HSC_100K_NEW

 

CONFIDENTIAL

BUSINESS PAPER

 

General Meeting

 

Wednesday 9 June 2021

at 6:30PM

 

 


Hornsby Shire Council                                                                                           Table of Contents

Page 1

 

TABLE OF CONTENTS

 

CONFIDENTIAL ITEMS        

Item 9     GM23/21 Renewable Energy Proposal......................................................................... 1         

 


      


 

General Manager's Report No. GM23/21

Office of the General Manager

Date of Meeting: 9/06/2021

 

9        RENEWABLE ENERGY PROPOSAL

This report should be dealt with in confidential session, under Section 10A (2) (c) of the Local Government Act, 1993. This report contains information that would, if disclosed, confer a commercial advantage on a person with whom the council is conducting (or proposes to conduct) business.   

 

EXECUTIVE SUMMARY

·              North Harbour Hydro (NHH) has approached Council seeking an exclusive option to undertake a detailed feasibility on a pumped hydro station that would ultimately require access to Westleigh and Hornsby Parks. NHH’s intent is to undertake detailed feasibility planning, design and approvals ahead of a decision to commence construction and it would compensate Council through no-cost energy and/or the receipt of lease and licence fees.

·              To allow the matter to be submitted for Council’s consideration, the General Manager sought initial legal advice prior to signing a Non-Disclosure Agreement (NDA) with NHH. A draft preliminary proposal has now been received from NHH which, if supported by Council, would allow NHH to commence a detailed assessment of the proposal.

·              To fully appraise Council of its requirements and responsibilities in considering the proposal, further legal advice was sought asking a series of questions about Public Private Partnership (PPP) provisions; the Office of Local Government’s (OLG) Guidelines on Procedures and Processes to be followed by Local Government in PPP’s; the need for an EOI/market testing process to be undertaken; is a direct negotiation process possible; are there other mechanisms or means by which the project could be pursued; etc.

·              The legal advice indicates that the project is likely to be a PPP; the OLG’s Guidelines on Procedures and Processes to be followed by Local Government in PPP’s are current; all PPPs are required to undertake an EOI/market testing process to identify preferred partners in the project; and the only alternatives to a PPP for this project is a contract entered after going through a tendering process.

·              Based on the legal advice from Bartier Perry, and discussions with officer/s from the OLG, it is inappropriate for Council to further consider NHH’s current request. It may be appropriate, however, for Council to consider whether the NHH proposal has created an interest whereby Council is prepared to test the market to determine if a public/private partnership approach to renewable energy projects using Council land and facilities is feasible and attractive.

RECOMMENDATION

THAT Council authorise the General Manager to progress the matter in line with the next steps outlined in the Discussion Section of Confidential General Manager’s Report No. GM23/21.

 


PURPOSE

The purpose of this Report is for Council to consider a request from the NHH company in respect of a Pumped Hydro Proposal between Westleigh and Hornsby Parks.

BACKGROUND

A confidential approach has been made to Council by NHH seeking an exclusive option for them to undertake a detailed feasibility on a pumped hydro station that would ultimately require access to Council owned land at Westleigh and the Hornsby Quarry void at Hornsby Park. NHH’s intent is to construct underground pumped hydro infrastructure to generate renewable energy and then sell it to the electricity grid. It understood that the proposal does not require any investment by Council.

The option sought by NHH would allow them to undertake detailed feasibility planning, design and approvals ahead of a decision to commence construction. NHH’s end-goal is to have a (subterranean) lease over part of both sites whereby Council would be compensated by the provision of no-cost energy and/or the receipt of lease and licence fees. It is noted that some limited aboveground access to the Hornsby and Westleigh sites may also be required.

The information provided informally by NHH to the General Manager and relevant staff included an overview of NHH; details of the proposal; and a draft term sheet for the option agreement. NHH also provided a summary of the preliminary external legal advice they have received about the proposal. This details what NHH consider is the legislative framework and the relevant considerations for Council. Although some of these matters are beyond the granting of an initial option, they have been useful for overall context.

In order that an appropriate briefing on the matter could be provided to Council, the General Manager sought some general advice from the OLG about the protocols to be followed in dealing with proposals of this type. This led to the General Manager seeking some initial legal advice prior to signing an NDA with NHH. 

