28 May 2014

Rates: Mangawai Ratepayers v. Kaipara District

Mangawhai ratepayers got sympathy but not much more in their High Court challenge to cost blowouts exceeding $20 million on their local sewage scheme.   The cost overruns stand, the construction loans are still payable and the increased rates stand.  Local councillors responsible have been turfed out of office with government appointed commissioners installed to run Kaipara District until new elections scheduled for October 2015.  Kaipara’s chief executive has departed.
It has been a sorry tale of local body incompetence.  Out of their depth in negotiating and signing a public/private partnership deal to construct and operate a sewage reticulation and treatment system for the Northland seaside town of Mangawhai, district councillors left angry ratepayers carrying the can.  Many ratepayers have suffered stress, anxiety and financial hardship by having to pay rates at a significantly higher level than anticipated.  What for some was the purchase of an idyllic retirement home by the sea at Mangawhai has turned into a nightmare.   A number face a forced sale at a significant capital loss to avoid meeting potentially even higher rates.
Between 2005 and 2007, Kaipara District entered into a series of contracts for a new Mangawhai sewage system.   Initial public consultation documents disclosed a cost of some $35.6 million.  By the time the project was complete the cost had ballooned to $57.7 million, nearly all on borrowed money.  And five years later, with unpaid interest on the debt capitalised, the debt was up to $63.3 million.
A 2013 report by the Auditor-General concluded that Kaipara District “lost control” of the project.  By late 2007, Kaipara District did not know what was being built, what it would cost, how many properties it would service or how it would be funded.
The court was told Kaipara District staff and councillors made a series of catastrophic decisions on the basis of insufficient information.  The contract was signed at a price already in excess of a benchmark figure set by Kaipara District.  Funding was arranged through bankers ABN Amro Bank.  Only after signing contracts for the construction of a sewage treatment plant did Kaipara District realise there was no provision in the contract to deal with treated wastewater.  Twelve months on the scope of the project was doubled, with no public consultation.  Purchase of a farm at a cost of $11.1 million to deal with wastewater added substantially to the increased costs.
In the High Court, Justice Heath was moved to say that it was incomprehensible that a democratically elected council, in conjunction with its executive team, could increase the cost of a major infrastructure project by some $22.1 million without consulting ratepayers.  A consortium of Mangawai ratepayers challenged the validity of rates levied by Kaipara District.
The High Court ruled that Kaipara District failed to give the required public notice necessary for an infrastructure project of this size.  This failure meant the decision to proceed with the project and to levy rates to pay for the project were both unlawful. 
ABN Amro loans financing the unlawful project remain enforceable as a “protected transaction”.  Rules in the Local Government Act enable financiers to get a certificate from borrowing councils stating that all proper procedures have been followed.  These certificates reduce the cost of council borrowing; financiers then do not have to audit the minutae of council projects to make sure all required steps have been taken.  ABN Amro obtained the necessary certificate to support its funding of the Mangawai sewage project.
In December 2013, government passed legislation validating retrospectively the unlawful sewage contract and the otherwise unlawful rates levied.  Ratepayers complained this unjustifiably took away their legal right to challenge what Kaipara District had done.  Justice Heath noted it was common to use validating legislation to legitimise local council mistakes and he ruled that ratepayers’ loss of their legal rights in this case was legitimate in a free and democratic society.
Mangawhai Ratepayers v. Kaipara District Council – High Court (28.05.14)
14.021