Terms of Reference
Responsibilities
The purpose of the Committee is to:
(a) control and review
expenditure across the Auckland Council Group to improve value for money
(b) monitor the overall
financial management and performance of the council parent organisation and
Auckland Council Group
(c) make financial
decisions required outside of the annual budgeting processes
Key responsibilities include:
·
Advising and
supporting the mayor on the development of the Long Term Plan (LTP) and Annual
Plan (AP) for consideration by the Governing Body including:
o
Local Board
agreements
o
Financial policy
related to the LTP and AP
o
Setting of rates
o
Preparation of the
consultation documentation and supporting information, and the consultation
process, for the LTP and AP
·
Monitoring the
operational and capital expenditure of the council parent organisation and
Auckland Council Group, and inquiring into any material discrepancies from
planned expenditure
·
Monitoring the
financial and non-financial performance targets, key performance indicators, and other
measures of the council
parent organisation and each Council Controlled Organisation (CCO) to
inform the Committee’s judgement about the performance of each
organisation
·
Advising the mayor
on the content of the annual Letters of Expectations (LoE) to CCOs
·
Exercising
relevant powers under Schedule 8 of the Local Government Act 2002, which relate
to the Statements of Intent of CCOs
·
Exercising Auckland
Council’s powers as a shareholder or given under a trust deed, including
but not limited to modification of constitutions and/or trust deeds, granting
shareholder approval of major transactions where required, exempting CCOs, and
approving policies relating to CCO and CO governance
·
Approving the
financial policy of the Council parent organisation
·
Overseeing and
making decisions relating to an ongoing programme of service delivery reviews,
as required under section17A of the Local Government Act 2002
·
Establishing and
managing a structured approach to the approval of non-budgeted expenditure
(including grants, loans or guarantees) that reinforces value for money and an
expectation of tight expenditure control
·
Write-offs
·
Acquisition and
disposal of property, in accordance with the long term plan
·
Recommending the
Annual Report to the Governing Body
Powers
(a) All powers necessary to
perform the committee’s responsibilities, including:
a. approval of a
submission to an external body
b. establishment of
working parties or steering groups.
(b) The committee has the powers
to perform the responsibilities of another committee, where it is necessary to
make a decision prior to the next meeting of that other committee.
(c) The committee does not
have:
a. the power to
establish subcommittees
b. powers that the
Governing Body cannot delegate or has retained to itself (section 2).
Exclusion of the public – who
needs to leave the meeting
Members of the public
All members of the public must leave the
meeting when the public are excluded unless a resolution is passed permitting a
person to remain because their knowledge will assist the meeting.
Those who are not members of the public
General principles
·
Access to confidential information is managed on a “need to
know” basis where access to the information is required in order for a
person to perform their role.
·
Those who are not members of the meeting (see list below) must
leave unless it is necessary for them to remain and hear the debate in order to
perform their role.
·
Those who need to be present for one confidential item can remain
only for that item and must leave the room for any other confidential items.
·
In any case of doubt, the ruling of the chairperson is final.
Members of the meeting
·
The members of the meeting remain (all Governing Body members if
the meeting is a Governing Body meeting; all members of the committee if the
meeting is a committee meeting).
·
However, standing orders require that a councillor who has a
pecuniary conflict of interest leave the room.
·
All councillors have the right to attend any meeting of a
committee and councillors who are not members of a committee may remain,
subject to any limitations in standing orders.
Independent Māori Statutory Board
·
Members of the Independent Māori
Statutory Board who are appointed members of the committee remain.
·
Independent Māori Statutory Board
members and staff remain if this is necessary in order for them to perform
their role.
Staff
·
All staff supporting the meeting (administrative, senior
management) remain.
·
Other staff who need to because of their role may remain.
Local Board members
·
Local Board members who need to hear the matter being discussed
in order to perform their role may remain. This will usually be if the
matter affects, or is relevant to, a particular Local Board area.
Council Controlled Organisations
·
Representatives of a Council Controlled Organisation can remain
only if required to for discussion of a matter relevant to the Council
Controlled Organisation.
