The law and QAC
In September, QAC sent a company profile and FAQ to council candidates. Among other things, this outlined how its role is defined by various pieces of legislation. It seems, at times, that the legislative responsibilities under which QAC must operate are used to nudge control of it beyond the influence of councillors.
This paper reviews the legislation to help councillors understand the role of QAC and the scope of their control over it.
The law shows councillors have huge and directive control over QAC. It shows that:
- QAC doesn’t need to grow for business or profit reasons.
- It also doesn’t need to grow for infrastructure reasons (that’s up to council’s view on how to best support our community’s current and future wellbeing).
- Council can set any objectives for QAC that fit with increasing the wellbeing of our community.
- It is totally council’s control and job to set the objectives and the nature and scope of QAC’s business (and all other strategic decisions).
- The Statement of Intent (SOI) is totally the big deal as the way for council to control, direct and evaluate QAC.
- Council has absolute right to direct the board of QAC to modify the SOI to make sure it fits with council’s objectives.
- The QAC constitution and council’s 75% shareholding gives council absolute and total control to pass binding shareholder resolutions at any time, even without notice or consultation with QAC or the other shareholder (AIA).
- QAC has control over landing fees and can increase these.
- While Queenstown Airport is currently designated as a Lifeline Utility under the Civil Defence Emergencies Act, the Governor General could easily transfer this to an alternative such as Ladies Mile if required.
If you are interested to learn more, grab a coffee, pull up a comfy chair and join me in the long grass of detail.
Must QAC be profit driven?
Some people falsely argue that QAC is required by law to operate as a successful business and to be as profitable and efficient as comparable businesses in the private sector. That councillors cannot, therefore, control or limit QAC from making its own commercial decisions about its growth and expansion plans.
This is wrong.
It is true that the law requires QAC to:
- “conduct its affairs in accordance with sound business practice” [s.59(1)(d) of LGA] and also to
- “be operated or managed as a commercial undertaking” [s.4(3) of AAA 1966],
But the words “operation”, “management” and “sound business practice” refer to how it operates, not to what it does.
This legislation was introduced to move away from previous experience where councils may have subsidized organizations or commercial activities that they controlled. CCOs must now, for example, properly account for the assets they have, deal with depreciation and finance costs and so forth. CCTOs must generate revenue and apportion costs in the manner of a normal business. They cannot cross-subsidize within the business, they need to cover the investment costs of capital and their profit return should be commensurate with the size of investment.
Note: CCTOs are a subset of CCOs, and the legislation applies equally to both.
These laws require QAC to operate with sound business practice, but they do not relate to the strategic vision or purpose of QAC.
The law gives council (as controlling shareholder) complete control over the objectives and the nature and scope of activities of QAC. These objectives can be either commercial or non-commercial [s.59(1)(a) of LGA]. And the legal mechanism of control is the Statement of Intent.
To understand how strongly the legislation empowers council to set non-commercial objectives, it is worth contrasting the relevant section with that outlining the principal objective for SOEs in the State Owned Enterprises Act 1986 (The CCO legislation in the LGA was modelled on the SOEA).
Both SOEs and CCTOs are required to be good employers and exhibit a sense of social responsibility. But, whereas the SOE legislation requires them to be as successful and profitable as a private business, the LGA requires CCTOs to achieve the objectives of its shareholders as specified in the SOI. And those objectives can be commercial and/or non-commercial.
For a State Owned Enterprise: The principal objective of every State enterprise shall be to operate as a successful business and, to this end, to be as profitable and efficient as comparable businesses that are not owned by the Crown [Section 4(1)(a) of SOEA 1986]
For a Council Controlled Organisation: The principal objective of a council-controlled organisation is to achieve the objectives of its shareholders, both commercial and non-commercial, as specified in the statement of intent. [Section 59 (1)(a) of LGA 2002]
This highlights the absolute importance of the SOI as the controlling document that sets the purpose and strategic objectives of the CCTO. What is written into the SOI is what QAC is compelled to do.
This is made further explicit in section 60 of the LGA which states that decisions relating to the operation of CCOs must be made in accordance with its SOI and its constitution.
In the case of QAC, its constitution is just a set of rules, much like the standing orders that govern council meetings. The constitution offers no insights or guidance into the purpose or objectives of QAC, so the SOI is the single key document for this.
It has been strongly asserted that the SOI is QAC’s document and that council should have a hands off approach. This view is not borne out in the legislation.
Yes, the annual job of drafting the SOI and presenting a final version to shareholders (council and AIA) sits with QAC. But the law provides the ability for both QAC and council (as controlling shareholder) to change the SOI at any time (clauses 4 and 5 respectively of Schedule 8, LGA).
More significantly, the law gives council (as controlling shareholder) the directive control over nine of the 11 elements that must by law be in the SOI. This gives council the right (in clause 5) to require QAC to add or strike out any provisions in the SOI that relate to those nine elements. And the Board of QAC must comply.