DISCUSSION

Following the signing of the NDA referred to above, a draft preliminary proposal has been received from NHH which, if supported by Council, would allow NHH to commence a detailed assessment of a pumped hydro energy storage facility that includes:

·              An underground reservoir and turbine hall at the Hornsby Quarry site - below the approved design landform which is expected to be completed by the end of 2022.

·              An upper reservoir at the Westleigh Park site - either combining the existing Sydney Water Thornleigh Service Reservoir or a newly constructed reservoir. (N.B. The Westleigh site is currently the subject of a draft Master Plan proposing the establishment of sporting and environmental precincts. The works, including decontamination of the site and creation of a new landform for three field areas are due to commence in early 2023.)

·              An underground tunnel connecting the upper reservoir to the lower reservoir via a turbine hall – at least 50 metres below the ground surface.

NHH’s aim is to negotiate a long-term lease of the subject Council land on the basis that financial or other consideration would be provided to Council via several possible options e.g. the provision of no-cost energy and/or the receipt of lease and licence fees.

To ensure that Council is fully aware of its requirements and responsibilities in considering NHH’s proposal, legal advice was sought from Bartier Perry in respect of the following:

·              What is the likelihood the project will be subject to PPP provisions within the Local Government Act?

·              Is the process at page 9 of the OLG’s Guidelines on Procedures and Processes to be followed by Local Government in PPP’s current and if not, what has changed?

·              What is the likelihood that the project would be classified as a high-risk project within the terms of the relevant provisions of the Local Government Act, supporting Regulation(s) and the Guidelines?

·              Can Council enter into a PPP agreement with a party where an EOI/market testing process has not been undertaken, and if so, what are the circumstances in which this could occur?

·              Is a direct negotiation process possible, and what would be deemed to be best practice/the process to be followed in these circumstances?

·              Does Council need to comply with the Guidelines to enter into a lease with a private party?

·              How could Council proceed with a consideration of the Project and protect its interests prior to an agreement being prepared and signed by both parties for the delivery of the project?

·              In the event that the proposal falls within the realms of a PPP, are there other mechanisms or means by which the project could be pursued. In other words, is another pathway available to Council and the proponent (NHH)?

·              What is appropriate/necessary in respect to engagement with the OLG in relation to Council’s consideration of the proposal?

The request to Bartier Perry also sought comment on Council’s current understanding that a public interest/economic evaluation is required as part of a PPP. Arguably, it is understood this should be undertaken even if the PPP provisions do not apply and should occur prior to submission and consideration of the project by Council. The evaluation could also assist Council in negotiations with the proponent of the Project and the financial terms that would form part of an agreement between the parties.

Advice has received from Bartier Perry in the following terms:

1.       The project should be treated as a PPP

(a)        The project is likely to be a PPP for the purposes of the Act for the following reasons.

(b)        NHH falls within the definition of a ‘private person’ under section 400B(2) of the Act.

(c)        There will be a PPP if Council enters into an ‘arrangement’ with NHH where NHH finances the provision of ‘public infrastructure or facilities’ and Council retains an interest in it, such as ownership of the land or the infrastructure: section 400B(1) of the Act.

(d)        The term ‘arrangement’ is broadly defined in the Act to include a contract or understanding. The arrangement does not need to involve the formation of an ‘entity’ with NHH in order to trigger the PPP provisions of the Act: section 400B(2). An entity arises where there is a partnership, trust, corporation, joint venture, syndicate or other body (whether or not incorporated).

(e)        In its February 2021 proposal, the infrastructure which NHH is proposing to construct on Council’s land is designed to service the Hornsby LGA.

(f)         The Act does not define what constitutes ‘public infrastructure or facilities. Nor do the Guidelines offer any assistance. The closest definition which might provide some guidance is found in the Dictionary to the Hornsby Local Environmental Plan 2013 (LEP).

(g)        The LEP provides the following definition:

Public utility undertaking means any of the following undertakings carried on or permitted to be carried on by or by authority of any Public Service agency or under the authority of or in pursuance of any Commonwealth or State Act:

(a)        Railway, road transport, water transport, air transport, wharf or river undertakings.

(b)        Undertakings for the supply of water, hydraulic power, electricity or gas or the provision of sewerage or drainage services.

And a reference to a person carrying on a public utility undertaking includes a reference to a council, electricity supply authority, Public Service agency, corporation, firm or authority carrying on the undertaking.

