in our report is the need for local and central government to continue to work together and focus on how climate change matters can be better dealt with. In particular, what we have suggested is there needs to be a better conversation about what data is going to be collected in respect of climate change? What is the quality of that data that needs to be collected? Who’s going to collect that data? How is that data going to be used in future planning and accountability documents like long-term plans?

To support better planning. This is a recommendation for the councils in this room. Councils need to do more to better understand that performance and condition of their assets. Councils generally have very, very good information about the age of their assets, but they are lacking information in terms of the condition and performance of their assets.

That information is needed to ensure that the assets are being managed in the most efficient and effective way. You can’t replace assets based on the age profile of them and have a great level of assurance to your community that you’re replacing them in a timely way.

What we did see in the long-term plans were numerous councils actually going through a process of accurately identifying what are the most critical assets. What are the assets that service our schools, our libraries, our hospitals and how we go about collecting good information about those critical assets? There was still a lot more for councils to do. What we would argue is that given the capital expenditure constraints that local authorities are starting to come up to given the impact of climate change, actually there is growing pressure for councils to have this better information about their most critical assets to ensure that they’re making the right decisions at the right time.

The fourth issue that we highlight in the report and one that may resonate with some of you in the room is since the concept of long-term plans were introduced in 2002, there have been a number of changes to the legislation. Those changes have impact on the process, the content, and the preparation of long-term plans. There’s been a change in almost every long-term planning cycle.

What we have said is now we think it is time to stand back and for the Department of Internal Affairs and the local government sector as a whole, to consider whether or not this regime is still fit for purpose into the future. Now that shouldn’t be confused by the fact that we still think long-term planning and reiterating my earlier point. Long-term planning is really, really important for councils, particularly given the management of assets with really long-life cycles.

We think some of the content requirements can often be quite long and difficult to engage with. I think the longest infrastructure strategy we saw was 146 pages. Don’t quote me on that I could be off by two or three pages. That’s simply just too much for anyone to reasonably engage with. That’s not a criticism of the council that prepared it. They were merely having to comply with numerous legal disclosure obligations.

We think there’s time to now take a step back and think, actually what is the content requirement needed in these long-term plans and how do we best achieve that? What does all that mean for the sector as a whole? Well, in summary I’d say collectively the sector is actually facing some quite significant challenges and challenges that require both local and central government to work together.

New Zealand has a population that’s increasing and aging. As a result, councils are responding to substantial levels of growth and that’s impacting on the capital expenditure that they need to incur. All councils are responding to the need for increasing reinvestment in their infrastructure and their existing infrastructure. Sometimes, also having to reinvest at higher levels because of historical under-investment.

They also need to invest to improve services to meet policy decisions and also expectations of the community. Those who use the councils’ services don’t necessarily live in the place in which they use them. I think Palmerston North is a really good example. There will be many people that work in Palmerston North that don’t live within the Palmerston North city council boundaries.

We are also seeing the impact of tourism as well. Addressing all of those challenges comes at quite a cost. We do acknowledge the fact that the productivity commission is conducting a funding and financing review at the moment. We did take the opportunity to submit on that review. What we did say was that we think that national problems like immigration and climate change need national solutions. Where national solutions are required, we think there needs to be a stronger discussion around who pays for those national solutions.

Secondly, what we pointed out was there’s a need to confirm the future role of local government before determining what an appropriate funding and financing regime will look like. At the moment there are some significant reviews in place that will affect the sector. Reviews like the three waters review. We think that there’s a need to conclude that review because the significant impact of waters on many local authorities before starting to have a strong and serious conversation about funding and financing.

Those were the two key points that we put in our submission to the sector. In respect of water management, we’ve had a bit of a theme over the last year in our work programmes. In Debbie’s introduction she talked about our core role being in annual audits and that’s correct. We also have our own enquires function which Dave looks after. We also have a performance audit function. Over the last year we have focussed numerous pieces of work around water management.

I’m not going to go into any depth around what these reports talked about. You’ve got your little card now you can go and have a look for yourself. What I want to do is highlight some of the key messages that have come out of those reports and they do relate to some of my earlier comments about the long-term plan.

Good data is important to inform good decisions and conversations with the community. One of the first reports that we did was around irrigation. Looking at how six regional councils was collecting information from water meters. Most of that can be collected quite manually. That restricts a regional council in what they can do with that information.

