Council watchdog under fire over abrupt end to long investigation
SOURCE:ABC Australia|BY:Jesse Thompson
The integrity agency tasked with keeping the local government sector in check is under fire after an ABC investigation raised questions over whether it was properly empowered to carry out its core functions.
Victoria's local government watchdog closed a long and resource-intensive investigation into a botched major council project without producing a final report on its findings.
The revelation sheds new light on the abrupt conclusion of an extensive investigation into the Hepburn Shire Council's failed redevelopment of a Daylesford theatre under former CEO Aaron van Egmond about a year ago.
At the time, the watchdog — the Local Government Inspectorate (LGI) — issued a brief media release explaining that there was insufficient evidence to prove any offences and the council had improved its procedures, so no investigation report would be released.
But calls for its release continued for months afterwards, as stakeholders pushed for transparency around the council's multi-million-dollar loss on the project.
"The council has called monthly — sometimes fortnightly — for the release of that document," former mayor and current long-term councillor Don Henderson said.
"We've been to ministers, we've been to the premier, we've been everywhere to get the release of that document.
"The council needs it. We should have it, and people who were involved should be answerable."
Don Henderson says the council had repeatedly called for the report to be released. (ABC News: Patrick Rocca)
Despite these calls, the years spent investigating and the creation of two detailed drafts, it can now be revealed that a final report was never produced before the investigation was closed.
An ABC investigation has uncovered evidence that the LGI determined it did not have the power to publish such a document during the course of its investigation.
Council loses millions on bungled redevelopment
One of the largest buildings on the main street of Daylesford, the Rex Theatre was among eight sites shortlisted during the search for a new, multipurpose council venue in 2014.
The council's vision was for a "modest, practical and sustainable" facility, to be known as the Hepburn Hub, that would refresh key services like the town's library and the council offices.
Rating poorly on several criteria, the privately owned Rex was not among the three sites deemed most suitable for the project.
It would require about $9 million in grant funding to acquire and fit out — the highest price tag of any option shortlisted, and millions more than the council-owned town hall that was initially selected as the preferred site.
The council's handling of the redevelopment was the subject of a Local Government Inspectorate probe. (ABC News: Patrick Rocca)
It is unclear exactly what took place before councillors at an August 2016 meeting were told of "a new opportunity" to purchase the Rex building following discussions with its owner, according to meeting minutes.
A motion to purchase the building was carried and the council bought the site for $6.34 million later that year, becoming an owner-builder on the major project.
Years later, the council would say it could find no evidence of an independent valuation before the purchase.
Mr Henderson — the only still-serving councillor from that era — claimed councillors were not allowed into the site when it was under construction.
"We kept asking. When I actually got to have a look with all the councillors, I was just shocked," he said.
"I said, 'This can't possibly be done for this amount of money.'"
Early analysis suggested the council-owned town hall building would be a more suitable site for the redevelopment. (ABC News: Patrick Rocca)
A trail of council documents shows an initial estimated construction cost of $1.25 million and a 2017 completion date blowing out. The development was eventually suspended amid delays and claims of mismanagement.
The sale was $2.6 million less than the council had paid for the building years earlier. With $3 million already spent on the project, the shire shouldered a $5.6 million loss.
While the Hepburn Shire Council maintains a recent rate cap variation would have been necessary anyway, it has conceded the multi-million-dollar figure, for a small council, was "significant".
Final investigation report does not exist
The project's failure was the subject of a comprehensive investigation launched by the LGI in 2019, after it was referred a complaint made by the Hepburn Shire Council's new CEO.
As the integrity agency tasked with investigating local government wrongdoing, the watchdog interviewed key figures and prepared at least two detailed drafts that ran scores of pages.
But a final report was nowhere to be found years after its expected release by the end of 2020.
Work on the Hepburn Hub project was eventually suspended. (Supplied: Hepburn Matters)
Then, in September 2024 — about five years after the investigation was launched — the LGI announced the probe had concluded with insufficient evidence to prove any breaches of local government legislation.
In a brief media release, the LGI said its chief municipal inspector (CMI) was also satisfied the council had improved its practices enough to avoid similar issues in future.
"Accordingly, the LGI will not be taking any further action in respect of the investigation. Nor will the LGI be publishing any report," the media release said.