(h)        The second limb of the definition would indicate that the infrastructure proposed by NHH is most likely to be ‘public infrastructure or facilities’. If that is the case, then it would bring the project under the PPP provisions of the Act.

2.       Status of the Guidelines

(a)        The Guidelines are current and in force for the purpose of section 400C(1) of the Act. The flowchart on page 9 of the Guidelines provides an overview of the current processes and procedures to be followed in undertaking a PPP.

(b)        In paragraph 6 below, we point out various amendments which have been made to the Regulation since the Guidelines were published in 2005. Those amendments render certain provisions of the Guidelines inapplicable now, but these provisions largely relate to projects which are excluded from being PPPs. Otherwise, the Guidelines are still current and applied by OLG.

3.       ‘High risk’ or ‘significant’ project

(a)        On the information provided by NHH in its February 2021 proposal, this Project will involve the investment of over $300 million into the local government area. Accordingly, the project will be ‘significant’ for the purpose of the Guidelines and must go through the two-stage project review committee (PRC) process.

(b)        The project will be significant because it has an estimated total cost of more than $50 million: para 2.1.1 of the Guidelines.

(c)        The project will also be ‘high risk’ if the individual risk or a combination of several risk aspects of the project are so significant or large that the Departmental Chief Executive considers that it warrants the project being examined further. In such a case, the risk may be borne by Council, its ratepayers, its community, the wider community, the integrity and due protection of the value of the public assets held by Council or the public interest generally: para 2.1.2 of the Guidelines.

(d)        Given the extent of construction involved in the project, the amount of Council land that will be affected and the proximity of Council infrastructure to the project site, we think it is likely that it will be considered ‘high risk’ by the Departmental Chief Executive.

4.       Can Council enter into a PPP without having tested the market?

(a)        The short answer is no. The EOI/market testing process is a key element in ensuring that the community gets the best value for its investment in the project.

(b)        All PPPs are required to undertake an EOI/market testing process to identify preferred partners in the project: see para 2.3.6 of the Guidelines.

(c)        Where there is limited interest elicited by the EOI process, it may be more appropriate for Council to go straight to the preferred partner stage. The evaluation panel appointed to assess the bids received during the EOI process may make a recommendation to this effect: see para 2.4 of the Guidelines.

5.       Direct negotiations

(a)        Within the context of testing the market by EOI process, the Guidelines acknowledge that a level of direct negotiations are required for PPPs but dictate that transparency must be maintained at all times: see para 2.3.6 of the Guidelines.

(b)        Council must comply with the current version of the direct negotiation guidelines, entitled Direct Negotiations: Guidelines for Managing Risks and published by the ICAC in August 2018.

6.       Leases and the Guidelines

(a)        A lease is a contract between two parties and is caught by the definition of ‘arrangement’ in section 400B(2) of the Act. Accordingly, a proposal in the nature of a lease is not exempt from being a PPP or from being subject to the Guidelines.

(b)        When the Guidelines were issued in 2005, clause 408 of the Regulation excluded leases of community land to private persons from being arrangements constituting a PPP: see para 1.3.

(c)        However, in 2007, the Local Government Amendment Act 2007 was enacted with the effect of amending clause 408 of the Regulation by only excluding the following arrangements from the PPP requirements:

(i)         Contracts entered into pursuant to the tendering process.

(ii)         A voluntary planning agreement.

(iii)        An arrangement arising out of the imposition by Council of a requirement under section 306 of the Water Management Act 2000.

(d)        Tendering and voluntary planning agreements are well-understood by councils and need no explanation. However, the third excluded category of arrangements, while not as readily understood, does not apply to exempt this project from the PPP provisions of the Act. That is because Council is not a water supply authority under Schedule 3 of the Water Management Act 2000. Therefore, it cannot rely on section 306 of that Act to exclude the project from the PPP provisions of the Act.

(e)        Accordingly, para 1.3 of the Guidelines is out-dated now and reference must only be made to clause 408 of the Regulation to identify the arrangements excluded from the PPP requirements.

(f)         Anyway, the project involves more than simply a lease.

7.         How could Council proceed with a consideration of the project and protect its interests prior to an agreement being prepared and signed by both parties for the delivery of the project?