Clause 5 is a straight editing job where council (as controlling shareholder) could rewrite the SOI to how it wants. While it does require council to consult with QAC regarding the matters concerned (and case law sets standards for this), the law requires that QAC must comply. That makes pretty clear who’s boss.
Those nine elements that are controlled by council (as controlling shareholder) are listed as (a) to (i) of clause 9(1) in Schedule 8. In summary, these have to do with:
- The objectives, nature and scope of activities and board governance [(a),(b), and (c)].
- Some financial information and controls, including dividend distributions [(d),(e),(g), and (h)].
- Performance targets and how these are measured [(f)].
- Process regarding how QAC might acquire other companies [(i)]
The only two elements required to be in the SOI that council cannot directively control (as controlling shareholder) are:
- Related to the services that council might buy from QAC, [(j)] and
- The board’s estimate of QACs enterprise value, and how they estimated this [(k)].
This shows the law is very clear that council (as controlling shareholder) has complete control over the objectives, nature and scope of activities, and all the strategic levers governing QAC.
It makes sense that, in practice, the best way to manage QAC is for council to have an open and respectful relationship with the board and executive of QAC, and to use consultation and discussion to guide strategic planning. But this doesn’t change or diminish the fact that council is the boss as it owns the controlling share of the company. If council wants a change in strategic direction, then it is entirely its call to make.
The Office of the Auditor General (OAG) has published several excellent reports on how councils should govern CCOs.
- Governance and accountability of council-controlled organisations (2015) This is essential reading. It has been used by advisers to councillors to emphasise positive relationships as the key to managing QAC. That’s obviously true, it makes sense to have the board and executive of QAC working positively. But this advice misses the importance the OAG gives the SOI (7.12 to 7.22). The auditor also questions the reluctance of councils to use clause 5. The example given of when in 2010 QAC sold 24.99% of the company to AIA without councillors’ knowledge is sobering.
- Statements of intent: Examples of reporting practice (2009). The OAG reviewed 125 SOIs and found none that met a “best practice” standard, or even any specific section of any of them that could model an aspect of best practice. Instead, this report discusses examples of some sections that were “better” practice to help illustrate how they could be improved.
QAC’s statement of intent illustrates many of the OAG’s concerns of poor performance reporting. Two examples being:
- It’s not made clear how the objectives of QAC are based on those council has for it.
- There is no effective performance monitoring. The four pages titled “Priorities and Performance Metrics” would be better called a task list. It includes almost no measures of performance and certainly no evaluation.
A worthwhile goal for council this year would be to have QAC deliver an SOI that would meet the OAG’s standard for best practice.
The starting question is: Does council know what it wants from QAC?
The air noise boundary consultation brought to a head community concern regarding airport growth. But at no time since has council, as governance entity, clarified any change in its objectives for QAC (ie by resolution). Yet council has twice now refused to agree to the SOI submitted by QAC. In this process the cart is leading the horse!
As key infrastructure, is QAC compelled to expand?
The mayor’s assertion in his statement on 28 August that both council and QAC are legally compelled to facilitate the airport’s inevitable growth is false.
A comparable example would be if the mayor of Auckland and NZTA were to claim that the law compels them to build more motorways. That’s not what the law says.
The law states that the purpose of council is “to promote the social, economic, environmental, and cultural well-being of communities in the present and for the future”. [s.10(1) of LGA]
It further requires council to “ensure prudent stewardship and the efficient and effective use of its resources in the interests of its district or region, including by planning effectively for the future management of its assets”. [s.14(1)(g) of LGA]
It requires council to take “a sustainable development approach taking into account; the social, economic, and cultural well-being of people and communities; and the need to maintain and enhance the quality of the environment; and the reasonably foreseeable needs of future generations”. [s.14(1)(h) of LGA]
The law does not prescribe that the airport must grow, but rather allows council to determine how the airport should be developed to meet the well-being of its community.
In the face of global warming, over-tourism impacting hotspots throughout the world and a local community stressed by rapid growth to name but a few issues facing our community, it’s council’s job to balance these complex issues and find the best way to achieve our community well-being. And that means for all members of the community, not just businesses under a debunked trickle-down theory.
Creating a mass-transit air service that provides budget-priced, bulk air access direct to Central Queenstown or Wanaka may not be the best way for council to achieve the social, economic, environmental, and cultural well-being of our community.
Just as councils manage the surface transport in our cities, where they can choose between car-centric urban sprawl or intensive development supported by public transport, we can choose the character of this district we call home.
QAC’s so called demand-led growth for bulk, cheap air services would likely perpetuate low-value, high-volume tourism that undermines environmental values, exhausts social licence, overwhelms infrastructure and entrenches a low wage economy. And do so against strongly expressed community opposition (92.5% of over 1,500 submissions, unanimous opposition of all 7 Wakatipu community associations, and Queenstown Stakeholders’ representing Destination Queenstown, Queenstown Chamber of Commerce and Downtown Queenstown).
