Part 7: The Strategic Investment Fund
- Introduction
- Cabinet criteria for the award of Strategic Investment Fund grants
- The application process
- Monitoring of Strategic Investment Fund grants
Introduction
7.1
The Strategic Investment Fund (SIF) is administered by Investment New Zealand.
Investment New Zealand is a business unit within NZTE and is New Zealand’s
dedicated investment promotion agency. The SIF is designed to assist in the early
stages of investment assessment and planning of a business in New Zealand.
7.2
Three types of grants can be given under the SIF:
- Feasibility study grants enable potential investors to conduct pre-feasibility and feasibility studies, to quantify substantial investment opportunities in New Zealand.
- Guarantees of funding are provided for significant projects that seek to access funding from other government programmes. Funding from the SIF reduces as the level of funding from other government sources increases.
- Cash grants are available for significant projects, where access to funding from other government programmes is inappropriate or does not fit with the project’s requirements.13
7.3
The objectives of the SIF are to:
- encourage significant investment in new projects;
- demonstrate the Government’s commitment to support major new investments;
- provide firms making significant investment decisions with an informed opportunity to compare the benefits of investing in New Zealand with other options; and
- identify any impediments to investments proceeding, and, where appropriate, advise the Government of the need for procedural change.
7.4
The SIF was established in June 2000.14 For the 2003-04 year, $3.975 million was
allocated to the SIF. On 10 May 2004, the Minister for Industry and Regional
Development announced that the SIF was to receive an additional $4.025 million
from 1 July 2004.15 Figure 14 below sets out a breakdown of applications under the
SIF, by year.
Figure 14
Applications to the Strategic Investment Fund since 2000-01
| |
Approved | Declined or cancelled grants | Total ($) | |||
|---|---|---|---|---|---|---|
| Feasibility studies | Cash grants | Guarantees of funding | Approved | Paid | ||
| 2000-01 | 2 | 0 | 0 | 0 | 78,300 | 78,300 |
| 2001-02 | 9 | 1* | 1 | 1 | 1,895,000 | 900,000 |
| 2002-03 | 13 | 3 | 0 | 1 | 3,859,375 | 3,094,150 |
| 1 July 2003 to March 2004 | 3 | 0 | 1 | 0 | 2,192,188 | 115,887 |
| Totals | 27 | 4 | 2 | 2 | 8,024,863 | 4,188,337 |
* This was a combination of a cash grant and a guarantee of funding.
7.5
The approved applications ranged in value from $20,000 to $2,000,000. The most
common grants were feasibility studies for $50,000 or $100,000. The cash grants
ranged from $500,000 to $1,500,000, and the guarantees of funding were for $500,000
and $2,000,000.
7.6
NZTE was able to provide us with adequate data about approved applications,
including one approved application that had been subsequently cancelled. NZTE does
not keep a record of declined applications.16 This Part discusses the approved
applications. No issues were raised by the cancelled grant.
Cabinet criteria for the award of Strategic Investment Fund grants
7.7
Cabinet has stipulated that the SIF is available to support the implementation of
specific strategic investments that demonstrate significant benefits to New Zealand,
in terms of sustainable development (in economic as well as environmental and
social sustainability) through a substantial investment involving:
- new direct investment in New Zealand of indicatively $50 million over 5 years, and/or the creation of 200 new jobs in New Zealand over 5 years;
- development unlikely to occur in New Zealand without the Fund;
- complementing New Zealand’s areas of competitive advantage;
- no negative consequences domestically; and
- a high level of clear “spill-over” benefits.
7.8
The operating principles of the SIF are to:
- provide genuine additional benefits and gains, taking into account short-term and long-term direct and indirect costs and benefits, including potential impacts on both environmental and social sustainability, as well as economic impacts;
- refrain from crowding out private sector activity, and accelerate and complement the provision and development of private sector services;
- be based on partial funding, so there is both a partnership between central government and local government, education and research institutions, and the private sector, and commitment from participants;
- complement and co-ordinate with the activities of other government programmes;
- involve an explicit commitment from potential investors to proceed with implementation, subject to the outcome of any feasibility study with assistance contingent on meeting those commitments;
- be consistent with New Zealand’s international obligations; and
- be available to worthy domestic and/or foreign potential investments.
