The Details of The Commercial Arrangement With Douglas Aerospace

Wagga Wagga City Council
The Details of the

Commercial Arrangement with Douglas Aerospace
September 2015
2015 Prosperity Advisers Group
Uncontrolled copy if printed
1. Executive summary
1.1
OVERVIEW
Prosperity Audit Services has been engaged by Wagga Wagga City Council
(WWCC) to conduct an independent investigation in relation to the commercial
arrangements with Douglas Aerospace Pty Limited (Douglas Aerospace) and its
related proponents.
In October 2012, WWCC entered into commercial arrangements with Douglas
Aerospace to partially fund the construction of two aircraft hangers at Wagga
Wagga Regional Airport (the Airport). WWCC agreed to provide a commercial
loan to Douglas Aerospace up to a maximum value of $2.5m to assist in the
construction of the hangars.
Council established the Douglas Aerospace Review Committee (DARC) following
the May 2014 Supplementary Council Meeting to provide oversight and advice in
regard to solvency issues and other concerns surrounding WWCCs arrangements
with Douglas Aerospace. Douglas Aerospace has since entered voluntary
administration and the final outcome and financial implications for WWCC are
currently unknown.
Our investigation was performed at the request of the DARC following the
preparation of a draft report by Council staff in relation to WWCCs commercial
arrangements with Douglas Aerospace. We have been requested to review the
findings in the draft internal audit report and perform other procedures to
recommend for improvements for WWCCs consideration.
The detailed scope was agreed with the Council prior to the commencement of the
investigation.

Commercial Arrangements with Douglas Aerospace
1.3
CONCLUSIONS FROM THE INVESTIGATION
In our opinion, the commercial arrangements with Douglas Aerospace have

resulted in a potentially adverse financial outcome for the Council that could have
been prevented with a more robust project management, due diligence and
governance approach. When they did proceed, appropriate safeguards found in
normal banking/financing arrangements (such as director and bank guarantees,
registered mortgages and payment of the borrowers contribution up-front) were
not effectively implemented by management.
For a project of this magnitude that involved multiple directorates, we believe that
Council staff had the ultimate responsibility for the projects outcomes.
Based on our investigation, it appears that a number of shortcomings with respect
to project management, WWCCs procedures and specific shortcomings by
management exposed WWCC to preventable risks. The key shortcomings noted
during the investigation have been outlined in Table 1 and have been categorised
as follows:
Project management framework;

Due diligence processes;
Risk management framework;
Performance of management; and
Audit and risk committee.
Further detail on the conclusions arising from the investigation has been included
as follows in section 2.
The investigation was performed during June and July 2015.

1.2
INVESTIGATION APPROACH
Our investigation was conducted by interviewing certain members of the DARC,

Councillors, the WWCC Internal Audit Manager, WWCC directors, management
and relevant WWCC staff.

Table 1: Key shortcomings identified during the conduct of the investigation.

No.
1
Key Shortcomings Identified

In our opinion, the
commercial arrangements
with Douglas Aerospace
were not subject to
appropriate project
management processes.
In our opinion, insufficient

due diligence processes
were conducted over
Douglas Aerospace, the sole
director of Douglas
Aerospace or the builder
(Indistri) before entering into
the commercial
arrangements.
Reference to
detailed
findings
Explanation
As acknowledged by management in a report to Council, we understand that it is uncommon for WWCC to grant
financial assistance at a level to that loaned to Douglas Aerospace.
Notwithstanding the above, the commercial arrangements with Douglas Aerospace were not subject to appropriate
project management processes such as:
o establishment of a steering committee;
o engagement of appropriately qualified and experienced experts (probity, finance, legal etc.);
o utilisation of WWCCs tender processes to evaluate market participants.
The proposed structure of the commercial arrangements was inappropriate as they created a conflict of interest for
WWCC. The conflict arises from the Councils role as financier, landlord and building regulator.
A delay of 5 months in WWCCs building compliance response to the deficiencies in the hangars fire safety certification
arose from a decision by relevant directors to not pursue a Show Cause Notice issued in May 2014. A subsequent
Show Cause Notice was later issued in October 2014 to restart the compliance process. In our opinion, it is unlikely that
this delay would have arisen if it were not for the conflict of interest created by the poor development of the commercial
arrangement structure.
The process for the release of loan funds was poorly developed and resulted in WWCC releasing loan funding based on
a letter of request from Douglas Aerospace without confirming the status of the construction project.
The timeframe agreed in the planning and development of the commercial arrangements with Douglas Aerospace was
inappropriate and did not allow sufficient time to complete a thorough due diligence process.
An independent assessment over the proposed construction costs for the hangars was not obtained as part of the due
diligence processes.
There was no documented due diligence process conducted over Indistri..
Despite a number of clear warnings included in the independent external financial assessments, additional due diligence
processes were not undertaken to clarify or resolve these warnings.
The due diligence procedures did not include a search for director bankruptcies, previous corporate insolvencies and the
activity of related parties.
2.1
2.2
No.
In our opinion, the risks

