Of particular interest is the attention placed toward the end of OAG's report on CCO governance. I have high-lighted in bold sections which concentrate on this. The OAG's advice to Council - which you can see in context below is that: "....If a CCO is not meeting the Council’s expectations, the Council should remove the board, replacing it with members who the Council has more confidence in to act on its expectations...."
Look here for the full report, and chapter by chapter sections.
Auckland Council: Transition and emerging challenges
Prepared by: Office of Auditor General, December 2012
Transition
The Auckland local government reforms are one of the most significant public reforms of the last 30 years. The reforms were carried out in just 18 months. We asked the (50) people we spoke to what they thought could be learned from such a major transition.
In July 2012, Auckland moved up four places to be ranked as the ninth most liveable city in the world on Monocle Magazine’s annual quality of life top 25 cities index. Monocle Magazine attributed the lift, among other things, to Auckland’s new governance structure. In 2009, the Royal Commission on Auckland Governance noted that Auckland ranked fifth on the Mercer Worldwide Quality of Living Survey. In 2011, Auckland had moved to third place.
The ATA described the new planning system for Auckland as “the cornerstone of the Auckland reforms”. It foresaw that achieving one spatial plan, LTP, and unitary resource management plan would be challenging for the planning and policy activities and elected bodies of the Council. However, it also saw that there would be efficiencies for the region’s citizens, businesses, and organisations in having one set of consistent rules and policies, rather than the eight sets of different plans and policies, numbering in the hundreds, that existed before the amalgamation.
The Royal Commission identified two broad, systemic problems with Auckland’s former local government arrangements – weak and fragmented regional governance and poor community engagement. It cited disputes between councils over urban growth and the development and sharing of important infrastructure, inconsistent standards and plans, and limited sharing of services between councils. The Commission considered that this resulted in delayed (and sometimes suboptimal) decisions for the region, poorer services at a higher cost than necessary, and prolonged formal and duplicative consultation instead of true connection with their communities.
As we were writing this report, Parliament was debating the role of local authorities in the economic, social, environmental, and cultural well-being of their communities. Many people we spoke to observed that the expectation of local government to contribute to community well-being had been fundamental to the Auckland reforms.
We have observed the support for the Auckland Plan during our audits. This support is an early indication of the significant and promising differences that new governance arrangements could achieve. However, we were told that regional integration is creating “winners and losers” as it begins to affect communities and households – for example, the current rating changes and consolidation of contracts for services.
Rating System
The Council has completely overhauled the rating systems used by the former councils to provide a stable and predictable basis for rating throughout the region. The main platform of the new rating system is a capital value-based general rate, with eight property type-based differentials ranging from 0.25 to 2.63 for each dollar of capital value, and a uniform annual general charge ($350 for each separately used or inhabited part of a property). The Council has taken a taxation approach to rating rather than attempting to set rates to reflect the benefits received from services in each area.
The new system has meant significant shifts in the rates paid by households. These shifts are influenced by changes in the valuation of properties and by the extent to which the new system differs from that used by the former councils. The rates some ratepayers pay have reduced, while those of others have increased.
Budget and Debt
The Council currently funds just under 65% of its depreciation expenses. It will build to fully funding its depreciation expense during the term of the LTP. Debt is drawn down only when costs are committed, and forecast capital expenditure is deferred until it is actually required. Although the Council’s focus on managing operating costs will generate further savings, the Council’s longer-term growth and development needs see the Council’s group debt rise from $4.03 billion at 30 June 2011 to the $12.7 billion in 2021/22 forecast in its LTP. About half the projected debt relates to transport activities; a quarter to water, wastewater, and storm-water activities; and a quarter to other core Council activities.
This debt forecast is based on projected rates increases of 4.9% for each year of the LTP. A 3.6% increase was passed by the governing body for 2012/13, the first year of the LTP, Recently, in proposing the Council budget for 2013/14, the Mayor has indicated a rates increase of 2.9%. In the longer term, debt looks likely to increase and to become a more significant factor in the Council’s financial management. Debt is increasing during the long term as the Council invests in infrastructure but, as discussed in more depth in our report on matters arising from the 2012-22 LTPs, the forecast debt remains well within the policies’ limits of the Council and appears prudent.
Management Systems
We were told that the quality of management and monitoring information given to the Council’s Senior Leadership Team has been poor, although it is improving. We also heard that information system and management issues are affecting those in governance roles. Elected members expressed concern that they did not know when or by whom the work to integrate the Council’s systems was being carried out.
We were told that the quality of management and monitoring information given to the Council’s Senior Leadership Team has been poor, although it is improving. We also heard that information system and management issues are affecting those in governance roles. Elected members expressed concern that they did not know when or by whom the work to integrate the Council’s systems was being carried out.
The immediate transition to a unitary Council has passed. The stability of day-to-day services has been ensured, and the main strategy and planning documents have been prepared. The Council is starting to optimise the value that can be gained from the initial change process. Many people we spoke to considered that it will take two to three electoral periods to settle the changes, to consolidate and standardise service systems and processes, to unravel and resolve issues, and to learn how to better understand and manage inherent tensions.
The Chief Executive and the Executive Leadership are now leading a process of organisational transformation to improve the Council’s capability to deliver the Auckland Plan and value for money. However, significant challenges remain. As one of the largest organisations in the country, the Council will wrestle with its size to communicate effectively between its governance tiers, departments, and CCOs, and to be responsive and agile. Significant work remains to:
• understand the different policies and regulations currently in force;
• understand the levels of service and the performance of each area against these levels, and determine future service levels that are seen as fair and equitable; and
• develop systems to address the Council’s internal and external service performance needs.
Regional leadership, Two tier structure, Maori participation...
