Kaipara District Council: The Auditor-General’s decision on requests to make a report under section 44 of the Local Government Act 2002
Part 1: Introduction
After receiving requests to do so, I have reconsidered my previous decision not to make a report under section 44 of the Local Government Act 2002 (the Act) about any losses incurred by the Kaipara District Council in respect of the Mangawhai wastewater scheme.
After careful consideration, I again decline to make a section 44 report.
I set out the background and give my reasons for my decision below.
Part 2: The law
Under section 44 of the Act, if satisfied that a local authority has incurred a loss and has not been fully compensated, I can report to the local authority on the loss and may make recommendations about recovery of the loss or to prevent further loss. The local authority must respond to the report, and individual members may also respond. The section 44 report and the responses must be given to the Minister of Local Government and tabled at a public meeting of the local authority.
The effect of making a section 44 report is that the loss is recoverable as a debt due to the Crown from each member of the local authority jointly and severally (section 46). If the debt is not paid, the Crown can commence proceedings to recover the loss from any or all of those members. Section 46 sets out several defences available to members to avoid personal liability for the loss, including lack of knowledge, that the member protested or voted against the loss-making decisions, or the member acted in good faith and relied on advice from staff or advisers.
This power sits within a broader legislative context for local authorities, and their accountability. My functions elsewhere in the Act, and in the Public Audit Act 2001, also play a part in helping to enable that accountability.
Sections 44 – 46 of the Act are attached as Appendix 1.
Part 3: My previous inquiry and decision
In 2012 and 2013, I conducted an inquiry into the circumstances relating to the Mangawhai wastewater scheme. That inquiry was a significant exercise. It took almost two years, cost my Office more than $1 million, and resulted in a written report of more than 400 pages. It is possibly the largest inquiry my Office has ever undertaken. It is certainly the largest in recent times.
The findings of that inquiry were presented to the House of Representatives and published in November 2013 (the Inquiry report).1
In the Inquiry report, I considered whether to exercise the section 44 power to make a report on a loss.2 I decided not to do so. The relevant extract from that report is attached as Appendix 2.
One reason for not making a section 44 report at that time was that we could not be certain about which of the numerous decisions and actions involved in planning the wastewater project were unlawful for the purposes of section 44(1). Many of those matters were then before the High Court in the judicial review proceedings brought by the Mangawhai Ratepayers and Residents Association Inc (MRRA). We said it would not be appropriate for the Auditor-General to pre-empt a ruling by the Court.
Part 4: Subsequent developments
The High Court has since held, in judgments issued in February and July 2014, that certain decisions by the Kaipara District Council about the Mangawhai wastewater scheme were unlawful, in administrative law terms.3 Most relevantly, the High Court declared that:4
The decisions taken in 2006 and 2007 by Kaipara District Council to enter into the EcoCare agreements and to adopt Modification 1 were each made in breach of Part 6 of the Local Government Act 2002, and were therefore unlawful;
The EcoCare agreements and the adoption of Modification 1 were each entered into in breach of Part 6 of the Local Government Act 2002, and were therefore unlawful.
After the High Court made those declarations, the MRRA and its legal adviser asked me to reconsider my decision not to seek to hold the elected members who made those decisions personally financially responsible.
The chief executive of the Council later made the same request on behalf of the Council.
Part 5: Process for reconsidering my previous decision
I have reviewed my previous decision, and assessed the issues afresh, to see whether I ought to now form a different view. I have considered the High Court’s 2014 decisions, and the points raised by the Council and by the MRRA.
I have done this because the MRRA and the Council asked me to. I would not ordinarily revisit a decision about whether to exercise the section 44 power, and I would not otherwise have done so in this case.
Having done so, I now again decline to make a section 44 report.
I emphasise that this is a new decision, but obviously it takes into account my findings in the Inquiry report, and in particular what I said there about the applicability of section 44 to the situation.
My reasons for my decision are set out below.
Part 6: Reasons
Pre-conditions met, but strong basis for not exercising discretion
No Auditor-General has made a section 44 report since the Act was enacted in 2002.
Section 44(1) contains two preconditions to the exercise of the discretion. First, the local authority must have incurred a loss to the extent that one of the actions or omissions set out in section 44(1)(a)-(d) has occurred. Here, the most relevant actions are unlawful expenditure or unlawful incurring of a liability. The High Court decisions have confirmed that the Council’s decision to enter into the contract to construct the Mangawhai wastewater scheme, including borrowing to do so, and a later modification decision that significantly increased its cost, were all unlawful.5 The first precondition is met.
Secondly, the local authority must not have been fully compensated for the loss. Although there are challenges involved in quantifying the losses, I am unaware of any recovery by the Council that would restore it to the position it was in before the losses.