associated with the
commercial arrangements
were poorly assessed,
documented and managed.
Risk mitigation strategies for
a project of this nature were
not appropriately
implemented.
In our opinion, WWCC did

not have adequate internal
expertise to manage a
project of this nature.
Shortcomings were also
identified in relation to the
performance by Council
staff.

Reference to
detailed
findings
Explanation
Based on our inquiries of management and procedures performed, it was unclear where the ultimate responsibility for
the risk assessment for the project lay within WWCC.
In a project that involves multiple directorates, we believe that the Council Management should have the ultimate
responsibility and actively manage the project and its risks.
The risk assessment conducted was insufficient for a project of its magnitude and risk profile. The risk assessment
identified nine risks for the entire project.
We do not agree with a number of the ratings within the risk assessment concerning risk probabilities and risk
consequences.
The risk assessment does not appear to have been updated during the implementation of the arrangements with
Douglas Aerospace, and accordingly, there is no evidence to support whether risks were managed on an ongoing basis.
Risk mitigation strategies that we would consider to be standard practice for a project of this nature that were not
implemented, including obtaining director/bank guarantees, obtaining a deposit from the borrower and appointing an
independent quantity surveyor to certify the satisfactory completion of each construction milestone.
Two Council resolutions were not fully actioned by management.
Council Management did not clearly communicate the findings of the due diligence processes in the report to Council,
dated 30 January 2012 i.e. the overall conclusion of the Independent external financial assessments was not included in
the report to Council and the Independent external financial assessments were not attached to the report, while
favourable supporting material was attached for Council consideration.
We understand that the implementation of the commercial arrangements was delegated by a member of Council staff to
another member of Council staff. Legal advice obtained regarding the execution of loan securities was not implemented
in its entirety.
Legal advice obtained in relation to the re-direction of payments to Douglas Aerospace (rather than directly to Indistri)
was reactionary and was obtained 12 months after transactions had already been processed.
A member of Council staff prepared the cheque requisitions to release payments to Indistri as well as signing the
statutory declarations as a witness. In our opinion, this compromised the segregation of duties between the Councils
Directorates.
A member of Council staff processed a double payment of $173,250.00 and an overpayment of $4,214.25 to Douglas
Aerospace in error.
Council Management did not act promptly to reduce further exposure following the Douglas Aerospace default on the
loan facility.
2.3
2.4
No.
In our opinion, the Audit and

Risk Committee (ARC) was
not consulted in a proactive
manner to assist in the
planning and development of
the commercial
arrangements.

Reference to
detailed
findings
Explanation
The ARC was consulted in relation to the proposed arrangements with Douglas Aerospace. However, this review was
undertaken after the Council had resolved to proceed with the arrangements.
The ARC was unable to provide any effective feedback on the arrangements prior to their implementation.
2.5
2. Detailed findings and recommendations

2.1

Project management framework to be reviewed and enhanced by management
Risk rating of finding: EXTREME
Finding(s) and risk
Recommendation(s)
Agreed action(s)
Currently WWCC does not have a policy or procedure on project management. We

understand that WWCCs project management framework relies on the following
practices:
2.1.1
WWCC project management framework to
be reviewed and enhanced by development
of policy and procedure documentation. The
development of the documentation should
take account of the following matters:
2.1.1.
Management
Response
to
Recommendations
Conditional agreement by management.
While management did not consider this
to be a project (see below) it is
acknowledged that Council does not
currently have a policy in place regarding
loans to third parties. This policy is
currently being developed and it is
anticipated that this will be presented to
Council at the November 2015 Policy and
Strategy Meeting. Consideration will be
given in the development of the draft
policy as to whether or not it should link
to
Council's
project
management
methodology and this will be subject to
the consideration of the elected body.
The recommended requirements for an
appropriate level of planning and
development prior to implementing
financial assistance (including the
conduct of a sufficiently thorough due
diligence process, where relevant) and
the necessity or not of establishing a
steering committee will be part of the
consideration given in developing the
draft policy. Even though Council did not
establish a steering committee it is
important to note that expert legal advice
was sought as deemed appropriate.
Council staff participate in a compulsory Project Management Fundamentals training