Were the Cabinet criteria met?
7.9
The SIF guidelines, discussed further below and prepared by Investment New
Zealand, did not clearly describe how the Cabinet criteria were to be interpreted.
Accordingly, it was difficult to establish whether the Cabinet criteria were met in
the grants we examined. For example, one of the Cabinet criteria requires a “high level of
clear spill-over” benefits. However, how this was to be assessed was not defined
in Investment New Zealand’s SIF guidelines. We identified some approved grants where
it was unclear whether the Cabinet criteria had been met, and some instances where in
our view the Cabinet criteria had clearly not been met.
| Recommendation 32 |
|---|
| We recommend that NZTE develop comprehensive guidance for how each of the Cabinet criteria is to be applied to all applications under the Strategic Investment Fund. |
7.10
Further, the supporting analysis in proposals or accompanying documents was poor.
For example, in a typical feasibility study application, the statement was made that–
The Company expects the project to create 150 new jobs immediately and a further 75-100 jobs to be created over 3-5 years.
There was neither supporting documentation nor any analysis of that statement.
7.11
Advice given to Ministers contained a number of assertions that were not supported
by any evidence or supporting documents. This was particularly evident for the
Cabinet criteria relating to new direct investment of $50 million over 5 years and/or
the creation of 200 new jobs over 5 years.
| Recommendation 33 |
|---|
| We recommend that NZTE ensure that applications for grants under the Strategic Investment Fund explicitly address all Cabinet criteria, and that all Cabinet criteria are met for every proposal. |
| Recommendation 34 |
|---|
| We recommend that NZTE ensure that, for all statements made in applications for Strategic Investment Fund grants, the appropriate supporting analysis is recorded, so that such statements can be verified. |
The application process
7.12
SIF applications come to Investment New Zealand from a variety of sources,
including other parts of NZTE, Ministers, MED, and other government agencies.
Firms are usually invited to apply for funding once Investment New Zealand has
spent time with the applicant to determine whether the project is likely to meet
the required criteria.
7.13
Proposals for feasibility studies, guarantees of funding and cash grants are developed
by NZTE in consultation with the grant applicant.
Feasibility studies
7.14
To be eligible for a feasibility study grant, the proposal must demonstrate:
- how the study will assess the commercial viability of new private sector investment;
- if the study proves that the project is commercially viable, how that project will be funded;
- that the proposed study would be unlikely to proceed without government support;
- what contributions and support will come from local government, education and research institutions, and the private sector;
- how any other existing government industry programmes will be involved in the programme;
- the capability and expertise of the people who will undertake the feasibility study;
- intended milestones and performance; and
- how the study will be monitored and evaluated.
7.15
Proposals are to be assessed on the basis of the benefits associated with the project
proceeding, and on the likely positive impact on industry, regional, and economic
development, including:
- the level of capital investment by the applicant;
- the indirect and direct employment that will be generated;
- the extent of industry development, including the introduction of new technology, new management practices and the establishment of strategic alliances;
- potential revenue generation and profitability; and
- how useful the findings might be for other projects and the wider industry.
7.16
Grants are available for 50% of the costs of the study, usually up to a maximum of
$100,000. The Chief Executive of Investment New Zealand approves such feasibility
study grants. Ministers can approve feasibility study grants of greater than $100,000.
Figure 15 below sets out the process followed when a feasibility study application is
received.
Figure 15
Approval process for Strategic Investment Fund feasibility
study grants
7.17
Once an application for a feasibility study has been approved, the applicant can start
work on the agreed project. There is no retrospective funding from the SIF for costs
incurred before the study was approved. Once the study has been completed, the
applicant sends an invoice to the New Zealand Director for Investment New Zealand,
who is required to certify the invoice before it is paid.