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Finance and Performance Committee
21 May 2019
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Proposal for Watercare Services Limited
to provide water services in Waikato district
File No.: CP2019/04355
Te take mō te
pūrongo
Purpose of the report
1. To
endorse the proposal for Watercare Services Limited to enter into a contract
for the provision of three waters services in the Waikato district.
Whakarāpopototanga matua
Executive summary
2. In
late 2018, Waikato District Council (WDC) approached Watercare regarding a
possible arrangement for Watercare to provide three waters services for the
Waikato district. A Waters Governance Board will oversee the delivery of
waters services in Waikato district.
3. Watercare’s
2018-2021 statement of intent has a commitment to explore alternative sources
of revenue, and the proposed arrangement would deliver on
that.
4. Watercare
has proposed three principles which would form ‘bottom lines’ for
the proposed arrangement:
· Watercare
will ensure its obligations and service to Aucklanders are not compromised
· no
cross subsidy from Auckland customers to Waikato customers.
· there
must be an acceptable return.
5. The
proposed contract covers two phases:
· phase
1: an initial two-year period starting 1 July 2019 in which Watercare will be
operating as a contractor. During this time, Watercare would also carry
out consultation and due diligence for phase 2 and finalise the commercial
arrangements.
· phase
2: If the arrangement proceeds to phase 2, during the remaining term of the
contract (July 2021 to June 2051) Watercare would provide an
‘end-to-end’ service in the Waikato district.
6. In
agreeing to enter phase 1 there will be an expectation that the commercial
relationship will continue into phase 2 unless there are good reasons not to.
7. We
recommend that the committee endorses Watercare entering into phase 1 of the
proposed arrangement. Before Watercare commits to entering phase 2, the
Governing Body should receive further advice, specifically considering:
· the
three bottom line principles being met
· group
financial impacts, including the impacts on the Auckland Council group’s
debt to revenue ratio
· any
other risks at a group level
· the
results of consultation with Aucklanders
8. If
the Finance and Performance Committee endorses the proposed arrangement, Watercare will continue to negotiate the contract between Watercare and WDC
before the planned start date of 1 July 2019.
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Ngā tūtohunga
Recommendation/s
That the Finance
and Performance Committee:
a) endorse Watercare Services Limited entering into the
first phase of a conditional Delegated Management Agreement for water
services in Waikato district to provide water, wastewater and some stormwater
services from 1 July 2019,
as the first phase of a possible
32-year arrangement
b) endorse
the three principles that underpin the proposed arrangement:
i) Watercare
Services Limited will ensure its obligations and service to Aucklanders are
not compromised
ii) there
will be no cross-subsidy from Watercare Services Limited customers in
Auckland to Waikato customers
iii) Watercare
Services Limited must make an acceptable return for delivering the services
to customers of the Waikato district
c) note
that during the initial two-year phase Watercare Services Limited will carry
out further due diligence on the second phase, a 30-year period commencing 1
July 2021 in which Watercare Services Limited would provide end-to-end
services, including:
i) developing
an asset management plan and price path to be agreed with the Waikato Waters
Governance Board
ii) assessing
the financial impacts, including the impacts on Auckland Council’s debt
to revenue ratio
iii) consulting
with Aucklanders on the proposal, as required under the Local Government Act
2002
d) note that if agreeing to enter phase 1 there will be
an expectation that the commercial relationship will continue into phase 2
unless there are good reasons not to
e) note that before Watercare Services Limited commits
to entering phase 2, it will seek endorsement from the Governing Body, which
will specifically consider:
i) the
three principles in clause b) being met
ii) group
financial impacts, including the impacts on the Auckland Council
group’s debt to revenue ratio
iii) any
other risks at a group level
iv) the
results of consultation with Aucklanders
f) request
Watercare Services Limited to work with Auckland Council staff to assess the
items in clause e) during the initial two-year phase to inform further advice
to the Governing Body
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Horopaki
Context
Background
9. Through
its 2018 – 2028 Long-term Plan, Waikato District Council (WDC) consulted
on four options for how it should provide its water and wastewater
services. The preferred option was a proposal to create a Waikato Waters
Governance Board which would enter into a commercial arrangement with Watercare
Services Limited (Watercare).
