Report on Public Sector Agencies
Results of 30 June 2001 financial statement audits
November 2001

Part 5 Special reviews

CITY OF GREATER GEELONG'S INVOLVEMENT WITH GEELONG BUSINESS AND TRADE CENTRE

5.118    Establishing the Geelong Business and Trade Centre Limited (the Company) was an initiative of the City of Greater Geelong and members of the Geelong business community. The Company was established to boost the profile and image of Geelong through the:

·      development of external awareness of Geelong;

·      provision of a strong Geelong presence in external markets and with various levels of government;

·      establishment of a convenient point of contact for Geelong business in Melbourne; and

·      provision of a point of sale for Geelong’s events, goods and services.

5.119    Two senior staff from the City’s Marketing and Public Relations Unit were responsible for the development of the concept behind the establishment of the Company in early 1999. These officers administered the Company from its establishment in September 1999 until February 2000, when a manager was appointed. One of these officers became an inaugural Director of the Company and acted as Chairman of the Company until May 2000, while the other acted as Company Secretary. The City’s Economic Development Manager was also appointed as a Director of the Company in January 2000, and the City’s Chief Executive Officer (CEO) was appointed as a Director and acted as Chairman of the Company from July 2000.

5.120    The Company’s foundation members comprised a range of organisations based in Geelong including commercial, educational and tourism entities. The Company was initially managed by a 9 member executive committee (comprising 2 representatives from the City and one from each of the other 7 foundation members).

5.121    The Company operated from premises in Southbank, Melbourne. The premises were leased by the City from September 1999 until August 2003 and sublet to the Company.

5.122    The Company experienced capitalisation and cash flow problems from the commencement of its operations in September 1999. These problems ultimately resulted in the Company Directors appointing an Administrator on 1 May 2001. The Company ceased operating on 8 May 2001. The Council established a sub-committee to deal with the Company failure and any ongoing implications for the Council in late April 2001, just prior to the appointment of the Administrator.

5.123    In June 2001, a meeting of the Company’s creditors resolved to accept a deed of company arrangement as suggested by the City and the Administrator. This arrangement involved the City forgoing a claim against the Company, the majority of which related to a Company overdraft facility for which the Council was guarantor.

5.124    A breakdown in the operation of the City’s governance and control framework resulted in the City participating in the formation and operation of a commercial venture in breach of the Local Government Act 1989, without conducting adequate cost benefit investigation, and without establishing adequate mechanisms to allow it to monitor the Company’s operations. Ultimately, the City has borne significant costs amounting to approximately $492 000 (refer to Table 5I for details of the composition of this amount) with limited benefit in terms of the achievement of Council’s objectives for its community.

5.125    In July 2001, the Council requested my Office to investigate the City’s involvement with the Company and report on all pertinent issues arising from this involvement. The scope of the review included:

·      Council’s management of its involvement in the establishment of the Company;

·      Council’s management of its ongoing involvement with the Company; and

·      the implications and consequences for Council arising from the failure of the Company.

5.126    The timing of key events in the history of the City’s involvement with the Company is shown in Table 5H.

Year	Key events
March 1999	Concept for the establishment of the Company developed by the City and discussed with a number of businesses in Geelong.
May 1999	Application by the City for Commonwealth Government funding to assist with the establishment of the Company.
June 1999	Endorsement by Council for the establishment of the Company.
July and August 1999	Planning undertaken by the City for the establishment of the Company.
September 1999	Further endorsement by Council for establishment of the Company and agreement by Council to enter into a lease for premises in Southbank, Melbourne for use by the Company. Company established and registered as a public company limited by guarantee on 22 September 1999.
October 1999	Commonwealth Government funding of $120 000 under the Rural Assistance Program secured.
November 1999	Official launch of the Company in Geelong.
January 2000	Agreement by Council to act as guarantor for the Company’s bank overdraft facility for an amount up to $200 000 on the basis that the Company was experiencing short-term cash flow problems but the long-term outlook was positive.
May 2000	City’s CEO made aware of the financial difficulties of the Company.
June 2000	A review of the Company’s financial position by the City’s Manager Risk Assessment and Audit was commenced. The review which was completed at the end of June 2000 highlighted the precarious financial position of the Company and raised significant concerns regarding its ongoing viability.
July 2000	The City’s CEO became a Director of the Company and was appointed as its Chairman.
July 2000 to April 2001	Company develops new budgets and marketing plans and seeks other sources of funding. The City is kept informed of developments.
April 2001	Directors of the Company resolve to appoint an Administrator. Council appoints a sub-committee to deal with issues arising from the failure of the Company.
May 2001	Company appoints an Administrator and the Company ceases operation.
May and June 2001	Meetings of Company creditors and the Administrator. Deed of Company Arrangement finalised.