Our recommendation in that regard was more to the Ministry for the Environment to say, actually, we think your regulations need to be updated here so that information that is submitted to councils, that can inform good decision making, is actually robust. Possibly an electronic so that it’s in a format that councils can use.

We did two reports on aspects of three waters. One was around drinking supply and demand. That was looking at four councils: Horowhenua, Kapiti Coast, Manawatu and Palmerston North. So, close to home here. We wanted to understand the challenges faced by those councils in supplying drinking water to the communities. What we did find was that there are stronger incentives for councils to take traditional supply management approaches relatively weak incentives for councils to carry out demand management by conserving water.

One of the biggest incentives around that is cost. Right. If you’ve got plentiful water supply, you’re going to continue to deliver your water in that way, or the way that you’ve been able to do so, rather than look at more costly solutions. While we consider that a traditional approach is satisfactory in the short term and even medium term, it does risk limiting a council’s ability to take a planned and deliberate approach to responding to a number of challenges that could occur. Some of those challenges could be things like climate change where there are water shortages.

Managing storm water systems to reduce the risk of flooding looked at how three councils managed their storm water systems to protect people in their communities’ property from being flooded. Actually, what we found was in those three councils there was very little information held about where flood risk will occur in those communities. Most of that information had only been informed by the fact that those areas where they’ve historically been flooded. They hadn’t done any proactive mapping.

Those three councils also had gaps of understanding of their assets themselves. The earlier point that I was raising, you need to have good information about your critical assets to start making really well-informed decisions about how you’re going to protect communities in this particular case from the effects of flooding.

The last point that I wanted to highlight from our reports is that collaboration is key to helping address challenges that local authorities and other public entities face. What we have seen is when you involve stake holders and involve communities the outcome is generally more positive, but the establishment of those relationships takes a significant amount of time.

In the fourth water report that we had published looked at how a marine spatial plan was developed for the Hauraki Gulf. While that was quite a successful stake holder led collaborative approach, it resulted in a completed plan, but it took double the time to actually achieve that plan than was ever anticipated.

The other report that we’ve highlighted around collaboration and in good conversations with communities is our consultation document report on the long-term plans. In that report we reflected on the need to understand stake holders and members of your community to be able to pick up and address the things that are really impacting on them. John referred to that earlier today in talking about, you know there are very specific groups in communities and many of them write to us and many of them write to you first. When they don’t get a satisfactory response, they then write to us. They say actually the long-term plan’s great and we like the consultation document.

Many of you are consulting on their annual plans right now. But actually, we want conversations about these things over here. Not necessarily these big things like the waste-water treatment plant, or housing, or transport, or these other big hairy issues that we can’t actually engage with because they are bigger than us. We want to know when the library is going to close.

That’s a real tension that we see the local government sector facing. I guess it comes back to my earlier point that we think it’s timely that the Department of Internal Affairs and the local government sector starts looking at the LTP framework to say how best we involve our communities in this conversation.

David Lemmon (Inquiries Manager)

I got the chance now to do something which I get to spend my days doing, which is tell stories. We’re going to conclude the day with a couple of stories that are about enquiries that we’ve done or work that we’ve assisted Audit New Zealand to do that I think pick up some of the themes from the course of the day and I’m going to quite unashamedly steal a couple of John’s comments from earlier.

One of his slides earlier talked about things which erode trust and confidence. Three things on there were: wasting money, people with their own agendas, and poor decision making. That’s not a description of this in a nutshell, but you’ll see an inscription of the story of Westland District Council’s procurement of the stopbank that those things are prevalent and can erode trust in the council and in the services they are providing and even eroded trust within the council. You’ve got councillors disagreeing with councillors. When the Government starts to argue amongst itself it can only loose focus and be distracted on providing the services to the rate payers it’s supposed to serve.

People may or may not have read this. Might be topical in local government land. Again, it’s on the website. You can find it on the card. There are summaries of it, a very clear over-view of it, and then a full report which a lot of people worked very hard to make very accessible, and I think it is.

I think there’s a hand-out with a slightly bigger version of this for closer, if people need it. In a nutshell, this is Franz Joseph for those that have been there and those that haven’t. This bridge is at the bottom there. You can see just in the middle of the black line. That’s the bridge that comes across the river and up through the town and then just where the red starts, this turns and disappears off and that’s the state highway heading north.