(a)        Council can progress through the process of consideration required by the Guidelines so long as any agreement for the delivery of the project is conditional on PRC approval. That is, Council could not commit to delivery of the project by NHH, or the terms of the agreement for delivery by NHH, without prior PRC approval.

(b)        This does present risks for both Council and NHH, since neither party will be bound to enter into an agreement for the delivery of the project by NHH, even though the parties might agree to be bound to follow the procedure in good faith and with due diligence.

8.       Alternatives to a PPP

(a)        The only alternatives to a PPP are those identified in paragraph 6(c) above, namely contracts entered after going through a tendering process or contracts in the nature of voluntary planning agreements.

(b)        Only a tendering process would be relevant to the project.

9.       Engaging with OLG

(a)      Clause 1.3 of the Guidelines makes it clear that if Council is unsure about whether or not a project is a PPP, it should seek advice from the Director General.

(b)      Early and full consultation would be advisable for a project of this size and significance. However, any such consultation would have to be undertaken with the consent of NHH as it would otherwise breach the confidentiality regime to which Council has agreed.

(c)      It is important to note that if Council enters into a PPP or carries out a project under a PPP without complying with the Act and Guidelines, it will be in breach of the Act.

(d)      Clause 1.6 of the Guidelines sets out the possible remedies which are available to OLG in the event of a breach of the Act, including impositions of a surcharge, investigations and public inquiries.

10.     Other advice

(a)      The first thing Council must do is identify the component parts of the project.

(b)      Key components of the project we have identified are:

(i)       Hornsby Quarry – this is community land and subject to a funding agreement/lease with Transport for New South Wales (TfNSW). Any agreement with NHH must not conflict with the TfNSW arrangement.

(ii)      Westleigh Reservoir – this is also community land.

(iii)     Community land cannot be sold without first being re-classified as operational land: section 45 of the Act.

(iv)     Community land leases must not have a term of more than 21 years unless the Minister for Local Government is satisfied that there are special circumstances justifying the term exceeding 21 years: section 47(5) – 47(8AA) of the Act. We assume that NHH would require a lease with a term significantly longer than 21 years to justify the construction of the proposed infrastructure on the land.

(v)      Penstock – consideration needs to be given to the acquisition of a sub-stratum tunnel for the penstock, turbine hall and reservoir where those items of infrastructure pass under land not owned by Council. Compulsory acquisitions of tunnels do not require Council to pay compensation to the owners of the land from which the tunnel is excised: section 62 of the Land Acquisition (Just Terms Compensation) Act 1991. Nonetheless, Council cannot use that land for the purpose of the project unless it has first acquired it.

(vi)     Compulsory acquisition – Council can only acquire land for the purpose of exercising any of its ‘functions’: section 186 of the Act. What is proposed in this project does not appear to fall within any of the functions identified within Chapter 5 (sections 21 – 23A) of the Act. That is because the elements of the project relate to the provision of pumped water, which is a function given to Sydney Water Corporation under sections 5 and 12 of the Sydney Water Act 1994. If this is the case, then Council will not be able to obtain ministerial consent under section 187 of the Act to acquire a stratum tunnel for the underground facilities.

(c)      These issues must be addressed before Council can proceed with the project. There may be other issues to be considered as well, which are not apparent from the information provided to date.

(d)      Before Council can submit the project to the PRC for assessment, it must satisfy the PRC that a business plan has been prepared for the project, Council has assessed the project and is assured that it has the capacity to conduct the project, a probity plan has been prepared, a public interest evaluation has been conducted with a positive community outcome, a project plan has been prepared, and reasons given why a competitive process is not proposed: para 2.3 of the Guidelines.

________________________________

In summary, the legal advice confirms that, notwithstanding the potential merits of the proposal, it is inappropriate that Council continue discussions with NHH at this stage. Should Council be of a mind to explore the feasibility and community benefits of a proposal of this type, an EOI process is likely to be required in the first instance. Accordingly, the following next steps are considered appropriate:

·              The General Manager advise NHH of Council’s position that it is unable to continue discussions with NHH at this time for the reasons outlined in Council’s legal advice; and indicate to them that an expression of interest process would be required to ensure that the community obtains the best value for its interest/investment in such a proposal.