Guarantees of funding and cash grants
7.18
The SIF can provide guarantees of funding for significant projects that seek to
access funding from other Government programmes. Commitments of funding
from the SIF will be extinguished when funding from other government sources is
approved or provided. The SIF can provide cash grants for significant projects
where access to funding from other Government programmes is inappropriate or
does not fit with the project’s requirements.
7.19
Guarantees of funding and cash grants are not to exceed $1 million for each year or
an aggregate of $5 million for each project. All proposals for guarantees of funding
and cash grants are to be considered by an inter-agency group co-ordinated by
MED, and must be approved by the Minister for Industrial and Regional Development
and the Minister of Finance, together with other Ministers whose portfolios are
involved.
7.20
For both guarantees of funding and cash grants, the process followed by Investment
New Zealand is set out in Figure 16 on the next page.
Figure 16
Approval process for Strategic Investment Fund guarantees of
funding and cash grants
7.21
Once an application for a guarantee of funding or a cash grant has been approved,
a support agreement is signed. The support agreement typically includes:
- a brief description of the project being funded;
- performance milestones;
- general obligations and conduct requirements for the grant recipient; and
- termination arrangements.
Guidelines
7.22
Investment New Zealand has 3 pages of guidelines for the SIF (the SIF guidelines),
which set out:
- the principles of the SIF;
- Cabinet criteria for support from the SIF;
- feasibility study grant criteria and what information needs to be included in feasibility study grant proposals;
- information and the objectives for guarantees of funding; and
- information on cash grants.
7.23
The SIF guidelines do not describe with sufficient detail how an application is to be
processed or assessed; nor how Cabinet criteria are to be applied and how risk is to
be assessed. The SIF guidelines are inadequate, particularly given the size and potential
value of SIF grants.
7.24
After the completion of our audit, NZTE began work on an Investment New
Zealand Procedures Manual. This manual should significantly revise the SIF
guidelines.
| Recommendation 35 |
|---|
| We recommend that NZTE significantly revise the Strategic Investment Fund guidelines to ensure that they are comprehensive, particularly given the size and scale of the Fund. The guidelines should include: how applications are to be processed, assessment procedures, how risk is to be assessed, and how the Cabinet criteria are to be applied. |
Documentation
7.25
The standard of documentation held on files was poor. In many cases, the files
were missing the proposal for funding, invoices, and the support agreement,
which is the contract between NZTE and the grant recipient. The audit team had
difficulty tracing each grant awarded under the SIF through the approval process.
| Recommendation 36 |
|---|
| We recommend that NZTE develop guidance as to what material should be held on each Strategic Investment Fund grant file, and check these files periodically for completeness. |
NZTE’s approach to risk for the Strategic Investment Fund
7.26
In the Cabinet minute establishing the SIF, investors are required to have “a proven
track record as a good corporate citizen and in terms of business acumen”. However,
in the SIF guidelines, there was no guidance on how the risk profile of an applicant was
to be assessed.
7.27
The risk profiling of SIF applicants was poor. There were some copies of credit checks
on file. But there was little evidence in the files that the organisational structures,
financial stability, or governance arrangements of grant recipients had been
considered. This is of particular concern, given the size and scale of grants able to be
awarded under the SIF.
| Recommendation 37 |
|---|
| We recommend that NZTE develop a comprehensive approach to the assessment of risk for Strategic Investment Fund grant applicants. Such an assessment must ensure that decision-makers are fully aware of the risk profile of all grant applicants. |
Were assessment procedures satisfactory?
7.28
The assessment procedures were not satisfactory. For the feasibility studies,
guarantees of funding and cash grants, there was no framework for assessing
applications.
7.29
For feasibility studies, applications were assessed on a case-by-case basis, with a
proposal sent to the Chief Executive of Investment New Zealand for approval.
