Council company's deals 'risky, ill-advised'

23:15, Mar 20 2014

Auditor-General Lyn Provost has found no impropriety in land deals by a Dunedin City Council company, but says they were risky, ill-advised and a mistake.

The inquiry, requested by Dunedin Mayor Dave Cull, focused on the board of utility company Delta, a Dunedin City Holdings Ltd subsidiary.

It decided to invest in residential developments at Luggate, near Wanaka, in mid-2008, and at Jacks Point, near Queenstown, in 2009.

The deals were part of a Delta board determination to seek new opportunities to expand its business and because, since 2006, the Dunedin City Council had sought higher dividends from the Dunedin City Holdings group of companies, Ms Provost said.

"The holding company was told of this shortly before the Luggate investment opportunity," she said.

"However, the council had given no direction about how much risk it was willing to take on."


Because the directors of Delta were also the directors of Dunedin City Holdings Ltd, the governance regime did not give Delta enough oversight or guidance on the investments, Ms Provost said.

Therefore, the holdings company and the council had to take some of the responsibility for the investments, she said.

In an overview of the 132-page report, Ms Provost said Delta lost about $5.9 million on the Luggate investment when it sold the property in 2013.

It projected a loss of about $2.8m for the Jacks Point land, sold under deferred payments with the final payment due this December.

"Although Delta carried out a careful process before investing in Luggate, it is difficult, because of the size of the loss, to avoid concluding the investment was a mistake," Ms Provost said.

"Delta directors regarded the investment as learning experiences for the company. Because of the losses involved, these proved to be expensive lessons.

"In my view there was too much focus on the likely profits and not enough consideration of risks of the market slowing, or an exit strategy if things went wrong.

"I consider Delta should have got independent advice before investing in Luggate and Jacks Point."

Ms Provost said her staff had found breaches of the Local Government Act 2002 and Companies Act 1993 and instances of Delta using artificial business structures to avoid public accountability.

Conflict-of-interest issues which comprised part of her two-year investigation into the 2008-2009 land deals had made Ms Provost "pause and think".

During the investigation, she was made aware some Dunedin ratepayers alleged impropriety about the investments.

However, her staff found no evidence of that, or of poorly managed conflicts of interest in relation to either investment.

"The extent of the interests and involvement of one of Delta's directors in Jacks Point, and how these interests and involvement were managed, caused me to pause and think," the report said.

"Although the overall management and disclosure of conflicts of interest was largely adequate, we identified some instances where there should have been earlier or fuller disclosure for better transparency [and] one stance where the director's involvement in both sides of a venture would have been problematic had the venture proceeded."

The Delta example should serve as a lesson to all local authorities, especially those with council-controlled organisations, she said.

The report made no recommendations. A separate report this year would explore wider governance and communication issues between council-controlled organisations and councils, Ms Provost said.

The Southland Times