STATEMENT OF PROPOSAL
TO ESTABLISH
A COUNCIL CONTROLLED TRADING ORGANISATION (CCTO)
FOR THE MAINTENANCE OF PARKS AND RESERVES
Hastings District Council
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Have Your Say
We encourage you to have your say on this proposal.
Copies of the proposal are available from:
Council’s Civic Administration Building, Lyndon Road East, Hastings and the
Hastings, Havelock North and Flaxmere Libraries. You can also phone 871
5044 and we’ll post you a copy, or you can download or view the proposal on
our website www.hastingsdc.govt.nz.
Make a submission
You are invited to make a submission on these proposals. Submission forms
are available from the Council’s Civic Administration Building, or you can make
a submission by logging on to our website www.hastingsdc.govt.nz or
www.myvoicemychoice.co.nz or writing to the Council at:
Lex Verhoeven
Hastings District Council
Private Bag 9002
Hastings 4156
Submissions close 4 May 2012
Speak to your submission
You can talk directly to the Council about your written submission to explain
points you want to make. The Council meeting to hear submissions will be
held commencing 30 May 2012.
Hastings District Council
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b)
Change to future management and governance of the
Parks Service Delivery
The planning and management of parks assets and the placement and
management of contracts for services with the CCTO would still be
conducted by Council.
Introduction
The Council has recently conducted a high level review of the governance and
management of its Parks Service Delivery Unit (PSDU). The review did not
identify any issue of poor workmanship or lack of effectiveness but did note
linkages to, and direction from Council’s Asset Management team could be
strengthened. This proposal builds on the restructuring arising out of the
2011 review and is focussed on improving the efficiency and effectiveness of
service delivery and enhancing value for money to the ratepayer while
improving the transparency and accountability of this activity. It is considered
that a change to the current activity structure may facilitate more effective
and efficient service delivery and provide greater value for money together
with improved accountability.
As a result of the review, Council is proposing to set up from 1 July 2012 the
PSDU as a stand-alone business unit within Council. The Establishment Board
set up to establish the business unit will review and evaluate the
appropriateness of establishing a Council Controlled Trading Organisation
(CCTO) for Council to consider. Subject to receiving a business case to
support it, Council will consider a proposal to form a new Company to be
responsible for the carrying out the maintenance and physical work to operate
and maintain Hastings Parks, Sportsgrounds and streetscapes. The new
Company is defined as a Council Controlled Trading Organisation (CCTO)
under the Local Government Act 2002. A CCTO is a Council Controlled
organisation that operates a trading undertaking for the purpose of making a
profit.
In order for the Council to be able to establish a CCTO and change the mode
of delivery it must first consult with its community on the proposal.
The key objectives for the CCTO if in due course approved by Council; are:
To provide the ratepayer with enhanced value for money for the
services contracted by Council and provided by the company.
Why are the objectives important?
If the key objectives above are included in the constitution of the company
and the Statement of Intent, they become the primary objectives of the
company’s board of directors.
In addition, Section 59 of the Local
Government Act 2002 states that:
“The principal objective of a council-controlled organisation is to:
a)
Achieve the objectives of its shareholders, both commercial and noncommercial, as specified in the statement of intent; and
b)
To be a good employer; and
c)
Exhibit a sense of social and environmental responsibility by having
regard to the interests of the community in which it operates and by
endeavouring to accommodate or encourage these when able to do so.”
d)
If the Council Controlled Organisation is a CCTO, conduct its affairs in
accordance with sound business practice.
These statutory provisions are restated to highlight that the company is set
up to achieve the objectives of its shareholders, which include efficient and
effective service delivery, enhanced value for money for services contracted
and financial prudence.
Outline of the Proposal
This proposal entails:
a)
To provide efficient and effective maintenance of streetscapes and
public facilities for sports, recreation and leisure-time occupation,
including the provision of facilities for those purposes, and
Hastings District Council
1.
The formation of a company, which will be a CCTO to carry out the
physical works to maintain parks and reserves and other council
amenities and associated activities as contracted and;
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a)
The consequent adoption of a suitable constitution for any
new company formed.
b)
Recruitment of directors for the new CCTO if it is established,
and
c)
Company ownership through a shareholding by Council
through its Holding Company, Hastings District Holdings
Limited, (The Holding Company) which will be responsible for
owning and monitoring the activities of this council controlled
company.
2.
The retention of the significant capital assets (the buildings) owned
by Council in direct Council ownership with maintenance and the
service delivery contracts to the CCTO.
3.
The transfer of all the existing operating assets, staff, contracts,
obligations and liabilities from the Council ownership into the new
CCTO.
4.
Transfer of the governance and management responsibilities from
Council to the new CCTO.
5.
Any formation of a CCTO for this purpose will be subject to a sound
business plan approved by Council.
BACKGROUND
The high level review indicated that the PSDU carries out its activities well and
had a workforce of similar calibre to other contracting business. The review
did however identify some weaknesses in terms of linkages to the Asset
Management Group; commissioning of work, lack of financial information to
measure performance and value and a lack of accountability. It also
suggested that work may be better performed and organised.
An Establishment Board has been established to set up the PSDU as a standalone business unit from 1 July 2012 and to prepare a detailed business case
for the establishment of the PSDU as a CCTO for Council to consider in late
2012. Council’s decision to establish the PSDU as a CCTO will be made
following consideration of the detailed business case.
Hastings District Council
A Company structure may be the best for meeting Council’s objectives of
improving performance, bringing innovative and commercially focused
governance and management to the Parks Service Delivery Unit, and ensuring
greater accountability to Council and the community. These objectives are
designed to deliver improved efficiency and effectiveness of service delivery
and enhanced value for money for ratepayers.
The Council has identified that it believes there is room for improvement in
how the PSDU operates, although it acknowledges that the PSDU has
operated efficiently and delivered a good service over many years as
effectively as it could in terms of its current governance and operational
arrangements.
A high level review of the governance, management and operational
arrangements for the PSDU consisted of the following:

An assessment of the current situation and its effectiveness in carrying
out PSDU operations.

An assessment of the identified positive and negative impacts of
alternative governance models against the current situation including:
stand-alone business unit of Council and a company structure.
REASONS FOR THIS PROPOSAL
Council believes that the performance of the PSDU is likely to benefit from
having a Board of Directors with appropriate commercial and community
background involved in its governance and management and that the current
structure of having the PSDU as a department of Council may be less than
optimal.
The structure provides unclear accountabilities
management and delivery functions of Council.
between
the
asset
The structure acts as a disincentive to operational managers from taking full
ownership for performance of the PSDU and impedes decision making and the
achievement of improved operational performance. It also confuses
accountability within the organisation.
Following the high level review conducted by Council, a company structure
has been identified as a potential solution to address the concerns with the
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Council structure. Although the review did not identify any issue of poor
workmanship or lack of effectiveness it did note weakness in linkages to the
Asset Management group, and the commissioning of work and the lack of
financial information to measure performance and value. It also suggested
that work may be better programmed and organised.
The Council believes that the stand-alone nature of the structure proposed
will allow a Board of Directors to have full accountability for decision making
and performance for the PSDU. The Council believes that this in turn will
improve performance by enabling innovation and flexibility in operations,
governance and management of the PSDU, which will increase the use and
vibrant nature of our parks & reserves and provide enhanced value for money
for the ratepayer.
The company structure provides a clearly understood accountability
arrangement, with Council retaining ownership over the company through
Hastings District Holdings Limited (the Holding Company). Making the
company responsible for the delivery of the parks & reserves maintenance
contracts means that Council, and therefore the community, retains direct
ownership of the land and buildings.
OPTIONS
The options that were assessed for alternative governance model included:
Status Quo (Council department); Stand-Alone Business Unit (with advisory
board) and a standard Commercial Company. These are described in some
detail below:

Status Quo (Council department) This would see the PSDU being
managed as a department of Council. Governance would be provided
through the existing Council committee structure.