Council’s management of its involvement in the establishment of the Company

5.127    The concept for the establishment of the Company emanated from the City’s Marketing and Public Relations Unit in early 1999, as part of the Unit’s “Geelong Smart Move” campaign. This campaign was aimed at attracting new residents and investment to the City.

5.128    The Council was informally briefed about the proposal to create the Company at its monthly briefing sessions in the first half of 1999 and the City’s CEO was periodically appraised of progress in developing the proposal between March and June 1999.

5.129    In May 1999, the City sought Commonwealth Government funding from the Regional Assistance Program to assist with the establishment of the Company. Funding of $120 000 was eventually secured in October 1999. The City’s application to the Commonwealth Department of Employment, Workplace Relations and Small Business for the funding was presented on the basis that the funding was required to assist with the establishment of a site in Melbourne promoting the interests of the Greater Geelong region. The application included a statement that the “City of Greater Geelong providing financial guarantees” with reference to the proposed Company. This statement was inaccurate and unauthorised by Council. The Council did not consider the provision of financial guarantees to the Company until January 2000 when it approved the provision of a guarantee over the Company’s overdraft facility. The application stated that Council had approved the Company constitution when Council had not done so at that point. The application was signed by the City’s Manager, Marketing and Public Relations on behalf of the City’s CEO. This was contrary to his delegated authority and Council policy.

Adequacy of initial advice to Council regarding the establishment of the Company

5.130    In June 1999, a report was presented to Council seeking endorsement of the proposal to establish the Company. The recommendations included in the report were subsequently accepted by Council. The report presented to Council:

·      stated that a feasibility study had been conducted and an action plan prepared to support the establishment and operation of the Company in central Melbourne;

·      detailed and sought support for the objectives of the proposed Company (as outlined in paragraph 5.118 of this report);

·      estimated that the cost to the City of facilitating the establishment, operation and promotion of the Company would be limited to a one-off contribution of $60 000 in 1999-2000, plus recurrent annual membership fees of approximately $12 000. The costs associated with the project were included in the 1999-2000 “Geelong Smart Move” campaign budget;

·      stated that other costs to the City associated with its involvement in the venture through the use of City staff, special initiatives, project expenses and other costs would be charged to existing departmental budgets within the City;

·      indicated that the proposal involved no policy, legal or statutory implications for Council;

·      stated that the risk of the venture failing to achieve its objectives was minimal, with the project having the potential to become self-funding in a relatively short period; and

·      recommended that:

·         the Company be established as an incorporated association pursuant to the Associations Incorporation Act 1981;

·         Council invite key local stakeholders to become Members of the Association; and

·       The Company’s Memorandum and Articles of Association specify that the Company’s Steering Committee be initially chaired by a Councillor nominated by the City of Greater Geelong.

5.131    Our review of the report to Council has led us to believe that it did not provide a sufficient basis for informed decision-making by Council. Specifically:

·      there is little evidence to support the assertion that a feasibility study had been conducted and an action plan prepared to support the establishment and operation of the Company in central Melbourne, and there was no evidence that the study and the plan were ever presented to Council;

·      the report did not specifically define the relationship between the proposed objectives and activities of the Company and Council’s objectives for its community;

·      the additional costs to the City associated with its involvement in the venture through the use of City staff, special initiatives, project expenses and other costs were not specifically identified and quantified in the City’s departmental budgets;

·      the indication in the report that the proposal involved no policy, legal or statutory implications for Council was incorrect; and

·      the statement that the risk of the venture failing to achieve its objectives was minimal, with the project having the potential to become self-funding in a relatively short period was based upon inadequate assessment of the feasibility of the venture, limited business planning and inadequately supported budgets for the initial year of the Company’s operations.

Adequacy of the City’s business planning for the Company

5.132    The City officers responsible for the development of the concept failed to develop an adequate business case to support their proposal to Council. These officers lacked business development, financial analysis and planning skills, and failed to seek assistance from, or consult with, other City staff or external specialists possessing such knowledge and expertise. The City’s management oversight of the activities of its Marketing and Public Relations Unit in respect of the venture was also inadequate.

5.133    Between June 1999 and October 1999, 4 separate budgets were prepared by the City’s Marketing and Public Relations Unit in relation to the Company’s operations. These budgets were not supported by adequate working papers or other documentation regarding the basis for the assumptions upon which the budget was prepared. During this 4 month period, the Company’s anticipated total expenses for the 2000 calendar year rose from $508 000 to $769 000 with commensurate, but unsubstantiated, increases in total income estimates from $522 000 to $769 000.