When an apparent draft report was leaked online earlier this year, the ABC was unable to report on the document for legal reasons.
Instead, it sought a copy of the final document under Freedom of Information (FOI) laws.
Months later, when the FOI request was finalised, the LGI revealed that the report did not exist.
"Documents relevant to this part of your request do not exist, as a final report of the investigation into this matter was not produced," the LGI wrote in its decision letter.
The agency reiterated its conclusion that no breaches of local government law could be proven and the council's processes had improved.
It later declined to answer a series of detailed questions — including why it took so long to finalise its investigation and how much it cost — because of confidentiality, referring the ABC back to its media release.
Questions over watchdog's powers
A day before the LGI issued its media release, the ABC has since learned, a letter arrived in the mailboxes of several stakeholders privy to the watchdog's investigation.
The document relayed the investigation's outcome and reasoning behind it.
But it also suggested an additional reason the report would not be published — one that the LGI would not publicly disclose the following day.
"LGI has determined that the CMI does not have the power to publicly release or publish the draft report or any other report relating to the investigation under the Local Government Act 1989," it is understood the letter said.
"Accordingly, the inspectorate will not be publishing any report or tabling any report to parliament."
Recipients of the letter were warned they could face a hefty fine or three months in prison if they breached an earlier confidentiality agreement over a draft report they had been provided, according to several sources.
"Further, a person who releases the draft report without the power to release it may be subject to civil claims for damages by those persons affected by the release," the letter continued.
The Hepburn Shire Council oversees several small communities in central Victoria. (ABC News: Patrick Rocca)
It is understood that the letter came with an A4 envelope to be used to mail the draft back.
Among people stakeholders the ABC spoke to, several speculated that the LGI had decided that publishing the report carried legal risk.
Pages and pages of material identified during the FOI search — which also sought documents related to the decision not to publish the report — were withheld from release because of legal privilege, with the LGI explaining they came into existence for the dominant purpose of obtaining and communicating legal advice.
Email attachments in some of the released documents also suggest there was extensive legal advice on the matter over several years, including the possible involvement of the Office of the General Counsel in 2023.
Minutes from an LGI meeting in August 2024 mention a briefing with the attorney-general and raise the next steps for the investigation.
"Suggested that [redacted] to put a positive position and share the table of the changes they have made around new policies and procedures," the minutes say.
The council later shared a table outlining its progress implementing more than 40 LGI recommendations, but the LGI would not say whether it had encouraged the council to take that step when asked by the ABC.
The state government last year passed a series of local government reforms that provided the CMI with the power to table reports in parliament, brief ministers and serve infringement notices in relation to council election conduct and personal interest returns.
Integrity agency 'asleep at the wheel'
Several Daylesford locals told the ABC that trust in the council and the LGI had languished in the information vacuum created by the investigation outcome.
One of the casualties of the saga was the Daylesford cinema, a volunteer-run operation that grew into a kind of community hub in a small town with limited entertainment options.
Displaced as construction got underway, the cinema is yet to welcome back audiences. Former president Gina Lyons and the entire committee resigned as the delays continued.
Ms Lyons was among several people to tell the ABC that their disappointment over the situation had been exacerbated by the LGI's handling of the investigation.
"It just made me think, 'What is their purpose? What is their value?'" she said.
Gina Lyons says the community deserves transparency about the investigation. (ABC News: Patrick Rocca)
"They do a lot of stuff on their website about checking over councillors' returns, personal interest returns — that's just a box-ticking, paperwork exercise.
"Really important governance failures, they were asleep at the wheel."
There is widespread speculation that the LGI, which has about 10 employees, is facing significant resourcing constraints.
The LGI's website suggests the agency has not published an annual report in three years.
Its most recent available annual report, from 2021-22, noted that holding people to account for breaches of local government legislation continued to be one of its greatest challenges because prosecutions are time-consuming and expensive.
A spokesperson for Victoria's attorney-general, who has oversight of the LGI, did not directly answer questions about whether the government had reviewed the legal validity of the body's previous reports or held concerns about the inspectorate's effectiveness.
"The Local Government Inspectorate plays an important role in Victoria’s integrity landscape, by ensuring Victorian councils comply with the law," the spokesperson said.
"We continue to work with the Inspectorate to ensure they can deliver their important functions efficiently and effectively."