10. In
late 2018, WDC approached Watercare regarding a possible arrangement for
Watercare to provide water, wastewater and some stormwater services for the
Waikato district. Watercare has provided a summary of the proposed
arrangement in Attachment A.
11. WDC
proposes that the Waters Governance Board will oversee the delivery of waters
services in Waikato district. The Waters Governance Board would report
directly to WDC but would have delegated authority to agree terms of the
arrangement with Watercare.
12. Watercare’s
2018 – 2021 Statement of Intent contains a commitment to explore
alternative sources of revenue (which was in response to the council’s
request in its letter of expectations for each of the substantive
council-controlled organisations to do so).
Current relationship with Waikato district
13. Watercare
already provides bulk water and wastewater services to Pokeno and Tuakau in
North Waikato, because the previous boundary of the Auckland region with
Waikato region was moved northward when Auckland Council was established in
2010.
14. Auckland
also receives around 61 percent of its water supply from the Waikato region,
with around 20 percent coming directly from the Waikato River under a
‘water take’ resource consent issued by Waikato Regional
Council. Watercare has applied to increase this take, although it is not
likely that the application will be considered for some time.
Legislative requirements
15. The Local
Government Act 2002 (LGA) provides for joint local government arrangements for
water services in section 137. Under the legislation, the proposed
arrangement between Watercare and the Waikato Waters Governance Board is
considered to be a ‘joint local government arrangement’.
Section 137 also:
· Requires
both WDC and Watercare to undertake consultation in accordance with Part 6 of
the LGA (within their respective areas). Watercare and WDC must take into
account the results of the consultation when it makes a decision whether to
enter into the arrangement.
· States
that the relevant local government (WDC) will continue to be legally
responsible for providing the water services.
· Provides
that WDC should retain ownership of all infrastructure after the joint
arrangement ends. Under the terms of the proposed arrangement, WDC would
retain ownership of the assets throughout the arrangement (Watercare will not
own WDC assets at any point).
Terms of the proposed contract for service
16. Watercare
has proposed three principles which would form ‘bottom lines’ for
the proposed arrangement:
· Watercare
will ensure its obligations and service to Aucklanders are not compromised
(i.e. Watercare must continue to operate its business in Auckland in accordance
with its Statement of Intent and obligations under s57 of the Local Government
(Auckland Council) Act 2009).
· there
will be no cross subsidy from Watercare’s Auckland customers to WDC
customers.
· Watercare
must make an acceptable return for delivering the services to customers of WDC.
17. The
proposed contract covers two phases:
Phase 1:
· Phase
1 is an initial two-year period commencing 1 July 2019 in which Watercare will
be operating as a contractor. During phase 1, WDC would continue to
collect revenue from Waikato customers with prices remaining consistent with
its Long-term Plan. Watercare would be compensated for the delivery of
the services within the LTP envelope and any capital expenditure would be
funded by WDC.
· During
this time, Watercare would also carry out consultation and due diligence for
phase 2 and finalise the commercial arrangements. This would include
developing an asset management plan (which would set out capital investment), a
funding plan and a proposed price path which would need to be agreed with the
Waikato Waters Governance Board.
Phase 2:
· If
the arrangement proceeds to phase 2, during the remaining term of the contract
(July 2021 - June 2051) Watercare would provide an ‘end-to-end’
service in the Waikato district, including:
o customer
billing and revenue collection
o customer
management
o operations
and maintenance of all water and wastewater assets, and some stormwater assets
o the
development and delivery of the asset management plan, including funding
capital expenditure
o fund
the costs of the arrangement over the life of the contract from the revenues
collected
· The
revenue would be approximately $20 million per annum to start with.