5.134    The absence of a sufficiently comprehensive feasibility study and an adequate business plan is considered to be one of the primary reasons for the ultimate failure of the Company. This inadequacy contributed to the Company’s under-capitalisation and resultant cash flow problems. Moreover, it raises the serious question of why more thorough and detailed business planning was not undertaken and presented to Council and why the report to Council in June 1999 asserted that a feasibility study had been undertaken. There is no evidence that the City’s CEO sought assurance about the adequacy of material about the feasibility of the venture and its underlying business plan prior to reports being presented to Council on the proposal.

5.135    In terms of the alignment between the objectives of the Company and those of Council, the Company’s constitution indicates that it was established to:

·      promote Geelong, including its industry and commerce;

·      encourage and assist Geelong enterprises to promote themselves and their goods and services outside Geelong;

·      establish premises and facilities outside Geelong for use by Geelong enterprises; and

·      appoint ambassadors to Geelong to represent Geelong to the world.

5.136    These objectives are broadly consistent with Council’s commitment, expressed in its Corporate Plan, to promote Geelong and support and facilitate economic development. While there is little documentary evidence to indicate that Councillors were involved in formulating the objectives of the Company, advice from the City’s senior officers and the Mayor indicates that Council was kept informed of the Company’s establishment at monthly meetings between Councillors and the City’s senior management. On this basis, it is reasonable to accept that the objectives of the Company were accepted by Council as being consistent with Council’s overall objectives.

Legal implications for Council arising from its involvement in the Company

5.137    Section 193 of the Local Government Act 1989 requires a council to obtain the approval of the Minister for Local Government and the Treasurer before becoming a member of a company limited by guarantee, or participating in the formation and operation of a corporation, trust, partnership or other body.

5.138    Relevant extracts from section 193 (1) to (5) of the Local Government Act 1989 follow:

“(1) For the purpose of performing any function or exercising any power conferred on a Council by or under this Act or any other Act a Council may--

(a) participate in the formation and operation of a corporation, trust, partnership or other body; and

(b) subscribe for or otherwise acquire and dispose of shares in or debentures or other securities of, a corporation; and

(c) become a member of a company limited by guarantee; and

(d) subscribe for or otherwise acquire and dispose of units in a trust; and

(e) acquire and dispose of an interest in a partnership or other body; and

(f) enter into partnership or into any arrangement for sharing of profits, union of interest, co-operation, joint venture, reciprocal concession or otherwise, with any person or corporation carrying on or engaged in, or about to carry on or engage in, any business or transaction capable of being conducted so as to directly or indirectly benefit the Council.

(2) If by virtue of any participation, subscription or acquisition under sub-section (1), a Council has the right to appoint some person to be a director of or hold office in or under the corporation, trust, partnership or other body the Council may appoint a Councillor, member of Council staff or other person to that office.

(3) For the purposes of sub-section (1)(c) or (1)(d) a Council may nominate a person to hold the shareholding or unit holding on behalf of the Council and the person nominated is to be treated as being the shareholder or unit holder of the shares or units.

(4) For the purposes of sub-section (1), a Council may obtain temporary financial accommodation by way of overdraft (in addition to anything the Council may do under Part 7).

(5) Before a Council does anything under sub-section (1) or (4) it must obtain the approval of the Minister and the Treasurer which may be either general or specific.”

5.139    As indicated previously, the June 1999 report to Council dealing with the Company proposal advised Council that there were no policy, legal or statutory implications arising from the proposal. However, this advice was not correct, but came about due to an apparent lack of knowledge of the relevant provisions of the Local Government Act 1989 by the City officers responsible for preparing and reviewing the report.

5.140    In August 1999, the City’s Marketing and Public Relations Unit sought legal advice about the implications of the Local Government Act 1989 regarding the City’s intention to become a member of a company limited by guarantee. This advice was sought after another City officer drew attention to the relevant legislative requirements.

5.141    The legal advice outlined a number of specific actions which would be required in order for Council to be involved in the project, outside the operation of section 193 of the Local Government Act 1989, and without the consent of the Minister and the Treasurer. The legal advice included recommendations that:

·      Council should not be a member of the Company;

·      Council-appointed members of the Company should not be designated as representatives of Council or have any obligation to report to Council or have any other special rights or powers;

·      Council’s relationship with the Company be formalised under 2 separate contracts; and

·      the Company should become administratively independent of Council as soon as possible so that there could be no suggestion that resources or benefits were being shared on a co-operative or joint basis.