program (for level 3 Managers and above).
Council has standard templates for use as part of the Project Management
methodology.
The Project Management Office (PMO) meets fortnightly to monitor projects and
provide a monthly report to the executive leadership team (E-team).
Quarterly spreadsheet reports are provided to Councillors and the Audit and Risk
Committee (currently being updated into a Performance Planner system format).
The issuance of loan funding should be

captured
under
WWCCs
project
management framework.
The project management framework

should link to the Granting of Financial
Assistance Policy and require an
appropriate level of planning and
development prior to implementation
(including the conduct of a sufficiently
thorough due diligence process, where
relevant).
The project management framework

should adopt a coordinated approach for
undertakings of an uncommon nature
and include the establishment of a
WWCC
steering
committee
(or
equivalent).
The commercial arrangements with Douglas Aerospace were not subject to WWCCs
project management processes. However, given that there is no formal policy or
procedure on project management at WWCC, the consistency of project outcomes would
largely be dependent on the skillset of the staff involved in managing each project.
In our opinion, a project management framework based on best practice would have
assisted in achieving a more favourable outcome in respect of the commercial
arrangements with Douglas Aerospace. These benefits may have included:
The establishment of a WWCC steering committee (or equivalent) to oversee the

project and coordinate clear lines of responsibility for the projects success. In a
project that involves multiple directorates, we believe that various members of the
ELT involved in the project have the ultimate responsibility
Where there was insufficient expertise within WWCC to manage a project of this
nature, an appropriately qualified and experienced probity officer may have been
engaged.
The WWCC steering committee should

be charged with the overall responsibility
for the project. Where there is insufficient
expertise within WWCC to manage a
project, the steering committee should
engage an appropriately qualified and
Setting of appropriate timeframes for the planning, development, decision-making and

implementation of the project.
experienced expert (probity, finance,

legal etc.).
Consideration of alternate opportunities or the conduct of a competitive tender

process for the anchor tenancy of Precinct 2A.
Better development of the structure of the arrangements with Douglas Aerospace,

including the identification of the conflict of interest between WWCCs Directorates as

2.1
Finding(s) and risk

they managed the following responsibilities:
o Business development proponent for Precinct 2A;
o Financier;
o Landlord; and
o Building compliance regulator.

Development of the terms of the arrangement that were commensurate with the level
of risk and on commercial terms rather than:
o An interest rate consistent with home lending rates at the time (i.e. 6.80%
p.a.);
o A disproportionate rent free period of 5 years; and
o The waiving of WWCC rates and water charges for 3 years.
Effective risk assessment processes including the identification of commercial risk

mitigation strategies. This includes the establishment of controls such as obtaining
director/bank guarantees and obtaining a deposit from the borrower prior to the drawdown of loan funding as is normal practice in a banking/financing arrangement.
Consideration over the appointment of the builder and their critical role in the success
of the project. This may have included the use of WWCCs purchasing power and
tender evaluation processes.
Development of commercial processes for the release of loan funds, including the
engagement of an independent quantity surveyor to confirm the satisfactory
completion of each milestone prior to payment.
Root cause:
Lack of policy and procedure documentation.
Lack of internal expertise in managing a project of this nature.
Responsibility for project oversight unassigned.

Risk:
Potential project failure.
Derivation of a return that is not commensurate with the level of risk.
Potential reputational damage to WWCC.

Recommendation(s)
2.1.2
WWCCs risk management framework
should be reviewed and enhanced in line
with any improvements made to the project
management framework. Refer to section 4.3
for further detail.
Agreed action(s)
Management Action(s)
Develop a policy regarding loans to third
parties.
Responsible Executive
Director Corporate Services
Target Date
30 November 2015 (report to Council)
2.1.2
Management
Response
to
Recommendations
Management
agrees
with
the
recommendation to review and enhance
the risk management framework. This is
ongoing in any event as demonstrated by
the July 2015 update in the Risk
Management Framework and the review
of the policy every 2 years. For the last
few years, quarterly reviews of critical
Organisational
risks
have
been
undertaken and reported through the
Audit & Risk Committee. More recently,
officers conducted a workshop with
Councillors on 'risk appetite' and the risk
appetite
statements
are
being
incorporated
into
Council's
Risk
Management Policy. Council has adopted
a very comprehensive Risk Management
Framework and this is subject to
continual monitoring and review. The
reference to section 2.3 in the
recommendation(s) is confusing as no
such section appears in the Prosperity