As noted in the Inquiry report, versions of “the surcharge power” (as it is sometimes called) in sections 44 to 46 have existed in legislation for many years. Previously, the power was available against both members of governing bodies and officers. However, after the Public Finance Act 1977 was repealed and the Public Audit Act 2001 enacted, the power was retained only in the Local Government Act 2002 and only in relation to elected members. In the more distant past it has been exercised, but only rarely and then usually against officers rather than members of governing bodies. On the rare occasions that the power has been used, the facts have been reasonably contained and straightforward. Research by my staff indicates that the most common use of the power was in the 1970s against public servants who had damaged work motor vehicles and were “surcharged’ by the Audit Office to make good the costs of the damage.
Section 44 is an unusually powerful sanction. If the Auditor-General reports a loss under that section, it effectively deems elected members to be personally financially liable for the amount of the loss caused to the local authority.
It would be complex and expensive to identify and quantify actual losses
Once a section 44 report is made, the loss suffered by the local authority is “a debt due to the Crown.” That means that the loss reported on must be sufficiently identified and quantified in the report. Also, one would generally expect there to be a reasonably clear causal relationship between the unlawfulness and the amount of the financial loss.
However, as noted in the Inquiry report, here any actual loss flowing from unlawful acts is extremely difficult to identify, let alone quantify, primarily because the wastewater scheme has been built and is operating effectively and has appropriate capacity for population growth despite costing significantly more than planned. It seems likely that the wastewater scheme could and probably would have still been built if managed differently, and wholly lawfully. And it would still have been expensive, and perhaps more expensive than initially intended, even if lawfully initiated and well managed. However, attempting to objectively determine how expensive it would have been under that hypothetical alternative would be extremely challenging. Obviously, considerable expenditure was properly required to develop and implement the scheme. So what is the “loss” to which a section 44 report might attach, where something cost much more than planned but works well? To determine that would be a highly complex (and contested) exercise, to distinguish the amount of any excess money and/or liability incurred to build it from the amount of money and/or liability that would have been incurred had it been built following lawfully taken decisions.
Also, and as noted in the Inquiry report:
- the way in which the Council conducted its decision-making, including in informal workshops,6 makes any real attempt at quantifying the overall cost of the scheme very difficult,
- the Council was over-reliant (for accountability purposes) on professional advisors.7 It is highly likely that elected members who were in office at the relevant time could establish the statutory defence of reliance on a professional expert adviser.
Given the difficulty involved in quantifying the loss and the availability of statutory defences, there would be almost no utility in spending further public money on a section 44 report because there is little prospect of the losses being recovered.
The High Court findings
The main change in circumstances since my previous decision is the declarations made by the High Court.
The High Court decisions do not persuade me to change my view about whether to make a section 44 report. Those decisions do not mean that such a report must be made. Nor do they significantly clarify the issues that would need to be determined in order to make such a report. Those decisions do rule that certain particular decisions of the Council were unlawful. But they do not assist in showing that the unlawfulness caused any particular financial loss, and they do not assist in identifying or quantifying any such loss. The unlawfulness was, in essence, a failure to follow prescribed consultation and decision-making processes. It is not the case that the Council could not lawfully have constructed the Mangawhai wastewater scheme at all. The unlawfulness does not have the character of, for example, a finding that certain expenditure or activities were (and would always have been) ultra vires the Council’s purposes, functions, or powers.
It is not easy to ascertain what financial losses were incurred as a result of the legal flaws that were found by the Court, and that would not have been incurred if those flaws had been avoided or had been promptly and properly remedied. It is not necessarily obvious that the identified unlawful acts added to the cost of the scheme.
In my view, although certain decisions of the Council have now been declared unlawful, for present purposes the position with respect to quantification essentially remains the same as when I published the Inquiry report. It would be extremely difficult to identify and quantify a particular financial loss, flowing from the acts the High Court found to be unlawful, and for which elected members ought to be made personally liable.
The length of time that has passed since the events in question also counts against exercising the section 44 power. Section 44 clearly works better where the elected members responsible for the unlawfulness or the loss are still in office, and there is no long delay between the relevant events and the section 44 report, and those responsible have the opportunity to fix the situation. The relevant decisions were taken at least eight years ago.
In particular, the responsibilities, duties, and powers of the Council’s governing body are currently being performed by Commissioners appointed by the Minister of Local Government. The elected members in office when the Commissioners were appointed are prohibited from acting in that capacity. That has been the position since August 2012. The members, having been effectively replaced, have no ability to take any steps in that capacity to remedy any unlawfulness or loss.
It is curious that one of the current requests has come from the Council itself. As the Commissioners are acting as the Council’s governing body, they ought to be in a position to take whatever legal action they consider appropriate in an effort to seek to remedy any unlawfulness or loss. Moreover, the Commissioners do not need to rely on a section 44 report by me in order to do so. A section 44 report is not necessary in order for a local authority to take action to pursue legal claims against individual elected members (or former elected members), if the local authority considers that appropriate. In that regard, I note that a section 44 report does not limit any other person’s liability for any loss. Nor does the absence of such a report.