· The
water and wastewater prices charged by Watercare would be based on a regulated
pricing model similar to those used overseas, which will be evaluated
periodically over the life of the contract. This would allow Watercare to
recover the costs of providing services and make a return above that.
18. We have
discussed the terms of the contract with Watercare staff, but have not had the
opportunity to carry out a detailed review. Watercare has advised that it
has the ability not to proceed to phase 2 if it is not supported by
consultation or there are commercial reasons not to proceed.
19. Watercare
proposes consulting with Aucklanders on the proposed arrangement during phase
1. Watercare has received advice that this would comply with section 137
of the LGA, as it would only be entering into a joint
local government arrangement at the beginning of phase 2.
Tātaritanga me ngā
tohutohu
Analysis and advice
Shareholder’s interest
20. Council-controlled
organisations are at arms-length operationally, but are required to achieve the
strategic objectives of the shareholder. The board of a CCO is
responsible for all actions of the company. It is part of the role of the
board of a CCO to ensure that all of the detailed risks relevant to its
specific business are considered, while the role of the parent (this committee)
is to hold the CCO accountable for its performance as agreed in its statement
of intent and exercise its rights as a shareholder, and to ensure that the group
impacts are adequately addressed.
21. Through
Watercare’s statement of intent, Auckland Council agrees the nature and
scope of Watercare’s activities. The proposal would extend the
geographic reach of Watercare’s activities. Therefore, the committee
should consider whether it supports Watercare entering into the arrangement so
that it can be confident in approving the statement of intent. Because of
the possible impacts on the group and the potential for the arrangement to be
long-term, the Finance and Performance Committee has an interest in the
proposed arrangement.
22. Also,
such an arrangement may have the potential to influence central government
decisions on the reform of the three waters sector, and would create an
expanded relationship between Auckland Council and WDC. Any government
changes to the three waters sector during the term of the proposed contract may
mean that the arrangement could change.
The two phases of the contract have different opportunities and
risks
23. The
proposed two phases of the contract are separate but linked, with the risks and
financial impacts (positive and negative) to Watercare and the council likely
to be lower in phase 1 (under a contracting model) than in phase 2 (where
Watercare would provide end to end services).
24. Watercare
has the ability not to proceed to phase 2, which allows a reasonable degree of
flexibility to ensure the final terms of phase 2 are reasonable and meet the
council group’s requirements. However, in agreeing to enter phase 1
there will be an expectation that the commercial relationship will continue
into phase 2 unless there are good reasons not to.
Assessment of impacts
25. We have assessed the proposal for Watercare to enter into the
proposed arrangement in relation to:
· its
strategic merits, which includes any impact it will have on Watercare’s
ability to deliver its work programme and maintain levels of service in
Auckland.
· any
group financial impacts.
· whether
the board will be provided with advice on all of the issues and risks relevant
to the proposal.
26. These three factors have been drawn from the
CCO accountability policy for assessing major transactions. Even though
it is not a major transaction under the policy, these are useful criteria to
assess the proposed arrangement against.
Impact on Watercare’s ability to achieve Auckland
objectives
27. The
proposed arrangement is in line with an agreed position of the council.
In October 2018, the Environment and Community Committee agreed an early
council group position on central government’s three waters reform, which
referred to negotiations between WDC and Watercare, and noted that ‘it is
a model that could spread the benefits of Auckland’s scale and capability
and deliver those benefits in an earlier and less disruptive way than structural
change, such as amalgamation’.
28. Under
the proposed arrangement, Watercare would take on existing WDC staff from 1
July 2019. The scale of operations in Waikato are relatively small
compared to Auckland. On balance, we consider that Watercare will be able
to maintain its levels of service and continue to deliver significant projects
in Auckland such as the Central Interceptor.
29. The
proposed arrangement includes some stormwater services in Waikato
district. The management of stormwater is outside Watercare’s core
role in Auckland where it has responsibility for water and wastewater.
