Part 3: Distributing funds

Management of the West Coast Economic Development Funding Package.

In this Part, we discuss:

A key role of the Trust is to assess applications for funding from external parties. If the Trust approves an application, the funding allocated is referred to as a “distribution”.

The Trust makes 3 main types of distributions:

  • business investment (providing finance and development capital);
  • regional development projects;
  • and community funding.

The Trust must distribute all funds in keeping with both the objects of the Trust (see paragraph 1.5), and the process set out in the Deed.

Distributions can be made in any form, and the Trustees have stated that they are prepared to consider applications for:

  • lending money (including suspensory loans);
  • subscribing for shares or other equity in limited liability companies; and
  • guaranteeing or acting as a surety for a defined amount of indebtedness or exposure.

Trustees have also stated that they will consider applications for grants, provided the application does not have the potential to affect the charitable status of the Trust. They will not give grants for feasibility, investigation, marketing or planning studies to businesses, organisations, partnerships, or individuals operating for profit.

Figure 5 sets out the value of the funds distributed by the Trust, up to 31 March 2005.

Figure 5
Funds distributed by the West Coast Development Trust, from 2000-01 to 2004-05

Year Business distributions Regional development projects and community funding Total distributed
2000-01 0 0 0
2001-02 $797,000 0 $797,000
2002-03 $2,518,000 $417,000 $2,935,000
2003-04 $7,248,000 $828,000 $8,076,000
2004-05 $11,515,000 $3,762,000 $15,277,000
Totals $22,078,000 $5,007,000 $27,085,000

The amount of money likely to be available for distributing each year is projected to be about $8-10 million. The Deed allows the Trust to distribute its net income and, once this has been distributed or set aside for distribution, the Trust may then also allocate up to 5% of the initial funding package in any one year.

The Trust has not distributed more than 5% of the initial funding package in any financial year, and its surpluses have more than covered the funds it has distributed. The Trust has more than preserved the value of the initial funding package. Accordingly, the Trust has met this aspect of the Deed.

The distribution process

Applications for distributions must pass through an assessment process that involves Trust staff, the Advisory Body (for applications for more than $100,000) and the Trustees who, when considering an application, must consider:

  • appropriate strategic development plans for the West Coast; and
  • whether other sources of funding or support are available, including assistance provided through industry or regional development policies and programmes of local authorities or central government.

The role of the Advisory Body is to give expert advice to the Trust on proposed distributions, analyse proposals, and recommend to Trustees that an application be declined or approved.

The Advisory Body can seek further information about an application, and engage external advisors to help in the review of applications, if required. It can recommend an application be accepted only if, in its opinion, the application promotes or satisfies the objects of the Trust, and if, in its opinion, the application aims to achieve self-sufficiency and sustainability.

The Trustees can either approve or decline the recommendation made by the Advisory Body. The Trustees may not approve an application for more than $100,000 without a recommendation to approve it from the Advisory Body. The Trustees may refer an application back to the Advisory Body for further consideration, but may not refer an application back a third time, if the Advisory Body has twice recommended that it be declined.

In deciding on an application, the Trustees may also consider the objectives, roles, and activities of any other organisation involved in economic development activities in the West Coast region, and any other matters they believe are relevant. Figure 6 sets out the distribution application process.

Figure 6
Process for considering distribution applications

Figure 6.

The process allows the Trustees to deal with applications for amounts less than $100,000, without consideration by the Advisory Body. This has not always been the case, and is the result of an amendment to the Deed. The original Deed made no provision for the Trustees to approve applications without a recommendation from the Advisory Body.

Managing distributions

We expected that the Trust would have a plan or strategy for distributing funds.

The Trust’s Strategic Plan (see paragraphs 2.65-2.67) is supported by a Business Plan. The Business Plan provides a framework for implementing the responsibilities in the Deed of Trust, and the goals set in the Strategic Plan. In addition, the Trust has policies for making distributions and granting community funding.

Systems for processing applications for business investment

We expected that the Trust would have a set of criteria to assess applications.

The Trust uses “client” files to hold information about funding applications. We reviewed the client files for all the applications for business investment, and the applications for regional development projects and community funding for more than $50,000.