Stand-Alone Business Unit Board This would be established if a
company was not established. The Business Unit would have delegated
authority by Council to make key business, operational and financial
decisions on Council’s behalf.
The PSDU activity will remain as a Council activity and function. There
would be no need for a separate legal entity. This would facilitate more
efficient and effective service delivery and improved value for money for
ratepayers. Accountability, clarification of responsibilities between assets
and the service delivery unit would be improved together with greater
Hastings District Council
transparency of performance. Accountability and responsibility for
decisions is still not clear between the Board and the Chief Executive as
all Council staff are legally answerable to the Chief Executive rather than
a Board.

A Company is a separate legal entity and is the most common and
convenient entity for the conduct of business particularly for medium to
large businesses. A company can carry on a profit or not-for-profit
undertaking and is formed by incorporation under the Companies Act
1993. A company is regarded as a legal entity in its own right, separate
from its shareholders. It can enter into contracts, sue or be sued, and
be convicted of criminal offences.
This would see a company formed where the Council, through its Holding
Company, is the owner and shareholder with the right to appoint and
remove directors. The company would be required to prepare an annual
statement of intent outlining its objectives and any key performance
measures and targets.
It would also enter into operation and
maintenance contracts with Council with clear measures of performance
and accountability.
In exploring the concept of a CCTO, Council does not want to tie itself to
a single variant involving just itself. It may be better to allow for
flexibility to explore joining with other CCTOs or Council operations, or
enabling shared services approaches. Accordingly this proposal includes
the ability to establish a wholly owned CCTO, or to establish a CCTO
owned jointly with other Councils. This proposal does not permit the sale
of any Council shareholding in any CCTO. Any such move would need to
be the subject of fresh Council decision making processes.
As a CCTO under the Local Government Act 2002 it would be required to
enter into an Annual Statement of Intent, prepare stand-alone audited
statutory accounts and these would all be available to Council at a public
meeting. Directors and management would have significant
independence.
An Establishment Board will manage the transition to a stand-alone
business unit and develop a detailed business case for Council to consider
in detail the merits of moving from a stand-alone business unit to a
CCTO.
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Assumptions
In the assessment of each of the models it was assumed that there will be no
transfer of land and buildings and that, in the case of a separate entity being
proposed, contracts would be entered into to operate and maintain these
assets to the standards expected of by Council.
EVALUATION OF OPTIONS
The alternative governance model options were assessed in terms of their
positive and negative impacts in accordance with their expected ability to
deliver more efficient and effective services and greater value for money to
ratepayers, improved accountability and clarity of responsibilities, improved
management and operational decision making likely set-up and compliance
costs; taxation issues and any other potential issues.
Status Quo (Council department)
For reasons set out in the introduction it is considered that the current
structure does not provide clear accountability or facilitate more efficient and
effective service delivery and enhanced value for money for ratepayers.
Accountability and clarification of responsibilities is unlikely to be improved.
Stand-Alone Business Unit Board of Council
The option of a Stand-Alone Business Unit Board of Council will mean that the
Board will have the delegated authority to make decisions on behalf of the
Council with regard to the business operations of the PSDU. The Business
Unit will however still be part of the organisation, and where the
accountability for decisions ultimately lie remains unclear.
The main impact of this option against the status quo would be greater
responsibility for decision making to be taken by the Board and the ability to
deliver more efficient and effective services and provide enhanced value for
money to ratepayers and improved management decision making. It would
also improve accountability and clarity of responsibility.
A Stand-Alone Business Unit Board may have some requirement for additional
compliance and set-up costs of separate financial, payroll and management
systems that adequately meet their ongoing business operation. There would
Hastings District Council
also be costs of maintaining a board. A potential downside could be the
conflict between being profit driven as opposed to improving service delivery
and enhancing value for money for the ratepayer.
Company
This option would have the ability to produce similar benefits to a stand-alone
business unit in facilitating improvements in the efficiency and effectiveness
of service delivery and provide greater value for money to the ratepayer and
facilitate improved accountability and transparency of operations. The
Company structure would have an enhanced reporting and accountability
regime over a stand-alone business unit.
A new company would comply with the requirements set out in the Local
Government Act including the requirement for an annual Statement of Intent
(SOI) that will be the governing charter for the Board of Directors appointed
by Council. The directors would be appointed for their skills, experience and
community interest that will add value to overall service provision. A Company
structure is more likely to attract high quality directors and management over
a stand-alone business unit enhancing the likelihood of realising the benefits
that are expected to be gained. The SOI will outline how the CCTO will meet
the high level Council policies and objectives and specify the minimum level of
service and financial performance targets to be met. The company is
required to report performance against the SOI a least six monthly basis. The
company model has a significantly enhanced accountability regime.
A potential down side to both a company and a stand-alone business unit
could be the conflict between being profit driven as opposed to improving
service delivery and enhancing value for money to the ratepayer. The cost of
running the board would not be dissimilar to a stand-alone business unit.
A company is a separate legal entity that has a separate legal personality
distinct from its shareholders. A company is a widely used and well
understood vehicle for operating a business particularly for medium to large
business’s and is relatively inexpensive to establish.
A company may have a similar requirement to a stand-alone business unit for
additional compliance and set-up costs of separate financial, payroll and
management systems that adequately meet their ongoing business operation
and the costs of maintaining a board
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There will also be some additional compliance costs such as audit fees, filing
of statutory returns mechanisms. Unlike a local authority or charitable entity,
a company will be subject to tax on profits at the rate of 28%, although
significant profits are not considered likely.
Summary of Identified Impacts of Structure Options.
Set out below is a summary of the identified impacts of the structure options
evaluated.
COMPANY
STAND-ALONE
BUSINESS UNIT
STATUS QUO
Summary of Identified Impacts* of Structure Options
o
o
o
 +
 +

