Statement of Expectation woes

The draft Statement of Expectations (SOE) to be discussed at Council’s extraordinary meeting tomorrow (Tuesday 25 Feb) is a much better structured document than in the past and we applaud that it is to be debated by full Council in the public domain. 

That said, we have two major concerns about its contents:

  1. The SOE offers neither council’s purpose nor strategic objectives for QAC. This, surely, is the whole purpose of the SOE, but it falls short.
  2. The SOE perpetuates the myth that QAC has legal responsibilities for commercial objectives independent from those set by Council, its controlling shareholder. The false assertion within the SOE that QAC is required to increase shareholder value would create an imperative for QAC to pursue growth and would give it an unjustified sense of independence that could result in conflict with Council’s strategic goals.

If you would like to know the detail, read the two notes below.

The SOE offers no strategic purpose to QAC

While the SOE sets out commonplace expectations to do with procedures, communications and governance, simply mirroring the requirements of the LGA 2002, it fails to give QAC any direction as to what its purpose or strategic objectives should be. Instead of letting QAC know the key objectives that Council wants of it, or to direct QAC as to the nature and scope of its activities, the SOE simply asks QAC to provide some. By framing these requests in the structure and shape of the relevant sections of law, the SOE is made to look effective without actually being so.  It is councillors’ role to set the strategic objectives they want QAC to meet through its operations – not QAC’s, not council’s executive leadership team and not the joint steering group’s.

In the section Matters addressed by section 64B (1) LGA on page 1 of the SOE, the draft SOE states:

  1. “Council expects that QAC will develop and implement master plans for its airports and that the company will work in partnership with Council on any draft Masterplans for the development of either Queenstown or Wānaka Airports. The QAC will be required to seek the endorsement of Council prior to any final adoption by the board.”

While indicating that Master Planning is in progress, this offers no guidance to QAC as to the purpose or goals that these Master Plans should seek to achieve. Should they seek to maximise growth, maximise financial return, maximise visitor numbers? Or should they aim to manage growth and cap climate change emissions that result from airport operation, including those of the airlines using the airport? This SOE fails to provide key guidance such as this.

Instead, it creates a wishy-washy process of “working in partnership with Council”, presumably behind the closed doors of unreported workshops, with no minutes or accountability and no guarantees of involvement of councillors elected to represent our community.

The LGA 2002 provides for local authorities such as Council to establish the entities of Council Controlled Organisations where they believe such entities would better deliver the purpose and responsibilities of the local authority that owns them. The purpose of QAC is, therefore, to deliver on the purpose and responsibilities of Council.

This is evident in the LGA 2002 and the QAC Constitution.

  1. Part 5 of the LGA 2002 “establishes the procedures for the transfer of local authority undertakings to council-controlled organisations”.[1](Our emphasis.)
  2. The principal objective of a Council Controlled Trading Organisation, as prescribed in law, is “to achieve the objectives of its shareholders, both commercial and non-commercial, as specified in the statement of intent”.[2]
  3. The QAC constitution deems that any written resolution signed by not less than 75% of shareholders is valid as if it had been passed at a meeting of shareholders.[3]  This means that Council (or its designated proxy) can at any time of year pass a valid shareholder resolution that would bind the directors of QAC to comply.
  4. Such a shareholder resolution, passed by Council as controlling shareholder, could compel QAC to modify its statement of intent and QAC is legally compelled to comply.[4]

The purpose of Council, as set out in Section 10 of the LGA 2002, is “to promote the social, economic, environmental, and cultural well-being of communities in the present and for the future”. Surely this is the high-level strategic purpose that Council should set for QAC.

The purpose of Queenstown Airport Corporation is to promote the social, economic, environmental, and cultural well-being of communities in the present and for the future through the provision of airport(s) and associated services.