5.142    This legal advice was not acted upon, and the officers within the City’s Marketing and Public Relations Unit did not inform the City’s senior officers of the advice. In addition, a subsequent report to Council in September 1999 seeking endorsement for Council involvement in the Company’s establishment again advised Council that there were no policy, legal or statutory implications arising from the proposal.

5.143    The Council’s involvement with the establishment and operation of the Company clearly breached section 193 of the Local Government Act 1989, in that Ministerial and Treasurer’s approval for Council’s involvement was not obtained. The Council’s failure to seek approval under Section 193 for its involvement with this Company also had the effect of circumventing the accountability provisions involving the audit of the Company by my Office. Certain concerns relating to the operation of the public accountability provisions of that section were outlined in my June 2001 Report on Ministerial Portfolios.

5.144    The fact that the statutory compliance requirements for Council were not investigated by the City’s senior management until August 1999 indicates that there were deficiencies in the City’s internal control framework relating to compliance with legislative requirements.

5.145    The fact that legal advice was ultimately sought and obtained but was not conveyed to the Council or the City’s senior officers or acted upon, raises concerns regarding the actions of the officer or officers who were aware of this advice, but did not bring it to the attention of Council and allowed the proposal to proceed in breach of the Act.

Council’s management of its ongoing involvement with the Company

Monitoring of the Company’s performance and operations

5.146    In September 1999, a report was presented to Council by the City’s Marketing and Public Relations Unit which recommended that Council approve the establishment of the Company as a company limited by guarantee and enter into a lease for the Company’s premises at Riverside Quay, Southbank, Melbourne. Council resolved to approve these recommendations.

5.147    No formal mechanisms were established to enable the City’s senior management and the Council to progressively monitor its ongoing involvement with the Company. This could have been achieved through the establishment of specific performance measures and targets in respect of the Company’s operation.

5.148    Formal reporting to Council regarding the operation and performance of the Company, following its establishment, was limited to:

·      a report in January 2000, recommending that Council agree to guarantee the Company’s bank overdraft;

·      a report from Council’s Audit Advisory Committee in September 2000 dealing with a review of the Company conducted by the City’s Manager of Risk Assessment and Audit; and

·      a report in July 2001, dealing with the Company’s failure and wind-up.

5.149    In May 2000, upon being made aware of the Company’s financial difficulties, the City’s CEO commissioned a review of the Company operations. This was undertaken in June 2000 by the City’s Manager of Risk Assessment and Audit. The report on the results of the review highlighted the precarious viability and sustainability of the Company and was presented to a meeting of Council’s Audit Advisory Committee in August 2000. A summary of the Audit Advisory Committee discussions regarding this matter was presented to a Council meeting in September 2000.

5.150    Formal mechanisms were not established to enable Council to progressively assess its continued involvement with the Company until the City’s CEO assumed the Chairmanship of the Company in July 2000, and commenced regular reporting on the performance of the Company to the Council’s Audit Advisory Committee.

5.151    In summary, Council did not receive adequate information relating to the Company’s operations and, therefore, was not in a position to make informed judgements about the performance of the Company for much of the period of its operation until the CEO initiated regular reporting to Council on the Company’s performance in June 2000.

Council’s representation on the Company

5.152    The Company was registered as a public company limited by guarantee in late-September 1999. The Manager of the City’s Marketing and Public Relations Unit was appointed by the Company’s foundation members as a Director of the Company and assumed the Chairmanship of the Board, although he was not formally appointed as Chairman until January 2000. This officer resigned from Council’s employ in February 2000 and though his involvement with the Company ceased at that time he did not formally resign from the Company until May 2000.

5.153    The City’s Senior Marketing Officer, Strategic Planning was appointed Company Secretary in September 1999 and acted in that role until January 2001 when he resigned from the City and the Company.

5.154    Council’s Economic Development Manager was appointed in January 2000 as a Director by the Company. On 3 July 2000, the City’s CEO was appointed as a Director of the Company, and assumed the role of Chairman of the Company’s Board.

5.155    While Council was aware of these appointments, they were not formally approved by a resolution of Council and, therefore, Council’s expectations of these City officers were not clearly defined.

5.156    At no time during the Company’s existence did a City Councillor act as a Director of the Company.

Lease by Council of Company premises

5.157    Council became the lessee of premises, intended for use by the Company, in Southbank, Melbourne in September 1999. The lease covered the period 1 September 1999 to 31 August 2003 and involved an annual cost of approximately $84 000 which was subject to periodic indexation during the term of the lease. Although the City attempted to assign the lease to the Company it could not secure the agreement of the lessor and the assignment did not eventuate. Therefore, Council became responsible for the financial liability of any rent arrears and ongoing rent payments after the Company ceased operating in May 2001.