Part 7: Other matters
For completeness, and in the interests of transparency, I wish to mention a number of other matters. The matters in this section are not determinative, or even highly influential, factors in my decision. It is not possible to be unaware of them, but I have not found it necessary to reach concluded views about them and I have not placed significant reliance on them:
a) I have already carried out a thorough investigation into the Council’s management of the Mangawhai wastewater scheme and issued a publicly available report that describes at length various governance and management failures in the Council and other problems with the wastewater scheme. My report includes a chapter on “lessons learned” to prevent similar losses being incurred in future. I do not think there is any useful purpose in duplicating or restating that work, or attempting to further add to it, in a section 44 report. That would be an inefficient use of public money, particularly where significant resources have already been expended on a lengthy and detailed inquiry. That inquiry means that there has already been a significant degree of transparency and public and political accountability over the problems relating to the Mangawhai wastewater scheme.
b) It is doubtful that a section 44 report could lead to recovery from any elected members, because the 2-year limitation period provided for in section 40(2) of the Public Audit Act 2001 might apply.
c) It is also doubtful whether the elected members who ought to bear the greatest responsibility for any failures could be made liable by virtue of a section 44 report, because the relevant provisions might apply to only the elected members who were in office when the Commissioners were appointed and have not since resigned, not former members.8 Not all of the former members involved in the wastewater scheme decisions were still elected members when the Commissioners were appointed. This might create an unfair liability on the members who remain.
Related legal proceedings
d) As I have noted, for the purposes of section 44, a local authority is regarded as having incurred a loss to the extent that one or more of the actions or omissions defined in section 44(1)(a)-(d) has occurred and the local authority has not been fully compensated for the actions or omissions concerned. While the Council has not yet been compensated for the actions or omissions that the High Court found to be unlawful, it has begun legal proceedings against me seeking damages for losses it says it has suffered caused by alleged failures by my auditors in their audits of the Council, arising directly from the Mangawhai wastewater scheme. It has also begun legal proceedings against its former chief executive. Both of those proceedings are still live. This means that those issues of legal responsibility and compensation are yet to be determined.
e) I note that it might ordinarily seem undesirable to make a section 44 report while a local authority is still in the process of attempting to obtain compensation that relates to the loss. It might even be arguable that it is premature to regard section 44 as even engaged, where the question of “full compensation” remains outstanding. Both of those proceedings are, in effect, attempts by the Council to recoup some of the losses from other parties who it considers should bear some legal responsibility for failings in connection with the Mangawhai wastewater scheme. While the legal and factual questions to be determined in those proceedings are not the same as those to be determined in making a section 44 report, they are undeniably linked. In another case, that might be a very strong reason for me to decline to make such a report. In the present case, however, because it directly affects me, I will not place weight on that factor.
f) It is unusual to be in the position of being asked by the Council to exercise a statutory discretion to hold people personally responsible for loss, while being at the same time the subject of a legal proceeding by the Council that may be related to all or some of the same loss. I must acknowledge that this places me in an awkward position. Nevertheless, the proper course of action is to make my decision as conscientiously as I can, leaving to one side the fact of the legal proceedings against me.
Part 8: Conclusion
In my view there would be almost no utility in making a section 44 report in this case. Here, a section 44 report would be a time and resource intensive further inquiry, where it would be almost impossible to objectively identify and quantify actual losses, and with almost no prospect of losses being recovered, in a context where detailed inquiry into the situation and recommendations about preventing similar losses in future have already been publicly made. The objectives of accountability, transparency, and learning lessons have already been amply served by publishing the Inquiry report in 2013. I do not consider I can usefully add much more in respect of this matter by carrying out a further inquiry.
Controller and Auditor-General
19 August 2015
1: Controller and Auditor-General (2013) Inquiry into the Mangawhai community wastewater scheme.
2: Paragraphs 24.38-24.49, at pages 268-271.
3: Mangawhai Ratepayers’ and Residents’ Association Inc v Kaipara District Council (No 3)  NZHC 1147,  3 NZLR 85; Mangawhai Ratepayers’ and Residents’ Association Inc v Kaipara District Council (No 4)  NZHC 1742.
4: Paragraph 38 of the No 4 judgment of 25 July 2014.
5: See Mangawhai Ratepayers’ and Residents’ Association Inc v Kaipara District Council (No 3)  NZHC 1147 at -, -; Mangawhai Ratepayers’ and Residents’ Association Inc v Kaipara District Council (No 4)  NZHC 1742 at -, , (a)-(b).
6: Paragraph 3.73.
7: Page 10.
8: See the definition of “member” in section 5 of the Local Government Act 2002, and section 258K of that Act.