New Zealand: Auckland Council and the Council Controlled Organisations Debate - Logical Evolution or Misguided Devolution?

NZ Local Government Update
Last Updated: 26 March 2010
Article by Mark Williamson, Linda Going and Iain Thain

Much has been said about the proposed role of Council Controlled Organisations or 'CCO s' within the new Auckland Council structure. In this update, we look briefly at the history of the CCO , look at what is proposed under the new Auckland Council structure and conclude by considering the ways in which the new Auckland Council is likely to exercise control over its CCO s.

The CCO and its origins

In simple terms, a CCO is any company or entity in which one or more local authorities control 50% or more of the voting rights or the right to appoint 50% or more of the governing body of the company or entity. The term 'entity ' in the Local Government Act 2002 (LGA02) is given a very broad meaning and can include trusts, partnerships, joint ventures, unions of interest and a range of other similar arrangements. The LGA02 contains provisions, among other things, dealing with the establishment of CCOs, their governance and reporting requirements.

1989 marked the birth of the predecessor of the CCO, the local authority trading enterprise (LATE). Councils which operated trading undertakings were permitted to transfer those undertakings to local authority trading enterprises. Corporatisation and privatisation were the flavour of the times and the culture and regulation of LATEs reflected this. Every LATE was required to operate as a successful business. Placing LATEs on an equal footing with private sector players was viewed as critical with arm's length rules prohibiting a Council guaranteeing the obligations of a LATE or providing finance on favourable terms. Boards of LATEs embraced their independence, at times leading to tensions between the business objectives of the LATE and the social and political objectives of its owner, the local authority.

1999 saw a change of Government and a cultural shift away from the focus on the trading/business activities of local authorities. Councils were increasingly wishing to use entities which potentially came within the definition of a LATE to undertake non-commercial activities. For example, when the Auckland Territorial Authorities combined to develop Auckland's transport network, a company LATE, Auckland Regional Transport Network Limited was formed (ARTNL). This new generation of LATE was very different to its predecessors with adequate Council control being viewed as a must, rather than as something undesirable. In addition to the statutory safeguards, the constitution of ARTNL built in additional protections such as requiring directors' decisions to be in accordance with regional strategy documents and requiring shareholder approval before particular transactions could be undertaken.

Reflecting the shift in focus in 2001 the Government amended the definition of 'successful business' under the Local Government Act 1974 to include achieving the commercial and non-commercial objectives of the LATE, being a good employer and having regard to social and environmental factors.

The passing of the LGA02 was a major landmark in the evolution of the LATE and led to its extinction. The term LATE was replaced with Council Controlled Organisation (CCO). This definition captured not only entities set up for the purpose of making a profit, but all entities controlled by Councils. The rules requiring CCOs to operate on an arm's length basis and in accordance with sound business practice remained but only applied to those CCOs which were set up to operate a trading undertaking with the purpose of making a profit (referred to in the LGA02 as Council Controlled Trading Organisations (CCTOs)).

The change of name from LATE to CCO or CCTO embodied the shift in focus from the previous era. While governance was to remain the responsibility of the board of the CCO, control firmly rested with Council with specific requirements set out in the LGA02 in regard to reporting and accountability. For example, if a Council was unhappy with the direction of the CCO or the CCTO as reflected in its proposed statement of intent it was duty bound to require the necessary amendments

The introduction of the LGA02 resulted in a number of Councils reviewing the way in which services were delivered to the public. For example, in Auckland, since 2002, Manukau City Council has transferred its water, leisure services and building inspection activities to company CCOs.

What is proposed for Auckland?

Six major CCOs are planned for Auckland being:

  • Auckland Transport
  • Waterfront Development Agency
  • Economic Development, Tourism and Events Agency
  • Property Holdings and Development
  • Major Regional Facilities
  • Council Investments

It is proposed that Watercare Limited (which will be responsible for both bulk and residential water delivery) will continue to fall outside the CCO regime but will be subject to its own particular set of controls and accountability mechanisms.

Earlier this month, the Auckland Transition Agency released a discussion paper on the major CCOs (excluding Auckland Transport which is being considered separately)1. Submissions on this paper close at the end of March. While many details are yet to be worked through, the paper does evidence that the Transition Agency has clearly turned its mind to the principal criticisms of the CCO model, being a lack of accountability to the public and the presence of a disconnect between the local boards and the proposed CCOs. The paper also provides some useful further detail as to the proposed interface between Council and the CCOs (it is proposed that Auckland Council will operate a dedicated council committee, governance and monitoring unit and an independent advisory board). The paper is silent on the legal form that the proposed CCOs will take. It is assumed that the majority will be companies but this is not confirmed (a decision which under current law will have tax implications). The paper is also silent about which, if any, of the proposed new CCOs will also be CCTOs (which, again will have tax implications).

Accountability mechanisms

A range of mechanisms exist to reduce the risk of a CCO 'going rogue'. These mechanisms may also be viewed as reducing the ability of Auckland Council to hide behind CCOs in the event of service delivery failures.

The LGA02 imposes a duty on members of the governing body of all CCOs to ensure that decisions made comply with the CCO's statement of intent and its constitution. Where the CCO is a company, the Companies Act 1993 also imposes a duty on the directors of the CCO to comply with the company's constitution. The existing reporting provisions of the LGA02 also require six monthly and annual reporting.

The LGA02 effectively requires a CCO's statement of intent to be in a form satisfactory to Auckland Council. It would also be usual to expressly provide in the constitution or other governing document of the CCO that the statement of intent must be approved by Council prior to adoption or any amendment.

Consistent with the provisions of the LGA02 and the Companies Act, it is proposed that Auckland Council will be able to remove directors/board members of each CCO at any time and for any reason. We suspect in practice for political reasons this will be viewed by Auckland Council as the option of last resort.

As we noted in our previous update, the Local Government (Auckland Law Reform) Bill presently authorises Auckland Council to impose additional accountability requirements on substantive CCOs (responsible for delivery of significant service or activity or the owner or manager of assets with a value of $10 million). This includes a long term plan covering a minimum 10 year period.

So what's next?

Feedback on the Auckland Transition Discussion Paper is due at the end of this month. Presumably the Agency will digest this feedback and continue to put further 'meat on the bones' of the CCO proposals as they currently stand.

The report of the Auckland Governance Legislation Committee is due on 4 May 2010. It remains to be seen whether the Government will weather the political storm which has erupted at the CCO proposals. Assuming it does, some areas which we would expect to receive close scrutiny by the Legislative Committee will be the process for appointment of initial directors of the CCOs and the linkages between the CCOs, local boards and various council plans (such as the spatial plan). While the need for these linkages has been highlighted by the Auckland Transition Agency in its paper, the linkages are generally absent in the legislation as it currently stands.

As always, we will keep you posted as the reform process continues.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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