OAG - Head Should Roll

I do not write this posting lightly.

At the Mangawhai Heads announcement of its Ecocare wastewater scheme enquiry, Lyn Provost, New Zealand's Auditor General was put under the microscope to an extent. You can read my recent posting about the Audit of the OAG's Audit New Zealand's role in the fiasco here.

The question I asked the Auditor General at the announcement, more or less went like this:

"You have unreservedly apologised here to the community for the problems in Audit New Zealand. You have told us that as a result Audit New Zealand is carrying out no further audits. You have told us that two people have been appointed to make changes to Audit New Zealand. Yet you appear to be taking no responsibility for what has happened.

This is Light Handed regulation. There are insufficient checks and balances. But you expect the community to carry the can. We have seen failures at Pike River with health and Safety Checks. We have seen failings in building safety in Christchurch because of inspection failures.

Where are the checks and balances?

As far as the community is concerned we rely on your office to check what was happening in KDC. No amount of LGOIMA and official information requests could reveal to members of the public what was happening "off balance sheet" (I didn't quite say that bit - but that's what I meant).

If you didn't check properly, then is it your failure, or is it the failure of Government because you didn't look hard enough?  It's one or the other.

Tell us what we can do about about this?"

I was struck by her answer, because it is not at all what I was expecting.

The Auditor General began with this remark....

"We must not act to discourage innovation...."

Man oh man. She went on about checks and balances a bit. But it was all pretty unsatisfactory. What did she mean? Was it innovative for KDC to build a wastewater treatment plant? Don't think so. Not rocket science. Ah. I get it. The innovation was the PPP scheme. A Public Private Partnership. That's the innovation that "must not be discouraged by the Auditor General...."

We read in the audit of Audit NZ (See quoted paras 35-40 and 339) that the loans for the scheme went "off balance sheet" from 2006 to 2009, which is while the scheme was built and funded through a PPP - though the loans were raised in KDC's name. This is the time when the OAG got no letters from the public. The ratepayers didn't know what was happening because there was no indication in Council's annual plans. It was Off Balance Sheet. And the Audit Office didn't revise its view of the project all the way through that time - 2006 to 2009.

Consider this. In 2006, the OAG prepared its own report entitled:  Achieving public sector outcomes with private sector partners. The OAG's 2006 report overview says this:

“Partnering” in its various forms is gaining in popularity in other countries as a means of building new infrastructure and delivering public services. There are also signs of increasing interest in this approach to procurement in the public sector in New Zealand, particularly in local government. Examples of partnering range from contracts where the private sector finances and owns public infrastructure to arrangements where public and private sector organisations work closely together as one team sharing risks and rewards....

The actual report contains these pearls:

It will be important throughout the process of making the decision to opt for a partnering arrangement, and during the partner selection process, to ensure that arrangements are in place for the involvement of internal and external audit. This involvement should provide assurance to the public entity and other stakeholders (such as Parliament) that the decision-making and selection processes stand up to public scrutiny.

and

(In relation to Papakura's PPP scheme) Water is seen as an essential commodity, and the control and supply of water and wastewater can arouse strong emotions. The Auditor-General identified a need for the Council to carry out sufficient consultation to assure itself that it had identified the needs, issues, and any concerns the community might have, to be used in the decision-making process. (ie - at this stage the OAG understood the consultation need).

And then in November 2011, the OAG went further and published its 2006-2011 enquiry entitled: Managing the implications of public private partnerships. Which includes this very interesting case study:

Case study: Mangawhai EcoCare Wastewater Treatment Scheme Project 

In the early 1990s, the Mangawhai EcoCare Wastewater Treatment Scheme Project began when the water quality in the Mangawhai estuary, north of Auckland, became noticeably degraded because of the cumulative effect of sewage disposal, geographic features, the number of people in the area during peak seasonal periods, and the use of septic tanks and long drops.

After the 1998 local government elections, Kaipara District Council engaged project managers who had Australian expertise in PPPs. The initial plan envisioned a “Build Own Operate Transfer” PPP model, with the assets being transferred to the Council in 25 years. However, the initial plan was changed when the Local Government Act 2002 came into effect.

In late 2005, from a short list of three companies, tenderer Earthtech Engineering Limited (now Water Infrastructure Group) won the contract to provide wastewater services to Mangawhai for up to 15 years, including providing a wastewater collection, treatment, and disposal system.

In January 2007, work on the $65 million EcoCare Scheme began. In July 2009, the first house was connected. The scheme includes 21 kilometres of sewers, 15 pumping stations, six kilometres of rising mains, a small water-reclamation plant, an 11-kilometre reclaimed-water transfer pipeline and a 180 megalitre reclaimed-water storage facility and irrigation system. Today, more than 2000 properties are connected to the scheme, which has the capacity to service 4500 properties.

The Council sought innovation from the market, long-term certainty in wastewater treatment, affordability, and improved water quality in the Mangawhai estuary. A major achievement of the project was the ability to change the scope of the works during the project development and construction stages.

Some of the lessons learned from the project include:

•  there is a clear need for expertise and experience with PPP projects to ensure success; 
•  flexibility is important, particularly where changes in demand are expected; frequent and effective communication with the community and other stakeholders is essential; 
• and a PPP education programme throughout the Council’s organisation was needed. 

 The project has attracted much local comment. The last two lessons could have helped mitigate some public concerns that the Council faces.

This is salutory for a number of reasons, not least of which is a clear statement from the OAG that it knew and acknowledged that: "A major achievement of the project was the ability to change the scope of the works during the project development and construction stages..."

This change of scope has been at the heart of the cost blow out. The OAG knew about it long ago, and thought it was a great thing.Even though it happened "off balance sheet" and away from the public gaze.

In her overview to this 2011 report, Lyn Provost says this:

If more PPPs are entered into, careful attention is needed to ensure that innovation continues to be encouraged and the challenges and opportunities that these partnerships present are fully understood, managed, and accounted for. For the public sector, this means broadening oversight and control of the PPP programme to ensure that the public’s interest is effectively represented, supervised and, ultimately, satisfied.

and...

Along with managing the risks identified in my Office’s 2006 report, Achieving public sector outcomes with private sector partners, and informed by the observations of my Auditor-General colleagues from other jurisdictions,

I consider that: public entities (ie Councils) involved in PPPs must:

– properly understand and manage these partnerships strategically, tactically, and operationally; and
– establish and maintain good ongoing relationships and processes with stakeholder and community groups;

and central agencies (ie Office Auditor General, Government...) should consider how best to:

– provide more co-ordinated guidance and support throughout the public sector, particularly with monitoring and managing these partnerships when they become operational;
– build a co-ordinated reporting strategy that provides regular and transparent performance information on the portfolio of PPPs; and
– comment on, and manage if needed, the strategic, sector-wide, issues that could affect the PPP programme, such as perceived limitations in local funding markets and the lack of domestic private sector expertise.

So. Given this advice to itself, much of which was known in 2006, why has the OAG sat on its hands for so long, especially when it knew full well about the lack of expertise at Kaipara District Council, and the risks involved?

An unreserved apology does not cut it.

Your head is on the block.