The ARC and ARTA – mutual reliance for successful public transport

Tom Bennett, Partner | September 2004

The Local Government (Auckland) Amendment Act 2004 has created two statutory entities for which the Auckland Regional Council (the “ARC”) has financial and political responsibility – Auckland Regional Holdings (“ARH”) and the Auckland Regional Transport Authority (“ARTA”).

The Amendment Act creates a unique governance structure for a local authority in New Zealand, by essentially “corporatising” two principal functions of the ARC. ARH will be responsible for the ownership and management of transport and other assets. ARTA will be responsible for the planning and procurement of public transport services.

After enactment of the Amendment Act, the ARC is now, in respect of public transport:

1. a funding body, through its rating revenue and the ARH funding stream;
   
   
2. a strategic body, through its responsibility for the Regional Land Transport Strategy;
   
   
3. a conduit for co-ordination of the regional funding body (ARH) with the regional operational body (ARTA).

This article focuses on the governance structure between the ARC and ARTA to identify one significant aspect of this new structure - the apparent structural weakness is its strength, by driving a relationship of mutual reliance between the ARC and ARTA.

From a legal perspective, the ARC’s governance tools in relation to ARTA are not as strong as one would normally expect for an organisation that will spend the bulk of the ARC’s rating and other income. The Act provides five legislatively - constrained mechanisms to regulate the relationship between the ARC and ARTA. Those mechanisms are:

1. the rules of ARTA;
   
   
2. the statement of intent of ARTA;
   
   
3. the funding/performance agreement between the ARC and ARTA;
   
   
4. the removal (and participation in the appointment) of ARTA directors by the ARC; and
   
   
5. the Regional Land Transport Strategy.

However, the ARC’s ability to control ARTA using those mechanisms is constrained by the Act. In particular:

1. the rules made by the ARC cannot be inconsistent with the Act – in particular, the statutory objective, functions and principles of ARTA;
   
   
2. there are no effective commercial sanctions available to the ARC if ARTA does not comply with its statement of intent or the funding/performance agreement – after all, ARTA is a statutory monopoly supplier of public transport services for the ARC;
   
   
3. ARTA is not required to give effect to the Regional Land Transport Strategy when preparing its regional land transport plan (which “operationalises” the Regional Land Transport Strategy) if there are financial or operating reasons to do so;
   
   
4. there is a prohibition on the ARC prescribing an “activity” of ARTA in the Regional Land Transport Strategy or when providing funding to ARTA. The nature of the relationship between the ARC and ARTA – in particular, the extent to which ARTA is a standalone organisation – will require careful work by ARTA and the ARC. Although ARTA has statutory objective, functions and principles, the Act is silent on a number of aspects of this relationship and appears to take a role-based, rather than entity-based, approach to ARH and ARTA;
   
   
5. although the ARC may remove a director, it does not have the unilateral right to appoint a director (except for temporary vacancies). ARTA directors are appointed by an appointments panel. While the ARC has a majority (8 of the 15 members), each panel member must act independently of his or her appointing local authority (even though a local authority may replace its panel member at will) and a majority of 10 is required to appoint a director.

In addition, the Amendment Act prescribes a statutory objective, and statutory functions and principles, which govern the activities of ARTA.

It is fair to say that the board of directors of a listed company would not implement such a constrained corporate governance structure in relation to a subsidiary which was responsible the bulk of the group’s operating activities.

However, the subtle nature of the governance structure under the Amendment Act should have the effect of driving the ARC and ARTA to a collaborative and co-operative relationship for the simple reason that neither will be able to deliver on their statutory responsibilities without the other.

The continued delivery and improvement of public transport will only occur if there is a very good relationship between the ARTA board and ARC councillors and officers – a relationship something like a “partnership”, recognising the ARC’s strategic role and ultimate financial and political responsibility for ARTA’s activities, and ARTA’s planning and operational/implementation role. This philosophy seems consistent with the “softwiring” emphasised in the Government Transport Sector Review of June 2004.

As a result, the individuals who are decision-makers in both organisations (and, to a lesser extent, the ARTA appointments panel) have significant responsibility for the success or failure of this governance structure and their respective organisations.

First published in Local Government Magazine.