The river itself has flooded more often that not. It’s a flood risk. Our office hasn’t taken issue with the fact that it is a flood risk and that is of concern for the locals. In 2016 it was a big flood and just where the red starts it flooded into there and damaged the hotel or motel that was there, which is still not open. Actually did, the current flood bank burst and there was a big flood event.

The risk of flooding is real and there are genuine concerns by the council, and by the mayor particularly, and certain councillors, that they needed to do something about it. We don’t take issue and haven’t taken issue with that fact that it might flood. Nor have we taken issue with the fact that they were genuinely motivated to do something about it.

We have taken issue with how they went about doing something about it. Their pursuit of doing the right thing wasn’t the best. What they built in a nutshell is the red bit. It is hard to see on this, but it’s clear in the report. There is a dotted line which sort of weaves its way next to the red. That was an existing access road which served as a stopbank and protected the wastewater treatment plant, which is hard to make out but is at the top of the red poking out into the river.

On a personal level it strikes me as a curious place to build a wastewater plant back whenever it was built, but that’s where it was and at risk from flooding. They wanted to protect it from flooding and that was why they did what they did.

Rather than fix the existing access road a new stopbank was built, which is the red line. Seven hundred metres long. Ten metres by six metres. It’s a big piece of kit and they did it, but how they went about doing it is not great. The full facts are in the report and we’ve gone to some effort to make them clear and accessible.

By way of summary, concern with the rising the mayor and two councillors hired a helicopter from the heliport down by the black area. Went up and had a look at the river. Decided for themselves that this is a problem that they needed to do something about. One of the councillors had a plan which, in the fullness of time, he described as really being his plan in his mind for what needed to be done.

They had a contractor in mind that was related to him. Sort of a brother who drove a digger for a company that they knew, and they just started. They knew they could go out. They negotiated a price for the digger. They negotiated a price for the local contractor for the rock that they would put on the side to armour the stopbank and they just began.

Regional council had no idea. There were no resource consents. The first time that the regional council found out about it was when the mayor posted a video on Facebook of the works underway. I’m not an RMA expert, but I’m pretty sure that’s not how it’s supposed to work.

The regional council said stop. You got to do this properly. There was a concern that the chief executive of the council didn’t have delegation for the works. They needed to get the council to approve it. The council had a meeting and unanimously agreed to pay for the works. The records of that meeting, which are not great. That was to maintain the existing stopbank, which in some councillors’ mind, when they think back, was maintaining the existing access road. Not building a new 700 metre 10x6 stopbank.

There was no, as you might expect with a plan that was sort of dreamed up very quickly and begun very quickly, no engineering expert, no engineering input into the design of the wall. It’s been built, there was some retrospective analysis. The regional council tried to help them build it as best they could, but there’s no assurance that it’s actually going to work.

No assurance that it’s not going to affect the rest of the river. The normal disciplines of making sure you get it built the right way weren’t there. There was no advice. No procurement advice. No market testing. They just picked a contractor they were related to and off they went. No assurance that they were getting value for money. Yes, they came in within the budget they set themselves, but who knows, they could’ve done it cheaper. They could have done it differently for a different cost.

The conflict of interest issue was not very well managed. These are some of the things you can pick up from the overview or from the report itself. I won’t go through them in the interest of time but given the story I have just described none of these are rocket science. The disregard for decision making is both the Local Government Act, it didn’t consult. They didn’t follow the prescribed principles in there for making the decision.

We got some quite pointed language in there. that’s a lesson not just for local government but for everyone about respecting the rule of law when actually making these decisions. There is provision for emergency works in the RMA. They didn’t even turn their minds to those provisions. Later on, tried to suggest that they were actually emergency works, but there is a process for that.

This wasn’t a situation where there was a flood and they were going out and stopping the flood from actually coming into the town. This was a real but perceived risk in the future that they decided to do works in order to mitigate not sandbagging to stop something from actually flooding.

There’s a question about whether it was actually authorised, because there was no records of what was actually decided at the council meeting. Very few records generally about what was organised or what was agreed. This is the point about the fact that some councillors thought they were approving some works to fix a wall, not build a new one. We haven’t gone further than that but it’s an interesting point.

In picking up the point that Paul made earlier about managing conflicts of interest. There just wasn’t any management of that. By management that’s, I don’t want to stand on his soapbox, but right from the start there was no consideration given to the fact that some people might perceive this was a problem. They were using a contractor that was a brother of the councillor that was driving the process.