5.158    The lease for the Southbank premises was executed by the Mayor and the City’s CEO on behalf of Council prior to formal confirmation that the Commonwealth Government Rural Assistance Program funding had been secured for the Company. As this funding was considered critical to the establishment of the Company, the execution of the lease prior to confirmation of this funding was premature and exposed the City to significant financial risk.

Agreement by Council to guarantee the Company’s bank overdraft

5.159    In October 1999, the 2 officers from City’s Marketing and Public Relations Unit who were acting as the Chairman and Company Secretary of the Company informed the Company that the Council would guarantee the Company’s loans. These officers had no formal authority from Council to provide such advice to the Company at that time.

5.160    On 19 January 2000, Council agreed to guarantee an overdraft facility for the Company of up to $200 000. The report presented by the City’s CEO to Council supporting the request for Council to act as guarantor of the overdraft facility, advised that the Company was experiencing short-term cash flow difficulties but that membership and casual usage rates were positive and that the liquidity position would improve to acceptable levels by the end of the financial year. The report indicated that the Company required working capital necessary for its operations through to 2001-02. The likelihood of concerns regarding Council’s continued involvement with the Company was tempered in the report by the statements that “Based on discussions with interested parties to date, the risk of this venture failing to reach its objectives is considered to be minimal” and that the provision of the guarantee by Council “will enable the Centre to become self-funded by the end of October 2001”.

5.161    On 28 January 2000, in response to a request from the CEO, the City’s General Manager Corporate Services provided advice to the CEO regarding the proposed loan guarantee document before it was executed. This advice indicated that, among other things, there was no limit on the guarantee provided for in the draft loan guarantee document, despite the fact that Council had only approved a guarantee of “up to $200 000”. The advice also suggested that the City should consider obtaining a back-to-back guarantee from the Company and its directors. The overdraft guarantee document subsequently signed in February 2000 by the Mayor and the CEO on behalf of Council limited Council’s potential liability to $200 000. However, the City did not seek to obtain a back-to-back guarantee from the Company and its directors.

5.162    On 7 February 2000, the Company board, as part of the loan guarantee conditions requested by Council, resolved “to provide a monthly report on total borrowings to Council”. There was no evidence that the Company complied with this commitment or that the City’s senior management or Council ensured that the Company complied with the requirement. Clearly, the provision by Council of a guarantee over the Company’s overdraft facility provided even greater incentive for the City to stringently monitor the Company’s financial performance on an ongoing basis. The fact that this did not occur for some months represented a serious breakdown in the City’s management of its relationship with the Company.

5.163    Subsequent to the appointment of the Administrator, Council learned that the Company’s bank overdraft was approximately $260 000. Despite the written guarantee limited to $200 000, the bank claimed that Council was liable to guarantee the full amount of the overdraft. Council sought legal advice in relation to the bank's claim and settled the claim by agreeing to pay the bank between $220 000 and $232 500. Council has paid the bank $220 000 as at the date of preparation of this report. Any additional payment up to the limit of $232 500 will be determined by the amounts realised through the sale of the Company’s assets.

Concerns regarding the viability of the Company

5.164    As outlined previously, the report to Council in January 2000 dealing with the loan guarantee advised of the Company’s short-term cash flow difficulties, but predicted the rectification of these difficulties by the end of the 2000 financial year.

5.165    The Company’s board did not meet between February 2000 and June 2000. In May 2000, a Council representative on the board (the City’s Economic Development Manager) expressed his concern to senior City officers, including the CEO, about the lack of Company meetings and its administrative performance.

5.166    The report on the Company’s financial position from the City’s Manager Risk Assessment and Audit, which was commissioned by the City’s CEO in May 2000 and completed in June 2000, highlighted serious concerns about the financial viability of the Company. These concerns were communicated to Council’s Audit Advisory Committee in August 2000 and Council in September 2000.

5.167    The Company’s audited financial statements for the year ended 30 June 2000 were not completed until 17 May 2001. These financial statements showed a net profit of $101 300 for that period. However, note 10 to the accounts, entitled After Balance Date Events, states that no matters had arisen since the end of the financial year affecting the state of affairs of the Company “… other than the circumstances outlined in point 2 of the Directors’ Declaration”.

