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