There might be some situations where a councillor or a governor in any form might be the best person to do it, but it’s better practice to recognise that. Write down why they are. Release them from other duties, make sure they don’t vote on certain things. Attend the right meetings and not others. None of that was done. They simply just got on and did it. 

We do have this in the report. It has been alluded to already today. The ends do not justify the means. There are ways of doing things that give assurance that money’s being well spent. That the public is being well served. That you can have some assurance that they are doing the right thing. It’s not just the right thing because they think it’s the right thing. It’s not, trust me, I know what I’m doing. You got to show me why you’re doing the right thing and then I can trust that you have.

The other quick one is not technically some enquiry work, but we helped Audit New Zealand do this piece of assurance work for Wintec in Hamilton. This has been well reported. Wintec, like other tertiary providers, is in the business of overseas students. They have a programme for acquiring those overseas students which in Wintec’s case required the chief executive and directors of internationalisation and others travelling to places like China and Hong Kong regularly to advance this overseas strategy that they had.

The challenge that they had was that people were concerned about what they were spending their money on when they were overseas. There were some particular allegations about private expenses and sort of after-hours expenses. Just generally private expenses doing things for themselves, buying things on the company card. What’s happening with money? And then a related concern about the severance or redundancy payments that were being made. There was a concern about the culture of Wintec and how they’re going about it.

Picking up a point which John made earlier, some of these things are not necessarily going to the performance of the entity, because in the sector they were doing okay, or better than others. They were getting students, and it was generally working. But it goes to the tone, the culture of the place, that you can’t trust they are doing the right thing if they’re spending money on themselves when they should be doing other things.

It starts to erode the confidence you have in the leadership of the organisation. Both from within the staff, but from outside looking in and saying well what are they getting away with. Yes, they might be performing but I’m not sure they’re doing the right thing with the money that isn’t theirs.

Along those lines, the report’s got a couple of pointed things in it which have been reported publicly. The upshot of their work was trying to find out what the expenses were on. Were they appropriate or not? Were they private or not? What actually was going on with the money that was being spent? The public money. The upshot of the work is that they just couldn’t. The records were such they were not able to describe what the money was being spent on. Irrespective whether it’s inappropriate or not that is unacceptable. The public expects that you should be able to say what you spend your money on and then be able to trust or make a judgment for itself about is that okay or not. If you can’t show what you’re spending money on it’s not good enough.

And as a little aside, one of the people who helped write the thing was quite pleased that those particular words survived in the report. It’s just not good enough which is a pretty clear way of saying, “It’s just not good enough.”

The other report is this one. To the extent there was a search for any serious wrongdoing. There was none found, mainly because we couldn’t see what the money was spent on anyway. But this point, and we’re not for a minute suggesting there was any fraud or bad things going on, but there is a risk there. If you can’t see what the money’s been spent on, surely there must be questions about what actually is going on and you should be doing better. People can’t trust that you’re doing the right thing if they can’t see there’s a process for what you spend the money on or in fact what you are spending the money on.

So overall on those two things, there is some pretty self-evident clear messages here that are, I think generally, are applicable to everyone in all organisations. The ends don’t justify the means. Not only have you got to make good decisions about spending money, you got show them. In real time in the moment, why are we doing this? What is it for? Let’s agree to do the right thing. Let’s build the stopbank because it’s the right thing right now, and then later someone comes along and says why have we spent the money that way. You should have the records and the capacity to say this is why. This is what we tried to achieve. This is why we did it.

Even if it didn’t work you should still show a good reason for it. It’s better than having no records at all. Having a poor process or decision-making process or a perceived lack of respect for a process undermines confidence. If people looking on think you’ve got rules for yourself and not others, or you’re riding roughshod over the rules that everyone else has to abide by but not us because we can do it differently around here. People won’t trust you are doing the right thing.

You respect your roles and your perception of the roles. Make sure that people understand that’s it’s your job to do this and not that. I’m doing this for this reason. I’m managing the interests that I have in a proper way. We’ve heard this more than once, but it really is toned from the top. If you lead properly, if you set the tone you expect the rules to be followed, you follow the rules yourself and are seen to do that. You set the right tone. Then you can make sure the tone flows down.

That’s a wiz through two examples of why trust and confidence depend on you doing the right thing and be seen to be doing the right thing.

For more information and to download presentations, visit auditnz.govt.nz.

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