The Trust uses a checklist to process applications. The checklist prompts staff to assess applications against the objects of the Trust, and check whether alternative funding sources are available. The checklist also takes the application through a risk assessment process.

When preparing an application for consideration by the Advisory Body and Trustees, Trust staff put together an Executive Summary, which includes reference to how, in the opinion of Trust staff, the initiative in the application: meets the objects of the Trust, has the potential to be self-sufficient and sustainable; and is for an amount that does not exceed 90% of the cost of the project.

The Advisory Body and the Trustees use the information provided in Executive Summaries when deciding whether to approve or decline applications. Business Plans to support the application and other information are also provided to the Advisory Body.

Systems for processing applications for community funding

The Trust is now receiving more applications for funding from “not for profit” community groups, trusts, and incorporated societies. These applications are for “community funding”, and the Trust may give funds as a grant or donation, a sponsorship arrangement, a suspensory loan, or a loan.

Until recently, the Trust processed applications for community funding using the same forms and criteria as applications for business investment. This arrangement was not ideal, as parts of the process are not relevant for community funding applications.

The Trust recognised the need to put in place better systems for community funding, and employed a Community Analyst to oversee this. The Community Analyst has completed a review of the files for community funding, and found areas where improvements could be made. New application forms for community funding have also been created.

The Trust is considering changing the way it manages community funding. Whatever changes the Trust makes, it must still ensure that distributions are made in keeping with the objects of the Trust.

Deciding on applications for business investment

We expected that the distribution of funds would comply with the Deed, and that the Trust would consider applications consistently.

The wording of the objects of the Trust in the Deed is open to interpretation. Differences in interpretation have led to significant discussion and debate at Trustee and Advisory Body meetings.

As part of our audit, we discussed the interpretation of the infrastructure clause in the Deed with Trustees, Advisory Body members, and Trust staff. Different interpretations were offered, and many people considered that this is an unclear area.

The Trust prepared a draft policy on interpreting the infrastructure clause in the Deed, but did not adopt the policy. Instead, the Trust resolved to consider applications that may deal with infrastructure on a case-by-case basis. We acknowledge that both the Trustees and Advisory Body members have been mindful of the need to comply with the infrastructure clause.

The Trust has recently sought some legal advice on the interpretation of the infrastructure clause. The advice seeks to define the term “infrastructure”, but does not consider the clause as a whole – that is, it does not seek to define the aspects of the infrastructure clause in relation to what is “normally the responsibility of the local authorities and central government”.

Recommendation 5
We recommend that the West Coast Development Trust seek further legal advice on, or clarify with the Settlor, the interpretation of the infrastructure clause of the Deed of Trust.

Deciding on applications for community funding

We expected that distributions for community funding would comply with the Deed.

The Trust was set up as a charitable Trust, to benefit present and future inhabitants of the West Coast region. The Deed states that the Trust Fund must be applied and used exclusively to promote sustainable employment opportunities, and to generate sustainable economic benefits, and is not to be used to support infrastructure projects that are normally the responsibility of local authorities or central government.

Some people we spoke to considered that the Trust could give funding to community groups and for community facilities because giving out this type of funding made the community a more desirable place to live. This then leads to population retention and growth – therefore generating economic benefits. Others thought that there was scope for the Trust to be involved in community projects for the good of the community. Conversely, another person thought that getting involved in community funding was a breach of the Deed.

These different perceptions and interpretations of the objects of the Trust make it difficult for Advisory Body members and Trustees to determine whether approving an application for community funding will promote sustainable employment opportunities and generate sustainable economic benefits for the West Coast region.

Some Advisory Body members we spoke to said that the Advisory Body has struggled to deal with community funding applications, because the role of the Advisory Body is to provide commercial judgements about applications – not whether one community group is more worthy of funding than another.

Some Advisory Body members also stated that some applications for community funding pushed the limits of the Deed. We note that, for the largest community funding distribution made by the Trust (about $1.8 million for a literacy project), the Advisory Body did not comment on whether it thought the application met the objects of the Trust; rather, it recognised that the Trustees had determined that the proposed project met the objects of the Trust. The Deed requires that the Advisory Body give an opinion on whether the objects of the Trust are met.