This purpose ought be written into the SOE and into the SOI. This purpose would then guide QAC as to what it should seek to achieve from the Master Plans it is currently working on. This purpose would ensure the perfect alignment of QAC’s goals with those of Council as required of it in the Local Government Act 2002.

QAC is not required by law to grow shareholder value

The draft Statement of Expectations before Council on Tuesday 25 February falsely states that QAC is required to increase shareholder value. In the second section of the SOE entitled “Matters addressed by Section 64B (2)” it states:

  • The Airport as a Commercial Entity
    QAC is required to have a commitment to retaining and growing long-term shareholder value.

[Point 2 of page 3 of Statement of Expectation]

This is not correct.

The effect of this assertion is to falsely transfer increased independence to QAC and thereby reduce the strategic control that Council has over the Corporation. For example, if Council policy sought to limit QAC’s growth or to restrict its operation to within the Queenstown ANBs, then QAC could seek to reject this directive under the premise falsely stated in the draft SOE that it is required to expand its operations in order to grow shareholder value. Believing QAC can act independently in this way in effect gives it powers that it doesn’t have in law.

If councillors do want QAC to grow long-term shareholder value above other strategic purposes such as ensuring their community’s wellbeing, then Council can direct this via the SOE and statement of intent. But QAC cannot assert this independently and this reference must be removed from the draft SOE.

QAC has many responsibilities under a range of laws, including the Local Government Act 2002, the Airport Authorities Act 1996, the Commerce Act 1986, the Civil Defence Emergency Management Act 2002, Public Works Act 1981 and others. It is also governed by its constitution. But none of these laws, nor its constitution, require QAC to increase shareholder value.

The Local Government Act 2002 requires QAC to:

  • “conduct its affairs in accordance with sound business practice” [Section59(1)(d) of LGA 2002]

And the Airport Authorities Act 1996 requires QAC to:

  • be operated or managed as a commercial undertaking” [Section 4(3) of AAA 1996].

The words “operation”, “management” and “sound business practice” in these sections refer to how QAC must operate, not to what it does.  They are certainly not a direction to “grow shareholder value”.

It should be noted that this same clause of “conduct its affairs in accordance with sound business practice” exists in Section 14(1)(f) of the LGA 2002 under Principles relating to local authorities. So, this need for sound business practice applies to all commercial activities undertaken by Council. There is no requirement that all commercial activities undertaken by Council must also increase shareholder value. It is false to claim that QAC must.

QAC does not have a requirement in law to increase shareholder value. Its purpose in law is quite simply:

to achieve the objectives of its shareholders, both commercial and non-commercial, as specified in the statement of intent[5].

Any requirement to maximise shareholder value would only hold if it was written into the statement of intent. Councillors, in their governance role of the 75.01% shareholder, have complete control over such an objective.

It is worth contrasting the principal objectives of CCTOs with those set for State Owned Enterprises. 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, as said above, can be commercial and/or non-commercial – so can include objectives such as retaining social licence for tourism,  fulfilling council’s  climate emergency declaration and managing operations within  ZQN’s existing air noise boundaries.

The State Owned Enterprise Act 1986The Local Government Act 2002
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”[6].  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”[7].

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. It is made further explicit in section 60[8] 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[9] 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.

This is not a matter of policy, practice or preference. Rather, it is a matter of law and fact. If Council or QAC reject this view and continue to insist that QAC has an independent requirement in law to grow shareholder value, then councillors, ratepayers and the general public have a right to proof. It is for Council and/or QAC to identify the relevant sections in law and to present the argument.

[1] Section 55(b) of LGA 2002
[2] Section 59(1)(a) of LGA 2002
[3] Clause 13.3.1 of QAC Constitution
[4] Clause 6, Schedule 8 of LGA 2002
[5] Section 59(1)(a) of LGA 2002
[6] Section 4(1)(a) of SOEA 1986
[7] Section 59(1)(a) of LGA 2002
[8] Section 60 of LGA 2002
[9] Constitution for Queenstown Airport Corporation

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