5.168    Point 2 of the Directors’ Declaration dated 17 May 2001 contained the following statement: “since the 30^th June 2000 the directors have become aware that a major sponsor has sought to withdraw from an agreement in principle to provide ongoing major funding. At the time of signing the Director’s Declaration the Geelong Business and Trade Centre has not secured any other major funding replacement which may have a detrimental effect on the ongoing viability of the Centre. Additionally, the Director’s are concerned that the membership budgetary targets have not been achieved to-date”.

5.169    The audit report issued by the Company’s appointed auditor expressed an unqualified opinion on the financial statements but contained an “Inherent Uncertainty” paragraph, highlighting the significant uncertainty as to whether the Company would be able to continue as a going concern and whether it would realise its assets in the normal course of business and at the amounts stated in the financial report.

5.170    The accounts and audit report were signed on 17 May 2001. We note that the administrator was appointed prior to this date, on 1 May 2001. In our view, the fact that an administrator had been appointed by the Company prior to the certification of the financial statements was a matter which warranted disclosure in those financial statements as an event occurring subsequent to the reporting date.

Council’s Marketing and Public Relations Unit

5.171    It is apparent that the officers within this Unit who developed the Company concept, established the Company and managed its initial operations were deficient in business planning, company administration and commercial financial management skills. The officers in the Unit failed to seek assistance from external advisors or from other Council officers who possessed this expertise. Moreover, the accountability and reporting mechanisms established for both the officers’ involvement with the Company and for reporting of the Company’s performance were clearly inadequate.

5.172    The City’s Manager Risk Assessment and Audit conducted a purchasing and project management audit of the Marketing and Public Relations Unit during 2000. This internal audit found that some Unit staff failed to comply with many of Council’s policies and procedures in relation to purchasing, project management and expenditure classification, and displayed a lack of professionalism in dealing with commercial matters which potentially exposed Council to financial loss and damage to its reputation. The report recommended that some form of disciplinary action be taken against the officer who was the initial Company Secretary for his continued non-compliance with Council policy and procedures. Action was not taken as the officer concerned resigned from the City at around the same time.

Implications of the Company failure for Council

5.173    During the second half of 2000, it became apparent to the Company’s board that the Company’s cash flow problems were severe. Despite concerted efforts to increase revenue through increasing membership subscriptions, seeking additional government funding and consummating an arrangement which would have generated commission revenue from a telecommunications company, by April 2001 it was apparent to the Company’s board that none of these initiatives would eventuate. The City’s CEO since his appointment as Company chairman in July 2000 had kept the Council informed of the Company’s performance and problems through the Audit Advisory Committee. In April 2001, the Company Executive Committee determined to appoint an administrator.

5.174    In late April 2001, a sub-committee of Council consisting of 4 Councillors including the Mayor, was formed to deal with the Company failure and to liaise with the Company Administrator in terms of establishing a final Council settlement arrangement.

5.175    On 1 May 2001, Administrators were appointed to the Company. The Company’s operations ceased on 8 May 2001.

5.176    The Council sub-committee obtained legal advice throughout May 2001, particularly in relation to a Deed of Company Arrangement which, in conjunction with the Administrators, it ultimately decided was the course of action in the best interests of all stakeholders. This Deed involved Council accepting its liability for outstanding rent and the overdraft guarantee, action which substantially increased the estimated creditors distribution. On 28 August 2001, Council endorsed the actions of the sub-committee in negotiating the Deed of Company Arrangement.

5.177    Council arrived at this decision on the basis of legal advice and that the Company was clearly a Council initiative and it was in the best interests of the Council from a financial perspective and the maintenance of its community and business image to take a leadership role in finalising the wind-up of the Company. This decision has involved Council assuming some financial obligations for which it may not have been liable.

5.178    On 26 June 2001, a meeting of the Company creditors resolved to accept the Deed of Company Arrangement as proposed by the Administrators and agreed to by the Council’s sub-committee.

Cost to Council

5.179    The estimated total direct cost to Council of its involvement with the Company is $492 827 which is outlined in Table 5I. Other indirect costs, mainly relating to the involvement of staff from the City’s Marketing and Public Relations Unit were not costed by Council and, therefore, are not included in this amount.

Nature of cost	Amount ($)
Establishment/promotional expenses	139 308
Company membership 1999-2000	12 000
Company membership 2000-2001	12 000
Negotiated loan guarantee settlement (a)	220 000
Rent arrears	24 512
Rent to 24 September 2001 (b)	29 300
Legal advice re: Company wind-up	25 000
Review by Auditor-General	21 000
Other Creditors (e.g. office supplies, telephone costs etc.)	9 707
Total	492 827

(a) This amount may increase to $232 500 depending on the income generated through the sale of the Company’s assets.