In another example, a charitable organisation applied for a grant. No employment was to be directly promoted, and there were no direct economic benefits to the West Coast region. The Trustees argued that there were significant indirect community benefits, and therefore the application met the objects of the Trust.

The Advisory Body twice recommended that the application be declined. The Trustees disagreed and, using their ability to approve applications that do not exceed $100,000 without a recommendation from the Advisory Body, approved a grant of $100,000.

In our view, the Trust is in a position to make a considerable contribution to the well-being of the community through funding community projects, but it needs to ensure that at all times projects meet the objects of the Trust.

It could be argued that almost any application for community funding could promote sustainable employment opportunities, or generate sustainable economic benefits, because the funding could make the West Coast region more desirable to existing or potential inhabitants. It is unclear whether this was the intention of the funding package. We consider that this interpretation of the Deed should be clarified with the Settlor.

Recommendation 6
We recommend that the West Coast Development Trust clarify with the Settlor the interpretation of the Deed of Trust, and determine whether, and under what circumstances, community funding distributions meet the objects of the Trust.

Distributions of more than $100,000

The Deed requires that the Advisory Body consider all applications for more than $100,000. We expected that the Trust would comply with this requirement of the Deed.

The Trustees have directly approved an application for sponsorship of more than $100,000, without consideration or recommendation by the Advisory Body. The Trustees approved this application on the basis that it was for “marketing and promotion”, presumably because it was regarded as an administrative expense rather than a distribution, and therefore did not require Advisory Body consideration.

In our view, funds paid out in response to applications for sponsorship from external parties are distributions. While a sponsorship agreement may result in advertising for the Trust, it does not result in direct provision of goods or services to the Trust. Rather, funding is provided to an external party, and the external party is the primary beneficiary of the funding.

In addition, the Trust’s guidance and application forms for community funding list “sponsorship” as a form of distribution that can be sought from the Trust.

The Trust has told us that it treats some applications for sponsorship as distributions, and others as marketing and promotions. This is inconsistent. All distributions, including sponsorship, must meet the objects of the Trust, and be administered in keeping with the process set out in the Deed. Applications for more than $100,000 must be referred to the Advisory Body.

To determine whether a matter may properly be regarded as a distribution (rather than marketing or promotions), the Trustees should consider whether:

  • it was initiated by a third party;
  • the use of the money primarily benefited the third party;
  • it involved a formal written application to the Trustees;
  • it was assessed against the Trust’s usual criteria for distributions;
  • the money was paid to a particular person or used for a particular purpose;
  • the project was wholly undertaken and managed by someone other than the Trustees and employees of the Trust; and
  • the matter is something normally regarded as a distribution.
Recommendation 7
We recommend that the West Coast Development Trust treat sponsorship as a distribution.

Distributions of less than $100,000

The original Deed did not provide for the Trustees to distribute funds without a recommendation from the Advisory Body. The Trust sought a change to the Deed that would allow the Trustees to approve distributions for less than $100,000 without consideration by the Advisory Body. The Settlor agreed to this change to the Deed.

In agreeing to this change, the Settlor communicated to the Trust that his preference was that the Deed would also be amended to impose limits on the amount of money that could be approved directly by the Trustees each year. This has been reflected in the Deed. Each year, the Trustees cannot distribute, without consideration by the Advisory Body, more than the higher of:

  • 25% of the Trust’s annual income; or
  • $1 million.

The Settlor also made clear that distributions made by the Trustees without consideration by the Advisory Body must be consistent with the objects of the Trust of promoting sustainable employment and generating economic benefits for the region.

The Settlor has advised the Trust that he considers that the role of the Advisory Body in making recommendations to the Trustees is a critical element of the checks and balances put in place to ensure that the Trust is effective in achieving its purpose. We consider that there is value in the Trustees seeking the opinion of the Advisory Body where there is uncertainty whether the objects of the Trust will be met, regardless of the amount applied for.

Observance of minimum distribution amounts

The Deed allows the Trustees to set a minimum distribution amount. At the time of our audit, this was set at $20,000 for any application (in February 2006, the minimum distribution amount was reduced to $5,000). The application forms for community funding state that those applications must be for a minimum of $5,000.

