Source: https://www.oag.govt.nz/2015/cco-governance/part2.htm
Timestamp: 2019-11-13 22:59:38
Document Index: 630995272

Matched Legal Cases: ['art 2', 'art 2', 'art2', 'art 5', 'arts 1', 'art 7', 'art 5', 'art 9']

Part 2: Principles and statutory framework underpinning council-controlled organisations — Office of the Auditor-General New Zealand
Part 2: Principles and statutory framework underpinning council-controlled organisations Governance and accountability of council-controlled organisations. https://www.oag.govt.nz/2015/cco-governance/part2.htm https://www.oag.govt.nz/@@site-logo/logo.png
list the principles of good governance for subsidiary entities;
outline the statutory framework for the governance and accountability of CCOs; and
note some issues that have arisen with the framework.
We also outline the provisions for Auckland that differ from the framework.
Principles of good governance for subsidiary entities
In our 2001 report, Local Authority Governance of Subsidiary Entities, we proposed five principles for good governance practice for subsidiary entities. They were:
The subsidiary entity should have a clearly defined purpose. We expect the purpose of the entity should be clearly stated and reviewed on a periodic basis. The influence exercised by the local authority over the finances, operations and direction of the entity should be consistent with that purpose.
The subsidiary entity's governing body should be effective. A local authority should have a process in place to appoint a governing body with the skills and competencies to carry out its duties effectively. Procedures should be in place for evaluating the performance of individual members and of the governing body as a whole.
The parties involved should be assigned clear roles and responsibilities. The roles and responsibilities of board members, shareholders, councillors and other parties (such as council and entity staff) should be clearly defined. Clear roles and responsibilities make the trade-offs among differing interests transparent and foster effective decision-making. The local authority should be able to hold the subsidiary entity to account. A local authority needs the structures, systems, information and capability to –
promote its interests (for example, as shareholder or purchaser of services);
influence the direction of the entity, as appropriate within the accountability relationship; and
Mechanisms for accountability to the community must be in place. A local authority should demonstrate that it is managing the community's financial and non-financial interests in the entity in an effective and efficient manner.
We confirm these principles and would now add:
The local authority and subsidiary must establish an effective working relationship based on mutual respect and trust. That relationship needs to be close enough for the local authority to know how the CCO is performing but still allow the CCO to operate at arm's length.
The statutory framework for council-controlled organisations
The statutory regime for CCOs is in Part 5 of the Act. No significant amendments have been made to that regime since 2002. However, local authorities should consider how other amendments to the Act, such as the redefinition of the purpose of local government and the requirement for cost-effectiveness in delivering services, might also affect CCOs.
Currently, the main statutory requirements are for a local authority to:
consult the community before setting up a new CCO;
appoint members of the CCO's governing body in keeping with the local authority's policy for such appointments;
consider and comment on the CCO's draft statement of intent;
describe the significant policies and objectives for the CCO in its long-term plans and annual plans;
regularly monitor the performance of the CCO to evaluate its contribution to the local authority's objectives for the CCO and the local authority's overall aims and outcomes;
report on the CCO's actual performance and achievements against its planned performance in the local authority's annual report;
review the cost-effectiveness of a CCO's provision of local infrastructure, local public services, or regulatory functions; and
consider exempting small non-profit CCOs from the accountability requirements in the Act and periodically review any exemptions given.
For CCTOs, a local authority:
must consider how to assess and manage risks associated with its CCTOs and whether the expected returns from any commercial activities are likely to outweigh the risks inherent in the activities;6
must not give favourable loans or other forms of financial accommodation to CCTOs; and
must not guarantee, indemnify, or give a security for any obligation by a CCTO.
The statutory requirements for a CCO and its board members include to:
achieve the objectives of its shareholders, both commercial and non-commercial, as specified in the statement of intent;
show a sense of social and environmental responsibility by having regard to the interests of the community in which it operates and endeavouring to accommodate or encourage those interests when able to do so;
carry out its affairs in keeping with sound business practice (if it is a CCTO);
make all operational decisions under the authority of the statement of intent and constitution;
prepare an annual statement of intent, a half-yearly report, and an annual report;7 and
meet the requirements of Parts 1 to 6 of the Local Government Official Information and Meetings Act 1987.