2.1
Finding(s) and risk


Recommendation(s)
Agreed action(s)
report. Management wish to make a
number of statements regarding the
findings in the section below.
Review of Risk Management Framework
with input from the Audit and Risk
Committee.
Director, Corporate Services
Target date
14 September 2015 (Report to Policy &
Strategy Committee following input from
the Audit & Risk Committee)

2.2

Due diligence processes for WWCC projects should be reviewed and enhanced by management
Finding(s) and risk
Recommendation(s)
Agreed action(s)
WWCC does not have a sufficient policy or procedure to assist staff in conducting due
diligence processes. We understand that WWCCs due diligence processes rely on the
individual expertise of the staff involved.
In our opinion, WWCC should develop policy, procedure and checklist documentation to
support the conduct of sufficiently thorough due diligence processes. We note the
following deficiencies in the due diligence process with respect to the commercial
arrangements with Douglas Aerospace:
2.2.1
WWCC due diligence processes to be
reviewed and enhanced by development of
policy and procedure documentation. The
development of the documentation should
take account of the following matters:
2.2.1
Management
Response
to
Recommendations
Management generally agrees with this
recommendation but disagrees with
reference to due diligence on the builder.
As stated earlier, this was not considered
to be a Council "project". As a result it
was not seen as being Council's role as
the financier to conduct due diligence on
the builder and to review previous
construction projects undertaken by the
builder. As also mentioned earlier, from
enquiries made, it is not the usual
commercial practice for a financier to
undertake due diligence on a builder
engaged by the borrower.
A bankruptcy search was not conducted over the businesss sole director.
An ASIC search for related party activities was not conducted.
Due diligence processes such as the consideration of the insurances, experience and
expertise of the builder were not conducted.
It is unclear whether Douglas Aerospace prepared a business plan for review.
The AEC Group Business Plan Review was of a generic nature and primarily
considered the marketplace as a whole was an insufficient replacement for Douglas
Aerospaces business plan.
An independent assessment over the proposed constructions costs was not obtained
and had the arrangements been subject to project management processes, this would
have been outside of WWCCs procurement policy.
The outcome of the independent external financial assessments was unsatisfactory

(rated 19%) and contained a number of warnings which were of a significant nature,
including:
o Complete financial statements were not provided.
o Explanations sought from the external accountant were not responded to.
o Related party balances constituted a significant portion of net tangible assets
and working capital.
o Fixed registered charges were already in place by other financial institutions.
o Douglas Aerospace was rated as Unsatisfactory and Douglas Aerospray
could not be rated due to a lack of information.
The issuance of loan funding of this scale

should be considered a higher risk
project
under
WWCCs
project
management framework and accordingly,
require the conduct of a sufficiently
thorough
due
diligence
process,
including engagement of legal, finance
and other experts.
WWCCs due diligence processes should

require
a
search
for
director
bankruptcies,
previous
corporate
insolvencies and the activity of related
parties.
Where a WWCC project involves the

construction of an asset to be used as
security,
additional
due
diligence
processes should be undertaken over the
builder, whether directly engaged by
WWCC or otherwise. Such processes
should include the review of previous
construction projects undertaken by the
builder.
Develop a policy regarding loans to third
parties.
Target Date
The Douglas Aerospace business was in a period of intentional downsizing which

may have impacted their access to capital.

2.2

Due diligence processes for WWCC projects should be reviewed and enhanced by management
Finding(s) and risk
Recommendation(s)
Lending institutions were reluctant to provide a commercial loan to Douglas

Aerospace on reasonable terms.
Douglas Aerospace had insufficient capital to contribute its 30% of the construction
costs.
Root cause:

Agreed action(s)
Results of a due diligence process

(involving loan funding) should be
reviewed by a WWCC steering
committee. Where there is insufficient
information or expertise within WWCC to
form a decision, the steering committee
should engage an appropriately qualified
and experienced expert (probity, legal,
finance etc.).
Risk:
Insufficient information upon which to make investment decisions.
Misunderstanding of the project risks.