+
+

o
Accountability back to Council
o
o
+
Ability to attract skilled professional
managers and directors
Governance based on sound business
advice, expertise and industry knowledge
o
o



+
Enhance value for money for ratepayer
More efficient and effective service delivery
Clear accountability and responsibility for
decision making
Direct control over activities
Operational costs
o
o
o
Set-up costs
o


Exempt from tax on income
o
o

Net Benefit
o

+
CONCLUSION
Council needs to complete and consider a full business case before making
final decisions on transitioning to a Company structure.
The analysis completed indicates that the establishment of a CCTO will
facilitate the delivery of efficient and effective services to council to maintain
its parks and reserves and other amenities and enhanced value for money in
improved service delivery.
Retaining the land and building assets in Council ownership with operating
and maintenance contracts to the CCTO ensures that Council retains control
of these key community assets and ensures through the asset management
plan review that the assets are being properly maintained.
The Council therefore believes that a company structure with directors
incorporated under the Companies Act may be the preferred model for
governance and resolved at its meeting of 14 February 2012 to progress this
option by approving this Statement of Proposal for consultation to provide
Council with the ability to set up a CCTO.
FUNDING
Through an agreement between Council and the CCTO, Council will provide
funding to the CCTO under parks operating and maintenance contracts to
provide parks operation and maintenance services. The company will report
against performance targets and will negotiate contracts on an annual basis.
Profitability will not be a key driver for the company when negotiating the
renewal of contracts with Council. The key drivers will be the efficient and
cost effective delivery of parks operation and maintenance services to Council
and the enhanced value for money to ratepayers.
QUESTIONS FOR THE COMMUNITY
To assist with the community’s consideration of these issues a number of
questions are posed:

Do you agree that providing it is supported by a robust business case that
the PSDU will be better governed by a separate corporate entity?

Do you agree with Council’s assessment that a company may be the best
governance option?
*The impacts are recorded against the status quo as: “o” = no impact on Council; “” = positive
impact or benefit to Council; “+” = positive plus and “” = negative potential impact or cost to
Council
Hastings District Council
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