In many of the applications we looked at, criteria were not addressed in proposals. In one approved application, we noted that the project did not meet all of the criteria
for receipt of funding. In other applications, criteria, such as those around job
creation requirements, were not met.
| Recommendation 38 |
|---|
| We recommend that NZTE develop a framework by which all Strategic Investment Fund applications are assessed to ensure transparency and consistency in decision-making. |
7.30
From March 2003, for guarantees of funding and cash grants, applications were
presented to the relevant Ministers after receipt of support from the NZTE Board and
circulation of proposals to the Treasury, MED, and other relevant officials. For one
cash grant from 2002 that we examined, the Treasury and MED were not consulted
before the proposal went to the relevant Ministers.
7.31
In all cases, the funding was approved in accordance with delegated authority.
In one case, the relevant Ministers were asked to agree to a funding application outside
the Cabinet criteria, which they did.
| Recommendation 39 |
|---|
| We recommend that NZTE ensure that a thorough review of all Strategic Investment Fund applications is undertaken by decision-makers, and that the reasons behind any decisions are accurately recorded on the file for each grant. |
Monitoring of Strategic Investment Fund grants
7.32
After a grant is approved, recipients are required to sign a support agreement
with Investment New Zealand, setting out the terms and conditions of the grant.
Included within those terms and conditions for feasibility studies are requirements to:
- supply monthly reports to Investment New Zealand on how the feasibility study was progressing, and meet with Investment New Zealand on a regular basis to discuss the feasibility study; and
- provide copies of the draft and final feasibility study to Investment New Zealand for comment.
7.33
Different terms and conditions have been established for the cash grants and the
guarantees of funding. The monitoring arrangements refl ected the different terms and
conditions. These arrangements ranged from those similar to the requirements for
feasibility studies listed above, through to a requirement that the company reach job
creation milestones that were audited by independent auditors on an annual basis.
The support agreement included a repayment formula if the job creation milestones
were not met.
7.34
Investment New Zealand did not require grant recipients to complete a standard form
upon completion of the feasibility study, and did not keep a record of whether the
proposed project had actually been undertaken.
| Recommendation 40 |
|---|
| We recommend that NZTE require all Strategic Investment Fund grant recipients to provide reports on the outcome of the feasibility study, cash grant or guarantee of funding. This should be in a standard format, to provide appropriate data for monitoring and evaluation of the Fund. |
7.35
We saw little evidence in the files of monitoring activity. In only 4 of the 14 approved
feasibility study grants we looked at was there any form of reporting back from the
grant recipient on file. For cash grants and guarantees of funding:
- in one case there was the requirement for external auditors to provide NZTE with an independent report as to whether the recipient was reaching job creation milestones on an annual basis – this was occurring;
- for 2 cases no payments had yet been made to the companies, so there were no progress reports on file; and
- in 3 cases there were no monitoring reports on file despite significant amounts of money having been paid.
| Recommendation 41 |
|---|
| We recommend that NZTE apply appropriate sanctions for those Strategic Investment Fund grant recipients who do not provide NZTE with the required final report. This could include withholding funds until such a report is provided. |
7.36
Controls over the payment of SIF grants were inadequate. In some instances,
invoices for feasibility studies merely required payment of the total NZTE contribution
in a lump sum to the grant recipient. They did not contain information on who had
undertaken the work or a breakdown of how their charges had been calculated.
| Recommendation 42 |
|---|
| We recommend that NZTE improve the payment controls applied to grants awarded under the Strategic Investment Fund. |
13: Combinations of guarantees of funding and cash grants can also be given.
14: When first established, the SIF was called the Major Investment Fund. For the sake of clarity, we refer to it only as the Strategic Investment Fund.
15: The SIF was reviewed as part of the evaluation of the implementation of Investment New Zealand. This is discussed further in Part 8.
16: The one application that was recorded as declined was where the application had been accepted but the applicant no longer wanted to take up the grant.
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