Issues with the statutory framework
We have previously reported on some issues with the statutory framework. These issues include:
how local authorities have used the power to exempt small CCOs;
compliance by non-profit CCOs with the requirement to have a statement of intent (this was a new requirement for those entities from 1 July 2004); and
the quality of performance measures in statements of intent.
We did most of this work in the first few years after the Act introduced these new measures in 2003. In that work, we commented that some local authorities and CCOs were slow to learn and meet the new accountability requirements for non-profit CCOs. The main problem was CCOs not reporting their performance and achievements in their annual reports because they did not have a statement of intent to report against.8
This has now been largely fixed. Most local authorities and CCOs meet the accountability requirements, and there is less need for us to refer to breaches in our audit reports.
However, the quality of statements of intent has been and remains an issue. In 2007, we published a report on the quality of statements of intent and performance reporting by CCOs and other public entities.9 In that report, we criticised the range and quality of performance measures some CCOs use and how they reported achievements against those measures.
It is not clear to us that local authorities are commenting on draft statements of intent or using their power to modify the content of the statement of intent as much as they could. We comment on this in Part 7.
Other issues about CCOs have arisen in annual audits or as matters raised with us by ratepayers. Those matters include:
whether local authorities had properly consulted before setting up a CCO,10 including whether the consultation requirement had been avoided when a holding company rather than a local authority formed the CCO;
local authorities breaching the Act's prohibitions on giving favourable financial treatment to their CCTOs;11
the commercial failure of smaller CCTOs;
the appropriateness of local authorities subsidising the activities of CCOs that compete with local businesses; and
appointing councillors as directors, including concerns about management of conflicts of interest for councillor/directors and whether councillors should be remunerated for their director role.
Auckland Council and substantive CCOs
In 2010, Auckland's local authorities were amalgamated into Auckland Council. The legislation that enacted this amalgamation introduced the concept of a "substantive CCO". These are defined as CCOs that deliver significant services or activities on behalf of Auckland Council or that own or manage assets with a value of more than $10 million.12 Seven such CCOs were formed in the amalgamation.
Some additional accountability requirements apply to Auckland Council and its substantive CCOs. These include:
Auckland Council must have an accountability policy for substantive CCOs. This policy must set out how the Council expects the CCOs to contribute to the priorities of the Council and the government. The Council may require the CCOs to say how they will do this in their statements of intent.
Substantive CCOs must give effect to the Council's long-term plan and act consistently with other plans (including local board plans) and strategies if the Council directs it to do so.
Auckland Council can also impose additional accountability requirements on substantive CCOs. It can:
specify additional planning and reporting requirements beyond those in Part 5 of the Act;
set out any requirements for managing strategic assets, including the process for approving any major transactions;
require quarterly reporting; and
require substantive CCOs (other than Auckland Transport) to adopt 10-year plans covering asset management, service levels, how the CCO will respond to population growth and environmental factors, and how the CCO will give effect to the Council's plans and priorities.
The other unique feature of the Auckland model for substantive CCOs is the statutory prohibition on appointing councillors or local board members to the governing body of a substantive CCO (apart from Auckland Transport, where two councillors may be appointed).
There is also a requirement for all of Auckland Council's CCOs to hold two meetings in public each year:
At one meeting, the CCO considers comments from shareholders on its draft statement of intent for the forthcoming financial year.
The other meeting considers the CCO's performance in the previous financial year against its statement of intent.
6: A local authority's investment policy must state the local authority's policies for investments, including how it assesses and manages risks associated with investments (section 105 of the Act). CCTOs can be regarded as a form of investment. See also section 14(1)(fa) of the Act.
7: These requirements do not apply to listed companies – see section 71A of the Act.
8: Controller and Auditor-General (2008), Local Government: Results of the 2006/07 audits, "Part 9: Non-profit council-controlled organisations".
9: Controller and Auditor-General (2007), Statements of corporate intent: Legislative compliance and performance reporting.
10 The Act previously required a local authority to use the special consultative procedure before setting up or becoming a shareholder of a CCO. In 2014, this changed to a requirement to consult in keeping with the consultation principles in section 82. This does not apply to a CCO such as a holding company that establishes a subsidiary CCO.
11 See sections 62 and 63.
12 Section 4(1) of the Local Government (Auckland Council) Act 2009.