Instead, managing the airport to within the current noise boundaries might well develop a more strategic, higher-value, better-paid, more sustainable tourism economy that could deliver a much better quality experience for visitors, and better livelihood and lifestyle for the local community. All achieved without an increase in aircraft emissions.
That mass tourism is overwhelming and destroying high value attractions all over the world is now a commonplace concern. Cap controls have been applied, for example, to Schiphol Airport to manage tourism in Amsterdam, and for cruise ships near Venice.
How mainstream these concerns are, is clearly evident when the state of California announces it is developing a Destination Stewardship Plan.
In their words, they “are re-thinking plans in order to shift from destination marketing to destination management.”
“This decision” they write, “results from a growing understanding of the need to balance a successful visitor economy with other factors such as the quality of life for residents, impacts on the environment and increased demands on infrastructure.”
If this is true for the whole state of California, often identified as the 5th largest economy in the world, then it is doubly so for us here in Queenstown Lakes. We need visionary leaders not locked in old paradigms.
Note: QAC’s “demand-led” growth paradigm is false economics. Market demand is not a standalone notion, it is the outcome of consumer willingness and ability to pay at a given price. Flights to Queenstown are substantially cheaper than equivalent flights to other regional centres such as Dunedin or Invercargill. QAC controls the landing fees, notwithstanding that it must consult with airlines when setting them. Raising the landing fees to mitigate excessive passenger growth rates would add hugely to QAC profitability. Research shows increasing landing fees leads to fewer empty seats, larger capacity aircraft and fewer flights per day.
The mayor and council staff have stated that we have no control over the number of people who choose to visit or live in our district, and that council is forced to develop more infrastructure to meet the demand. This view misses the fact that council has controlling ownership of the airport.
With 30-40% of visitors arriving by air, the airport is the single most effective tool that council could use to manage tourism growth in Queenstown and Wanaka. Currently it is systematically managed to maximise growth, as with last month’s 22% growth in international visitors compared to the same month last year, at a time when we’re told that tourism growth is weakening.
The excessive growth rates of the past ten years that is overwhelming our community can, in large part, be sheeted home to changes made at the airport. Introduction of jet services, alliance with AIA, introduction of international flights and extension of operating hours. Each of these is under the control of council as they relate to the nature and scope of activities.
Like the rest of the world, we need to smarten up and realise that our future success won’t come from just growing the number of bums on seats.
Can QAC increase landing fees?
Yes, QAC can charge landing fees on both a per aircraft and per passenger basis [section 4B of AAA 1966].
The only caveat is that it must consult with every affected “substantial customer” before 3 fixing or altering these charges. These consultations are routine and already occur regularly, as the law also requires QAC to consult on charges within 5 years of fixing or altering them, so this applies to the fees it currently charges.
Note: A substantial customer is defined in the law as one that pays more than 5% of the revenue earned by the airport.
Case law has set standards as to what constitutes “consultation”, particularly that it needs to be in good faith, but the upshot is that the right to set the fees and the amounts set is under the direct control of QAC.
In a scenario where Queenstown Airport capacity is effectively capped by the current noise boundaries and there is no expansion of Wanaka Airport, then the consumer demand for flights would be effectively managed by price increases. If QAC does not increase landing fees then all the price increase would go to the airlines. It makes sense that QAC would increase its fees in order to take an appropriate share.
Contrary to the assertions of some, this scenario presents the single most profitable outcome for QAC, and the largest potential dividend return for council.
It would avoid heavy capital costs and associated debt financing while dramatically increasing revenues. While it would ultimately result in a lesser equity value than might come from growth in numbers, equity offers little use to council or ratepayers unless the plan is to sell the company.
It would also reduce many of the costs – such as transport infrastructure – that are externalised to the community.
Queenstown Airport is required for emergencies
Queenstown Airport is listed as a Lifeline Utility in the Civil Defence Emergencies Act 2002 [Part A, (5) of schedule 1, CDEA], which means it must ensure that it is able to function during and after an emergency [s.60, CDEM]. This, however, has no bearing on whether the airport should expand.
The need for air support in case of civil emergency is also not a barrier to the possible relocation of Queenstown Airport. Alternative strategies can be developed to ensure emergency preparedness. For example, the Ladies’ Mile stretch of road could instead be designated by the Governor General as a Lifeline Utility to provide the same capacity (as explained here).
QAC is a company owned by AIA (24.99%) and council (75.01%). As with any company, the owners determine the objectives and nature and scope of its activities, along with other strategic goals. The rules governing how this works is QAC’s constitution, which operates under the Companies Act 1993.
Shareholder decisions are determined by majority vote, giving council control. More than this, section 13.3 of the constitution outlines that a majority of 75% of shareholders can pass binding resolutions at any time, even without prior notice or a scheduled meeting. The only obligation to other shareholders not present is for QAC to send them a copy of the resolution within 5 working days.
Good practice would be for open communication and consultation with AIA and with QAC. But, with council owning 75.01% of the company, the legal position is that council has unilateral control that it can exercise at any time.
Collated by John Hilhorst – 24 October 2019