2.3

Risk management framework to be reviewed and enhanced by management.
Finding(s) and risk
Recommendation(s)
Agreed action(s)
Whilst we appreciate that there has likely been updates to WWCCs risk management
framework since the commencement of the commercial arrangements with Douglas
Aerospace, there are enhancements that can be made to improve project governance,
oversight, monitoring and increase the likelihood of favourable project outcomes.
2.3.1
A WWCC steering committee should be
charged with the overall responsibility for a
project involving the provision of loan funds.
During the investigation, we were provided with current copies of the following policy,
procedure and checklist documentation:
The WWCC steering committee should

include a risk officer (or equivalent). Where
there is insufficient expertise within WWCC
to consider the risks of a project, the steering
committee should engage an appropriately
qualified and experienced expert (probity,
finance, legal etc.).
2.3.1
Management
Response
to
Recommendations
Generally management agrees with this
recommendation but does not agree that
a blanket approach to establishing a
steering committee will necessarily assist
or improve the process in all instances
e.g. loans to sporting or community
groups. The development of more formal
procedures and a checklist will provide
sufficient controls for dealing with loans in
the future. It is agreed that a steering
committee should be established in the
future in the relatively rare circumstances
where Council is dealing with substantial
loans in excess of $1M, with expert
professional legal and third party input on
more complex matters. The threshold
dollar amount is subject to consideration
in the policy to be developed.
WWCC Risk Management Policy (POL 079);
WWCC Risk Management Framework;
WWCC Risk Management Strategy;
WWCC Risk Management Plan;
WWCC Critical Issues Listing March 2015; and
WWCC 5a. Risk Log.
Whilst the above documentation appears reasonable, it lack specific guidance on the dayto-day application of risk management processes. The application of specific risk
management processes was, in our opinion, deficient in respect of the commercial
arrangements with Douglas Aerospace. We note the following examples:
It is unclear where the ultimate responsibility for the risk assessment lies within
WWCC and who was ultimately responsible for the Douglas Aerospace project. In a
project that involves multiple directorates, we believe that Council Management have
the ultimate responsibility.
The risk assessment conducted (i.e. the WWCC 5a. Risk Log) was insufficient for a
project of this magnitude and risk profile. The risk assessment identified nine risks for
the entire Precinct 2A project (including the arrangements with Douglas Aerospace).
The ratings assigned to the impact and probabilities for the risks identified in the risk
assessment do not appear reasonable. For example, the probability for risk #R004
identifies a very low likelihood that project cost variations would exceed contingency
amounts and the allocated budget. In our opinion, Council was not in a position to
accurately assess this risk given the lack of documentation in relation to the project
costings or oversight of the builder.
Develop procedures and checklists to
support the policy for loans to third
parties. The policy for loans to third
parties will include the requirement for a
steering committee to be established to
assess any loan applications which
exceed $1 million.
Target Date
10

2.3

Finding(s) and risk
Recommendation(s)
Agreed action(s)
The mitigation actions included in the risk assessment are insufficient. Responses
such as liaise with Douglas Aerospace project manager prior to and during
construction does not constitute a mitigating action as it does not describe what steps
will be taken to reduce the likelihood of this risk occurring.
The risk assessment does not appear to have been updated during the
implementation of the arrangements with Douglas Aerospace, and accordingly, there
is no evidence to support whether risks were managed on an ongoing basis. This
includes the careful consideration of whether Douglas Aerospace was the most
appropriate tenant given the unsatisfactory results of the independent external
financial assessments.
2.3.2
WWCCs risk management framework
should be managed on a dynamic basis as
the risks involved in any project change over
time.
Mitigating actions that were not appropriately identified include:

o Appointing appropriately qualified and experienced experts (probity, finance,
legal etc.) to oversee and assist in the implementation of the project;
o Obtaining an independent assessment over the proposed constructions
costs to verify the project costs;
o Obtaining director guarantees;
o Obtaining bank guarantees;
o Obtaining a deposit from the borrower prior to the draw-down of loan funding;
o Matching the release of loan funds to milestones rather than a letter of
request;
o Appointing an independent quantity surveyor to certify the satisfactory
completion of each milestone.
2.3.2
Management
Response
to
Recommendations
Management
agrees
with
this
recommendation and Council's risk
management framework and risk register
is already regularly reviewed (on a
dynamic basis) and referred to Council's
Audit and Risk Committee. This review
process is ongoing in any event, as
demonstrated by the July 2015 update in
the Risk Management Framework and
the review of the policy every 2 years.
For the last few years, quarterly reviews
of critical Organisational risks are
undertaken and reported through the
Audit & Risk Committee.
Officers
conducted a workshop with councillors on
risk appetite and the risk appetite
statements are being incorporated into
Councils Risk Management Policy.
We note that a number of the mitigating actions identified above were referenced in the
legal advice obtained by WWCC but do not appear to have been actioned.
Root cause:
Legal advice not implemented in its entirety.
Review of Risk Management Framework
with input from the Audit and Risk
Committee.
Director Corporate Services.
Target Date
14 September 2015 (Report to Policy &
Strategy Committee following input from
the Audit & Risk Committee).
11