(b) Council as the lessee has ongoing responsibility for the duration of the Southbank premises lease which does not expire until 31 August 2003. Monthly rent was $7 000 until 31 August 2001 when it changed to $7 375 per month. Council secured another tenant for the premises on 24 September 2001.

5.180    Council’s agreement to support the proposal to establish the Company in September 1999 was based on a total financial commitment of $60 000, as a contribution towards the establishment and promotional expenses of the Company, plus ongoing annual membership fees of $12 000. The extent of Council’s actual financial exposure primarily relates to the loan liability and around $80 000 in over-expenditure on establishment and promotion costs associated with the Company which was also met by Council. It is considered that had the initial feasibility and business planning been more adequately developed and had Council been appraised earlier of the Company’s financial difficulties, the financial cost borne by the Council may have been avoided, or at least mitigated.

5.181    The Council’s operating result for 2000-01 included $290 000 of the above costs associated with the Company. An additional amount of approximately $45 000, which is included in the above costs associated with the Company, will be reflected in the Council’s operating result for 2001-02.

5.182    Following finalisation of the Deed of Company Arrangement for the Company the only potential future financial exposure to Council related to its position as lessee of the Southbank premises. Under the lease arrangements, the Council’s exposure remained until 31 August 2003 when the lease expires. If Council had been unable to successfully let the premises for the entire period, its rent liability would have been approximately $169 000. However, Council has secured a new tenant for the premises in late September 2001 and has received rental income since that date.

5.183    Council’s contribution to fund the establishment and promotion of the Company exceeded the amount advised to Council of $60 000 by approximately $80,000 (133 per cent). Approval was not obtained from Council for these additional costs, and the nature and extent of these additional costs were not disclosed to Council. The additional expenditure was contained (but not separately disclosed) in the City’s Marketing and Public Relations Unit budget. The additional costs related to office fit-outs, company launch and promotion costs.

Lessons learned

5.184    Examination of the Council’s involvement in the establishment and operation of the Company provides a number of lessons which are discussed in the following paragraphs.

5.185    When determining whether it should become involved in future ventures with inherent commercial, legal or financial risk, Council must ensure that the City’s senior management undertake adequate research, analysis and planning which addresses the following key areas:

·      clear assessment of whether or not the proposed involvement is consistent with Council’s objectives;

·      identification of the demand for the functions to be performed by the proposed venture and other relevant market analysis;

·      identification of the benefits to be generated by the proposed venture for the community and Council and a detailed assessment of the likelihood of realising these benefits;

·      detailed assessment of projected financial viability of the venture, including carefully developed and substantiated budget and cash flow projections over at least 3 out years;

·      identification of Council’s initial financial contribution requirements, recurrent financial implications and potential exposures in respect of the establishment and ongoing operation of the venture;

·      a risk assessment in respect of the venture from Council’s perspective including identification of risks and how they would be managed and mitigated;

·      assessment of the adequacy of the proposed management and control structure, and of the expertise of those responsible for management of the venture; and

·      identification of mechanisms to be established to provide Council with the capacity to monitor the operation of the venture and protect the interests of ratepayers.

5.186    The City’s senior management should ensure that Council is provided with accurate and soundly based information on legal and statutory implications in relation to proposals for involvement with external entities and ventures. In addition, training should be provided to Councillors and senior City staff regarding statutory obligations and compliance issues in the local government environment.

5.187    Serious questions arise following the failure of the Company with regard to the legal responsibilities of City officers and Councillors who accept directorships of associated incorporated entities and the appropriateness of Council placing reliance on such directors to keep it informed about the performance of the entity. These questions relate to potential conflicts of interest and directors’ capacity to keep Council informed of any financial and legal consequences and risk exposures. Directors’ responsibilities are to the company under Corporations Law and on this basis the City should have established other mechanisms to ensure that the Company kept Council informed of the Company’s financial and operational performance.

5.188    To improve its governance controls Council should, in future, if it determines that a Councillor and/or City officer should act as its representatives on external bodies, formalise this by resolution. In considering this issue, Council should refer to the comments in the preceding paragraph indicating that the appointment of Council representatives as Directors of external entities is not a valid or effective mechanism to ensure that Council is kept informed of the entity’s financial and operational performance.

5.189    As a pre-requisite for any future direct involvement by Council with external entities, adequate performance monitoring and reporting mechanisms must be established at the outset and monitored to ensure Council is provided with credible and timely information regarding the operational and financial performance of such entities.