Delivering services through CCOs
A substantive CCO is unique to Auckland and is established under the Local Government (Tamaki Makaurau) Reorganisation Act 2009 or the Local Government (Auckland Council) Act 2009. A substantive CCO is a CCO that is responsible for delivering a significant service or activity on behalf of the Council, or that owns or manages assets with a value of more than $10 million.
The Auckland Council is operating under a new model where substantive CCOs deliver services and activities that are funded by more than 35% of the Council’s total rates. These CCOs also manage $25 billion of assets owned for the benefit of the public, which makes up 70% of the Council’s consolidated total assets. The Council’s CCOs provide many of the services that usually form the core activities of local authorities in New Zealand. These services include roading and public transport, water and waste water, and economic development activities.
The ATA saw CCOs as a way of ensuring efficient management of operations, allowing the Council to focus on developing policies, strategies, and plans to drive Auckland forward.
The expectations of the Council are set out in the CCO accountability policy, the Mayor’s annual letter of expectations, and the Guide for Council-Controlled Organisations.
The CCO accountability policy outlines the Council’s expectations of its substantive CCOs. The policy, which is required by legislation, identifies CCOs as partners in the delivery of the Council’s objectives and priorities, with a key role to play in the Council’s vision for Auckland. The Council expects each CCO to align its activities with those of the Council and to act consistently with its vision and with the objectives set for it by legislation.
The Mayor’s annual letter of expectations is intended to guide the CCOs’ strategic direction and help them prepare their SOIs. The letter of expectations sets out the parts of the draft Auckland Plan that each CCO is expected to contribute to, priorities in the draft LTP that each CCO is required to give effect to, and local community priorities and preferences identified in local board plans that each CCO is to consider addressing when preparing its SOI.
Records of discussions between the governing body and CCO board members conclude that there is enough formal performance monitoring between the Council and CCOs. More interaction was sought between CCO board members and councillors to foster a culture of co-operation and trust that is oriented towards the future, and that enables CCO governors and staff to understand the effect of CCOs’ business decisions for the Council.
For their part, Council staff told us that monitoring performance measures and targets is easy – after the fact. Their greater difficulty was with integrating and aligning planning and future initiatives. CCO boards were sometimes viewed as a barrier to the Council’s strategy and planning, by not refining their leadership of the CCO for the new arrangements and changing circumstances.
The Council appeared to be taking other steps to secure this alignment and integration, in addition to the Shareholder Expectations Guide. In particular, we were told that the Council is currently amending CCO constitutions so that the Chief Executive of the Council can be appointed as a member to any board.
We also heard that Council staff had found it difficult to get information from CCOs in the templates or time frames required for preparation of the LTP. There have not been similar issues for those CCOs that receive financial services from the Council. The CCOs that were perceived to be unhelpful in providing information said they were surprised and dismayed when Council staff raised these issues. The issues were attributed to miscommunication and misunderstanding of the overall financial model the Council was constructing, leading to information being supplied in a different way to that sought.
We were told that the CCOs are very responsive to the needs of the Mayor and governing body. However, they are seen as less responsive to Council staff. For example, we were told that CCOs could be slow to provide information on the grounds that it needs to be discussed by the CCO board first. Council staff were concerned that, as a result, governing body and local board members were frequently surprised by late information about matters such as project and budget changes.
Strong and Appropriate Governance - Important
In a letter to the Chief Executives of the Council and Watercare Services in August 2011, the Auditor-General noted that it is important that the Council has strong and appropriate governance arrangements for its CCOs. She noted, in particular, that the substantive CCOs are central to the well-being of Auckland and that the Council is politically responsible for their activities. She advised that she expected a framework for governance and accountability that:
• reflects the importance of CCOs to Auckland and to the Council;
• enables governing body members to pursue their political interest in CCOs’ business openly and transparently;
• offers opportunity for genuine engagement between the Council and the CCOs, at appropriate intervals and at the appropriate level of seniority, on the Council’s strategy and priorities and on the CCOs’ business performance and risks;
• enables adequate consideration of CCOs’ draft SOI and draft asset management and funding plans;
• complies with the relevant legislation; and
• does not impose a "compliance burden”.
The letter identified two main risks for the Council from its current effort to develop more formal governance reporting and monitoring frameworks:
• that a CCO’s independence from the Council is threatened or circumscribed in some way, in particular, if there were general ratepayer dissatisfaction with a CCO’s performance on any matter that gave rise to heightened political concern; and
• the creation of a "compliance burden".
The Council and CCO governance relationships are evolving. However, we noted a tendency by people we spoke with to focus on formal processes and mechanisms for consultation and monitoring between the Council and CCO staff. We were surprised at how infrequently the extent, nature, and quality of engagement with CCO board members was discussed.
We are not confident that the Council will be able to move to a more futureoriented and trust-based culture through the use of more formal processes and mechanisms. Ultimately, the mechanism for accountability of a CCO to its owner is through the board. If a CCO is not meeting the Council’s expectations, the Council should remove the board, replacing it with members who the Council has more confidence in to act on its expectations.
We consider that the Council could improve the feedback from the governing body on the CCOs’ SOIs. In our view, the feedback should prioritise the input on the CCO’s SOI from other parts of the Council to give CCO boards clear expectations about the Council’s preferences and priorities.
A Council Chief Executive who is also appointed as a CCO board member is likely to face conflicts between their duty to act in the best interest of the Council and to act in the best interests of the CCO as a director.
All CCOs – in particular, those that have a critical part to play in the public’s trust in the Council and the achievement of the Council’s consolidated LTP and the Auckland Plan – need to understand and demonstrate their commitment to playing their part.
A CCO board must endeavour to give the Council confidence that it understands the Council’s expectations.
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