2.3

Finding(s) and risk
Recommendation(s)
Agreed action(s)
Risk:
2.3.3
Where a WWCC project involves the loan
funding or the construction of an asset to be
used as security, additional risk mitigations
strategies should be considered. These may
include:
2.3.3
Management
Response
to
Recommendations
Management agrees with aspects of the
recommendations and they will be
considered as part of the formulation of
the new policy and procedures being
developed. However it should be noted
that:
Director Guarantees were obtained

as part of the Loan Facility
Agreement refer Introduction
Section (I).
Obtaining bank guarantees, whilst

agreed in principle, was an
unrealistic expectation in this
situation otherwise they would have
secured funds in their own right.
Obtaining a deposit from the

borrower prior to the draw-down of
loan funding is disagreed with. The
rationale for this recommendation is
unclear on the basis that the
borrower was to contribute 30% of
the cost of construction. This does
not appear to be a standard
commercial practice. A more
appropriate control in hindsight
would have been to request the
borrower to produce evidence of
their capacity to fund 30% of the
construction costs.
Potential reputational damage to WWCC
Obtaining director guarantees;
Obtaining bank guarantees;
Obtaining a deposit from the borrower

prior to the draw-down of loan funding;
Matching the release of loan funds to

milestones rather than a letter of request;
Appointing an independent quantity

surveyor to certify the satisfactory
completion of each milestone.
12

2.3
Finding(s) and risk


Recommendation(s)
Agreed action(s)
Matching the release of loan funds

to milestones rather than a letter of
request is disagreed with as a
recommendation as this was
already
provided
for.
The
framework for payments was clearly
outlined in the loan facility
agreement, contractor agreement
(clause
11)
and
collateral
agreement. These agreements
provided for release of funds based
on milestones as supported by a
letter of request.
Appointing an independent quantity
surveyor to certify the satisfactory
completion of each milestone is
agreed With the benefit of hindsight
we would have had an independent
assessment (not necessarily a
quantity surveyor) carried out of the
stage of completion prior to the
release of funds. It should be noted
however that where a Private
Certifier was commissioned by the
owner (Douglas Aerospace in this
instance), that person if doing their
job properly, would ordinarily be
providing
inspection
report
certificates to Council which would
have provided improved certainty
regarding the completion of each
milestone - this did not occur.
Council is currently developing a
13

2.3
Finding(s) and risk


Recommendation(s)
Agreed action(s)
process to monitor the construction
of projects being inspected by
private certifiers to safeguard that
buildings
are
constructed
in
accordance with the development
consent.
a) Develop a policy regarding loans to
third parties.
b) Develop a process to monitor the
construction
of
projects
being
inspected by private certifiers to
safeguard
that
buildings
are
constructed in accordance with the
development consent.
a) Director Corporate Services
b) Director Planning & Regulatory
Services
Target Date
a) 30 November 2015 (report to
Council)
b) November draft to the Corporate
Review Committee for subsequent
consideration by the Executive Team
14

2.4

WWCC to consider management performance in light of project outcomes.
Finding(s) and risk
Recommendation(s)
Agreed action(s)
In sections 2.1, 2.2 and 2.3 we outlined the deficiencies in relation to project
management, due diligence and risk management processes. The root cause for many of
the issues identified during the investigation appears to be the lack of internal expertise in
managing a project of this nature. Management failed to establish a project steering
committee and there is a core issue in WWCC simultaneously acting as the:
2.4.1
Council Management should consider
management performance against the
WWCC Code of Conduct and human
resource policies and procedures in respect
of the key findings noted under the Finding(s)
and risk section (left).
2.4.1.
Management
Response
to
Recommendations
The first part of recommendation 2.4 is a
general statement and there are no
references in the findings to specific
breaches of the Code of Conduct or
human resource policies and procedures.
It is agreed that there are a number of
process improvements resulting from an
examination of this matter. However
these should be viewed as improvement
opportunities and not performance
management or disciplinary matters. It is
management's strong view that any
departures from good practice in process
were not motivated by any negative intent
or deliberate demonstration of "bad faith"
or insincerity.
Business development proponent for Precinct 2A;
Financier in loaning capital to fund the project;
Landlord in sub-leasing the site; and
Building regulator that requires the issuance of compliance notices for noncompliant building development.
The conflict of interest that arises from the above structure should not have occurred
under proper project planning and appropriate mitigating controls should have been
established. The project failed as there were a number of shortcomings from due
diligence and risk management processes through to the execution of the project. In does
not appear that a robust leadership and/or project management process was in place.
For a project that involves multiple directorates, we believe that various members of the
ELT involved in the project have the ultimate responsibility for the projects outcomes.
Notwithstanding the above, we note the following issues in respect of management
performance:
Council Resolutions
Two Council resolutions were not actioned by management as follows:

o 17 October 2011 - A Memorandum of Understanding was not
developed with Douglas Aerospace by Council Management.
o 19 December 2011 - The outcome of the Independent external financial
assessments was not satisfactory as reviewed by Council
Management, and accordingly, the proposed arrangements should not
have proceeded to public exhibition.
Where appropriate, WWCC should develop

staff management plans, tailored training and
development goals to improve management
performance.
The second part of recommendation 2.4

states "Where appropriate, WWCC
should develop tailored training and

development
goals
to
improve
management performance." This is a
broad and non-specific recommendation

that is not particularly instructive. If there
are some definitive areas identified by
way of a recommendation that enable the
development of tailored training and
development goals, management would
be very receptive to initiating those
training opportunities.
15

2.4
Finding(s) and risk

Reporting to Council
In our opinion, management did not clearly communicate the findings of the due
diligence processes in their report to Council (dated 30 January 2012) as
prepared by Council staff assisted in preparing the reports content relating to
financial matters. We note that the outcome of the Independent external financial
assessments was unsatisfactory (rated 19%) and contained a number of
warnings which were of a significant nature. These should have been
communicated in a clearer manner to Council.
We acknowledge that there was some information provided in the report to

Council in relation to the independent external financial assessments warnings
over working capital and liquidity ratios. However, we believe the proper
interpretation of the independent external financial assessments reports was not
transposed into the report to Council and accordingly, we believe that the report
to Council was misleading.
The overall conclusion of the independent external financial assessments was

not included in the report to Council as prepared by the Council staff and the
Independent external financial assessments were not attached to the report
whilst favourable supporting material was attached. We believe that had this
information been included, the project may not have proceeded.


Recommendation(s)
Agreed action(s)
This is a matter for the elected Council to
consider.
N/A
Target Date
N/A
In our opinion, we believe the commercial arrangements should not have

proceeded.
Legal Advice
Legal advice obtained regarding the implementation of loan securities was not
implemented in its entirety by the Council staff resulting in the second mortgages
remaining unregistered.
Based on our discussions with interviewees in the course of our procedures, we

understand that the implementation of the arrangements was delegated by Council
staff. In our opinion, the ineffective implementation of the legal advice is largely due
to:
o The insufficient experience or expertise of a Council staff member;
o The lack of supervision and review over the work performed a Council staff
member; or
o A combination of the above two factors.
Certain legal advice was obtained after transactions had already been processed i.e.
the legal advice (from Bradley Allen Love obtained 9 May 2014) to confirm WWCCs
16

2.4
Finding(s) and risk


Recommendation(s)
Agreed action(s)
compliance with the LFA and CA regarding the payment of loan funds to Douglas
Aerospace directly (rather than to Indistri) was obtained 12 months after the payments
had already been made on 21 May 2013 (payment #9) and 30 July 2013 (payment
#10).
Processing of Payments
In our opinion, the approval for the payment of loan funds by Council was
inappropriate and a result of the poor structure for the arrangements.
We understand that a Council staff member prepared the cheque requisition to

release payments to Indistri as well as signing the statutory declarations as a witness
for payments #1 and #2. This compromised the segregation of duties between the
Councils Directorates and the overall management of the loan facility.
Council staff processed a double payment of $173,250.00 to Douglas Aerospace in

error (i.e. payment #4).
Council staff processed an overpayment of $4,214.25 to Douglas Aerospace in error

(i.e. payment #9).
Council staff did not follow up Indistri for the statutory declarations required under the
CA for each payment until 15 August 2014, over 12 months after some statutory
declarations should have been obtained.
Management of Loan Facility Agreement (LFA)
Finance first prepared an invoice to Douglas Aerospace to commence the loan

repayments on 14 May 2013 when the first repayment was due by 9 January 2013
under the LFA. A delay of 4 months.
Council staff supplied incorrect information to Councillors in relation to the amount by

which Douglas Aerospace was in arrears. On 8 May 2014, Council staff informed
Council via email that Douglas Aerospace was in arrears by $71,568.92 at 14 April
2014. In our opinion, the amount outstanding at 14 April 2014 was $108,368.24 as
outlined in table 7 of this report.
A letter advising Douglas Aerospace they were in arrears was sent on 15 January
17