Financial impact on the council group
30. The
group financial impact of most interest to the council is the possible impact
on the council group’s debt to revenue ratio. This will be affected
by the revenue from the contract (in phase 1 and phase 2) and debt taken on
(which may be incurred in phase 2). Phase 2 of the proposed arrangement
may include Watercare financing the renewal and development of assets in the
Waikato district.
31. It
is possible that there would be a positive impact on the debt to revenue ratio,
which would increase the council’s available debt headroom. The
extent of this will not be fully understood until due diligence is completed
during phase 1. For example, the asset management plan will determine the
required new assets and renewals in the Waikato district, which influences
capital expenditure and therefore any debt taken on to fund it.
32. We
recommend that Watercare and council staff should work together to assess the
group financial impacts during phase 1, and report back on this to the
committee before Watercare seeks its endorsement to enter into phase 2.
Board decision-making
33. Based on
the information that we have seen, Watercare staff have carried out a range of due diligence on the proposed arrangement, including:
· an
assessment of the risks involved in the proposed arrangement
· health
and safety implications
· the
condition of assets in Waikato district
· the
financial impacts and the possible return
34. The
board has received regular updates on the proposal. Watercare
staff are preparing a business case to inform the board’s final decision
on whether to enter phase 1.
35. Watercare
has also commissioned advice on the process that it has followed in developing
the proposed arrangement.
Summary
36. Based
on the analysis above, we recommend that the committee endorse Watercare
entering into phase 1 of the proposed arrangement.
37. Before Watercare commits to entering phase 2, the Governing Body
should receive further advice on the following
issues and considers whether to endorse the proposal. This should
specifically consider:
· the
three principles in (b) being met
· group
financial impacts, including the impacts on the Auckland Council group’s
debt to revenue ratio
· any
other risks at a group level
· the
results of consultation with Aucklanders
38. We will work with Watercare to assess these impacts.
Ngā whakaaweawe me
ngā tirohanga a te rōpū Kaunihera
Council group impacts and views
39. We have worked with Watercare staff to draft this report. The
recommendations are unlikely to have a significant impact on the other parts of
the council group.
Ngā whakaaweawe
ā-rohe me ngā tirohanga a te poari ā-rohe
Local impacts and local board views
40. The governance
of CCOs is the responsibility of the Governing Body which has delegated this to
the Finance and Performance Committee. There are no specific impacts on
any local board and staff have not consulted with local boards.
Tauākī whakaaweawe
Māori
Māori impact statement
41. Watercare
has existing relationships with Waikato-Tainui because of its presence and the
water take from the Waikato region, including the Waikato River.
42. Waikato-Tainui
has been involved in the development of the proposed arrangement. A
representative of Waikato-Tainui is the chair of the Waikato Waters Governance
Board.
Ngā ritenga
ā-pūtea
Financial implications
43. The
financial implications have been addressed in the body of the report.
Ngā raru tūpono me
ngā whakamaurutanga
Risks and mitigations
44. As with
any contracting arrangement, there is a risk of non-performance which may
create a reputational risk for Watercare. This risk can be mitigated
through Watercare’s due diligence and the development of the contracting
arrangements, including the initial two-year period during which Watercare will
be able to negotiate its performance measures.
45. There is
a risk that there may be substantial unforeseen investment required in Waikato
district. Watercare has mitigated this risk through the proposed
six-yearly review of the asset management plan and associated price path.
Ngā koringa ā-muri
Next steps
46. If the
Finance and Performance Committee endorses the proposed arrangement, Watercare
will continue to negotiate the contract between Watercare and WDC before the
planned start date of 1 July 2019.
Ngā tāpirihanga
Attachments
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No.
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Title
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Page
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a⇩
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Watercare Services
Limited summary of proposed arrangement
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19
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Ngā kaihaina
Signatories
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Authors
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Sarah Holdem -
Principal Advisor
Kevin Ramsay - General
Manager Corporate Finance and Property
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Authorisers
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Alastair Cameron -
Manager - CCO Governance & External Partnerships
Phil Wilson -
Governance Director
Matthew Walker - Group
Chief Financial Officer
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