Some distributions of less than $20,000 for business investments, and less than $5,000 for community funding, have been made. Inconsistent application of the policy for minimum distribution amounts leads to inequity in distributions – some applicants who need a smaller amount of funding will not apply (based on the policy), while others may apply and be approved.

Recommendation 8
We recommend that the West Coast Development Trust consistently apply its policy on minimum distribution amounts. If the West Coast Development Trust considers that exceptions to the policy are appropriate, it needs to specifically state in its application and guidance documents that exceptions may be considered.

Setting interest rates, loan conditions, and key performance indicators

If the Advisory Body recommends that an application be approved, it recommends to Trustees the amount of the distribution, and the terms and conditions of the distribution. While Trust staff may suggest an appropriate interest rate for loans, the responsibility (for distributions of more than $100,000) for setting interest rates or providing guidance to Trustees on the rate of interest to be charged on loans lies with the Advisory Body.

The Trust promotes that it is flexible in terms and rates according to business situations. For instance, the Trust may make concessions to ensure solvency while a business becomes established, and to support cash flow and seasonal variations. We were told that the Advisory Body and the Trustees are careful to ensure that the terms and conditions of funding support the self-sufficiency and sustainability of the business, but also that they do not create private benefit or upset competitive businesses.

The Advisory Body, when setting interest rates or conditions on a distribution, considers:

  • the applicant’s ability to pay;
  • the affect on employment resulting from the distribution in a particular district;
  • how the Trust can support a fledgling industry or business;
  • and the level of security offered.

We were told that the interest rates set reflected the risk of the investment – higher risk meant a higher interest rate. This claim was inconsistent with our finding that 2 high-risk loans for large amounts of money were given interest-free.

Until recently, the Trust had no formal policy for setting interest rates on loans or for setting loan terms and conditions. The Trust now has a draft Credit Policy Manual, which states that pricing for funding should be a balance between the risk involved in the project, the desire to provide the project with the best chance of success, and the Trust’s requirements to obtain a suitable return on its overall investment.

The draft Credit Policy Manual also states that, when setting an interest rate, the Trust should take into account:

  • the overall risk profile of the applicant;
  • the overall quality of the security provided;
  • comparable interest rates in the wider market;
  • the ability of the project to meet interest costs; and
  • the ongoing cost of monitoring and managing the investment.

While the draft Credit Policy Manual does not set out a fixed process for setting interest rates, it does provide more guidance than was previously available. The draft Credit Policy Manual also provides for interest-free, interest-only, and interest-concession periods to be given, and provides some guidance on when these may be used.

The draft Credit Policy Manual states that approved applications are expected to include suitable KPIs, which are to be agreed by the recipient and monitored by Trust staff.

Once the draft Credit Policy Manual is adopted, using it to establish loan conditions will be an improvement on the previous informal process.

File management

We expected that the Trust would maintain comprehensive files on applications that it has approved or declined. These files should include information on how each decision was made.

Many of the client files we looked at did not include the original application; nor did they record the application date. The checklist used by Trust staff to process the application was often not included in the file. In addition, information relating to the monitoring of distributed funds was often absent from the files.

Frequently, the minutes recording Advisory Body and Trustee decisions were not in the files. However, staff of the Trust were able to provide this information when we asked for it.

The draft Credit Policy Manual describes the information that should be held in client files.

Recommendation 9
We recommend that the West Coast Development Trust include all relevant information about funding applications and distributions in its client files.

Monitoring distributed funds

Trust distributions are usually subject to conditions, such as providing the Trust with regular financial reports, and updates on progress towards achieving KPIs. Staff of the Trust (Relationship Managers) are responsible for collecting the required monitoring information on funding recipients, making sure that loan repayments are being made, and carrying out an annual review of each distribution.

We expected that each distribution would be subject to ongoing monitoring.

In some instances, funding recipients were not complying with the conditions of their loan agreements (for example, quarterly financial reports were not being submitted). Trust staff acknowledged that, with staff turnover and heavy workloads, they had not been able to monitor whether all required reporting was kept up to date.

The Trust has appointed more Relationship Managers to handle the increasing number of distributions that need to be monitored. The draft Credit Policy Manual also deals with maintaining contact with funding recipients, the information that should be included on file, and what should be done as part of an annual review of the distribution.