·              A further report be submitted for Council’s consideration which advises of any response from NHH to Council’s position; outlines the process that would need to be followed for Council to conduct an EOI (or alternative option) to advance such a proposal; and details other matters that will need to be considered such as the community land provisions of the Local Government Act.

CONSULTATION

In the preparation of this Report, there was consultation with the proponent (NHH), Council’s legal advisers (Bartier Perry) and officer/s from the OLG.

BUDGET

At this stage, there are no budgetary implications associated with this Report. If the proposal progresses, there may be an opportunity for Council to achieved increased income and/or reduced electricity costs. It is noted that should Council elect to pursue the direction outlined in this Report, there will be costs arising. Staff will attempt to fund these costs from savings that are identified during the year.

POLICY

Consideration of a proposal of this type aligns with the Sustainable Theme of Council’s Community Strategic Plan. In particular, the stated outcomes of “People in Hornsby Shire support recycling and sustainability initiatives” and “The Shire is resilient and able to respond to climate change events and stresses” are particularly relevant.

From a Climate Wise perspective, Council’s intent to “Reduce Council’s corporate greenhouse gas emissions to 32 percent below 2018 levels by 2025, 53 percent below 2018 levels by 2030 and net zero by 2050” and to “Support the community in the goal of reaching net zero emissions by 2050 through the delivery of programs and initiatives that further community greenhouse gas emission reduction efforts” also have close links to the proposal.

The proposal also has relevance to the following goals contained in Council’s Delivery Program - to “Review and update the Long-Term Financial Plan having regard to the strategic direction of the Council” and “Review income enhancement opportunities and cost efficiencies”.

It is noted that the statutory and other protocols that Council would need to use in dealing with a proposal of this type are detailed in the legal advice from Bartier Perry.

CONCLUSION

The salient points from Bartier Perry’s advice that Council needs to consider in deciding how to progress this matter are:

·              The project is likely to be a PPP for the purposes of the Act.

·              The OLG’s Guidelines on Procedures and Processes to be followed by Local Government in PPP’s are current and in force for the purpose of section 400C(1) of the Act.

·              On the information provided by NHH in its proposal, this project will involve the investment of over $300 million into the local government area i.e. the project will be ‘significant’ for the purpose of the Guidelines and must go through the two-stage project review committee (PRC) process.

·              All PPPs are required to undertake an EOI/market testing process to identify preferred partners in the project: see para 2.3.6 of the Guidelines. The EOI/market testing process is a key element in ensuring that the community gets the best value for its investment in the project.

·              Within the context of testing the market by EOI process, the Guidelines acknowledge that a level of direct negotiations are required for PPPs but dictate that transparency must be maintained at all times: see para 2.3.6 of the Guidelines.

·              Council can progress through the process of consideration required by the Guidelines so long as any agreement for the delivery of the project is conditional on PRC approval i.e. Council could not commit to delivery of the project by NHH, or the terms of the agreement for delivery by NHH, without prior PRC approval. This does present risks for both Council and NHH, since neither party will be bound to enter into an agreement for the delivery of the project by NHH, even though the parties might agree to be bound to follow the procedure in good faith and with due diligence.

·              The only alternatives to a PPP are contracts entered after going through a tendering process or contracts in the nature of voluntary planning agreements. Only a tendering process would be relevant to the project.

·              Clause 1.3 of the Guidelines makes it clear that if Council is unsure about whether or not a project is a PPP, it should seek advice from the Director General. Early and full consultation would be advisable for a project of this size and significance. However, any such consultation would have to be undertaken with the consent of NHH as it would otherwise breach the confidentiality regime to which Council has agreed.

Based on the legal advice, and subsequent discussions with officer/s of the OLG, it is inappropriate for Council to further discuss NHH’s current request for them to be provided with an exclusive option to undertake a detailed feasibility on a pumped hydro station.

It is considered appropriate, however, for Council to determine whether the NHH proposal has created an interest whereby Council is prepared to test the market to determine if a public/private partnership approach to renewable energy projects using Council land and facilities is feasible and attractive.

RESPONSIBLE OFFICER

The officer responsible for the preparation of this Report is the General Manager - Mr Steven Head - who can be contacted on 9847-6604.

 

 

 

 

 

 

Steven Head

General Manager

Office of the General Manager

 

 

 

 

Attachments:

There are no attachments for this report.

 

File Reference:           F2021/00048

Document Number:     D08161741