Review of other investment and joint venture arrangements

5.190    Councils regularly enter into investment or joint venture arrangements, for a variety of reasons, with different types of entities including companies, and incorporated associations. A Council, therefore, needs to have processes in place to ensure that:

·      Council’s objectives are achieved;

·      Legal obligations are met; and

·      Proper reporting and accountability mechanisms are in place.

5.191    In view of the applicability of many of the principles raised in this audit, it is my intention to examine the quality of governance arrangements for similar ventures across local government early in the new year and prepare guidance material which might assist all Councils to avoid, or at least minimise, the likelihood of an outcome such as that illustrated here.

5.192    The Council should finalise its review of existing arrangements with external entities and establish whether or not such involvements are in accordance with its current corporate objectives and whether adequate representation, performance monitoring, reporting and risk minimisation strategies are in place. The City’s CEO and General Manager Corporate Services have advised that the review is progressing and that a comprehensive database of all Council’s external relationship is being collated.

RESPONSE provided by the General Manager - Corporate Services, City of Greater Geelong

Governance and control framework

We note your observations in respect of the breakdowns in Council’s governance and control framework. In order to mitigate the risk of a failure of this nature occurring again, Council will shortly complete the review of its governance procedures and control framework and will implement remedial action necessary to enhance reporting, monitoring and control of Council’s involvement with community groups and any commercial ventures.

Council acknowledges the significant cost that has been incurred in relation to this venture and is of the view that more effective market analysis and business planning may have delivered a different outcome. However, it should be acknowledged that Council was in uncharted waters and that from the outset there was an element of business risk associated with the venture.

Breach of the Local Government Act 1989 - section 193

Council acknowledges that having not acted in accordance with the legal advice sourced in relation to this matter, Council did technically breach section 193 of the Local Government Act 1989. Notwithstanding this, section 193 in its current form, is so general most Councils could experience problems in complying with its requirements. For instance, section 193 1 (f) requires the Council to obtain approval from the Minister and Treasurer to “enter into partnership or into any arrangement for sharing of profits, union of interest, co-operation, joint venture, reciprocal concession or otherwise, with any person or corporation carrying on or engaged in or about to carry on or engage in any business or transaction capable of being conducted so as to directly or indirectly benefit the Council”.

Arguably the existing provisions of section 193 potentially inhibit Councils entering into arrangements for the betterment of their communities. For example, involvement or participation in the Geelong Business Network, Bellarine Multi Arts Facility, Barwon Food Services Pty Ltd etc. arguably all these organisations provide a direct or indirect benefit to Council. In essence, the Minister and Treasurer would be inundated with requests for approval. Notwithstanding this, Council proposes to review its involvement with other entities, associations, external boards and committees from a governance and risk management perspective. Apart from reviewing compliance with section 193, Council will assess any conflicts of interest and how they are best managed. Council officer participation in these types of operations has primarily been to maintain enduring and meaningful connection with the community through active representation and advocacy. Council needs to reassess this situation in light of the current requirements of section 193.

Monitoring of the Company’s performance and operations

We agree with your observations in relation to the lack of formal mechanisms to enable ongoing Council monitoring of performance of the Company in achieving Council objectives.

Council is in the process of reviewing its involvement in several other entities, associations etc. with the view to assessing the appropriateness of existing arrangements. Governance procedures will be enhanced across-the-board to ensure Council can monitor, evaluate and assess the performance of operations in meeting objectives set by Council.

Lease of Southbank premises

We note your observation regarding the lease of the premises prior to “formal” confirmation of Commonwealth Rural Assistance Program funding on 29 November 1999. It should be noted that initial application for funding commenced in May 1999 and while formal advice was not received until November 1999, negotiations were well advanced prior to this. In hindsight, a memorandum of understanding would have supported the actions undertaken in advance of formalising the arrangements, but this was not sought. It should be noted that Council might still have proceeded with the lease in the absence of Commonwealth Government assistance.

Non-compliance with delegated authority and policy

Council notes your Office’s observations in respect to non-compliance with Council’s delegated authorities and policies. Council has already implemented changes to its purchasing procedures and systems, which mitigate the risk of some unauthorised actions occurring. Furthermore, this relatively new Council continues to develop its policies and procedures and communicate them to staff.

City officers and Councillors who accept directorships

This is a local government sector-wide issue as there would be many instances where Councils throughout Victoria would be affected by your Office’s proposition.

Conclusion

The Audit Advisory Committee of Council is of the view that the report is a fair representation of the apparent governance and control framework deficiencies that have impacted on the failure of this venture.

The report also highlights to Council the importance of establishing the appropriate governance processes, which will enhance control and monitoring of Council’s involvement in other community programs.