The draft Credit Policy Manual states that an annual review of the distribution should cover:

  • the general performance of the borrower or management during the period under review (including adherence to funding arrangements);
  • an explanation of major balance sheet and trading results movement (including as appropriate, ratios, tax situation, and distributions);
  • the prospects for the coming year;
  • a security review;
  • collateral support;
  • for companies, comments on major transactions, and compliance with a solvency test;
  • any other matter which will help assess the financial health of the entity under review; and
  • adherence to loan covenants and conditions.

Where the funding relied on KPIs being achieved, there was good monitoring and reporting.

Monthly reports on distributions were made to Trustees. These reports included commentary on whether conditions of loans have been met, and recent activities with each business.

Some Trustees we spoke to said they were satisfied with the amount and quality of monitoring information they received from Trust staff on distributions. Another said that, if Trustees were not happy with the amount of information provided, they would ask for more. Some Trustees also considered that the monitoring information provided had improved in recent months.

We consider that the Trust’s arrangements for monitoring distributions have not been ideal. The Trust is strengthening its monitoring arrangements through its draft Credit Policy Manual, and reviewing its regular reporting to the Trustees.

Many of the businesses in which the Trust invests are high-risk (for example, they might have been declined funding by other lending institutions). The conditions set in loan agreements (such as a requirement to provide quarterly financial reports, or to employ a mentor) have been placed there by the Advisory Body to ensure that the Trust will be alerted if problems start to occur. This also ensures that the businesses receiving funding benefit from receiving guidance and having up-to-date information with which to make business decisions.

Recommendation 10
We recommend that the West Coast Development Trust increase its monitoring of successful funding applicants to ensure that the terms and conditions of funding agreements are met.

Ease of applying to the West Coast Development Trust

We expected that the Trust would be accessible to the community, and that good quality advice would be provided to potential applicants. We also expected that information about Trust services and application forms would be easy to understand and use.

The Trust has contracted independent market research surveys of applicants and the wider community. The surveys of approved and declined applicants aim to determine customer satisfaction with the application process, and identify opportunities for improvement. The surveys of opinion leaders and the wider community aim to establish awareness of and attitudes towards the Trust.

Surveyed applicants generally considered that application forms were clear and easy to use. Mostly positive comments were received about being able to contact Trust staff, and receiving clear explanations.

However, most applicants surveyed reported that they found applying to the Trust to be difficult and costly. Some people we spoke to during the audit also had the perception that applying for funding through the Trust was too difficult, took too long, and the terms and conditions offered were more onerous than those offered by banks.

The Trust concedes that this may be true in some cases, but notes that, while it is not trying to compete with banks, it can offer greater flexibility with interest rates and repayments, equity investments, governance, mentoring, and advice. In addition, because of the potentially high-risk nature of some of the distributions made by the Trust, it considers that significant research into applications is required.

The Trust advises applicants that 2 months is a realistic timeframe to find out if their application has been approved or declined. During this time, Trust staff carry out the research and credit checks required to prepare an Executive Summary, and the Advisory Body and the Trustees assess applications at their monthly meetings. Approving or declining an application can be much longer when more information is requested, or for large and complex applications.

Reducing the time it takes to process smaller applications was one reason for the Trust requesting the amendment to the Deed that allows Trustees to approve applications for less than $100,000 without consideration by the Advisory Body.

We consider that independent market research surveys are a useful way for the Trust to receive information from applicants and the wider community on how the Trust is operating. This tool has been well used by the Trust.

Actively seeking applications

We expected that the Trust would actively seek opportunities for the community to access the Trust’s funds.

Some people we interviewed as part of the audit considered that the Trust could be more active in attracting businesses to expand using Trust funding, or encouraging the setting up of new businesses.

Trust staff have met with local accountants to encourage them to bring new business to the Trust through their clients. The Trust is considering preparing a template for applicants to use when preparing Business Plans to accompany their applications.

The Trust has written an Enterprise Development Strategic Plan 2005-08, which focuses on identifying current and potential businesses, assessing their capabilities, and providing advice to help them grow – to benefit the businesses and the region.

We consider that, now that the Trust has more relationship management staff, it is better placed to actively encourage business applications.

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