2.4
Finding(s) and risk


Recommendation(s)
Agreed action(s)
2014 by Finance, 2 months after the payment was due on 7 November 2013. This
demonstrates poor credit control processes.
Ineffective communication between Directorates as to whether the building certificate

had been issued when the business was operating. This is likely a result of the lack of
coordinated approach and lack of steering committee to oversee the arrangements.
The delay of 5 months in building compliance arising from a decision by relevant

directors to not pursue the Show Cause Notice issued on 19 May 2014. A
subsequent Show Cause Notice was issued on 9 October 2014 to restart the
compliance process. In our opinion, it is unlikely that this delay would have arisen if it
were not for the conflict of interest created by the poor development of the
arrangements with Douglas Aerospace. The conflict arises from the Councils role as
financier, landlord and building regulator in the project.
Council staff did not act promptly to reduce further exposure following the Douglas
Aerospace default on the loan facility.
In our opinion, for a project that involves multiple directorates, we believe that Council
staff have the ultimate responsibility to manage and promote WWCCs commercial
interests.
Root cause:
Council resolutions not followed.
Reports to Council misleading.
Errors made in processing of payments.
Risk:
18

2.4
Finding(s) and risk


Recommendation(s)
Agreed action(s)
19

2.5

The involvement of the Audit and Risk Committee (ARC) in considering the risks associated with any WWCC undertaking should
occur prior to the Council resolution
Risk rating of finding: HIGH
Finding(s) and risk
Recommendation(s)
Agreed action(s)
On 28 March 2012, a confidential report (CONF-1 Commercial Arrangements with

Douglas Aerospace Pty Ltd) was presented to the ARC.
2.5.1
WWCC should utilise the resources and
expertise of the ARC in a proactive manner.
2.5.1
Management
Response
to
Recommendations
Generally management agrees with this
recommendation.
However, it is
recognised that the role of the ARC is
evolving and has changed significantly
over time. It plays an important role in
Councils risk management regime and it
is considered appropriate that the terms
of the Audit and Risk Committee Charter
be reviewed to give more focus to the
ARC acting in a proactive manner.
The report outlined the history of WWCCs commercial arrangements with Douglas
Aerospace including a timeline of events and the compilation of the documentation
requested by the ARC. We understand that the information was presented in a number of
A4 lever arch files. We understand that an offer was also made by Council staff to make
the information available to any ARC member at a later date.
We note that the ARC review occurred after Council had passed a resolution approving
the arrangements with Douglas Aerospace on 30 January 2012. In our opinion, this
limited the usefulness of any review being undertaken by the ARC.
The
ARC
should
receive
sufficient
information on a timely basis upon which to
provide feedback to management (and the
project
steering
committee)
for
all
undertakings of an uncommon nature.
Notwithstanding the ARCs recommendations noted during the meeting, we do not agree
that WWCC considered reasonably the risks of the project, nor were sufficient risk
mitigation strategies implemented on a timely basis. We believe that proper consultation
with the ARC during the planning and development of the proposed arrangements with
Douglas Aerospace would have assisted in achieving a more favourable outcome for
WWCC.
Root cause:
Lack of understanding of the role and purpose of the ARC.
Relative infancy of the ARC.
Risk:
Review the Charter of the ARC to

give more focus to the ARC acting in
a proactive manner.
Report to the October/November

Audit & Risk Committee meeting.
Report to Council 14 December

2015.
Target Date
31 December 2015.
20
Sydney
Level 1
130 Elizabeth Street
Sydney NSW 2000
PO Box 20726
World Square NSW 2002
T. 02 8262 8700
F. 02 8026 8377
Newcastle
2nd Floor
Hunter Mall Chambers
175 Scott Street
Newcastle NSW 2300
PO Box 234
Newcastle NSW 2300
T. 02 4907 7222
F. 02 8026 8376
Brisbane
Suite 1, Level 3
200 Creek Street
Brisbane QLD 4000
GPO Box 2246
Brisbane QLD 4001
T. 07 3839 1755
F. 07 3839 1037
mail@prosperityadvisers.com.au
www.prosperityadvisers.com.au
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