Part 1: Introduction

Department of Internal Affairs: Administration of two grant schemes.

1.1
In this Part, we set out:

What is a grant?

1.2
A grant is a funding arrangement that is designed to support an organisation or activity rather than to buy goods or services. Typically, grants are an appropriate arrangement to support a "public good" activity, organisation, or project where the organisation involved is non-commercial.

1.3
The provision of a grant is one means by which a public entity can support a community organisation or activity. A grant may have significant conditions attached to the ongoing payment of funds (a conditional grant), or only a few and relatively simple conditions (a limited conditional grant). Grants to community groups are usually limited conditional grants.

Why we carried out this performance audit

1.4
This is the fourth in our series of performance audits of public entities that are administering grants.1

1.5
The Department aims to contribute to building strong, sustainable communities, hapū, and iwi. To help achieve this aim, the Department provides mainly limited conditional grants to organisations within communities. This is because, according to the Department's website:

Strong, sustainable communities, hapū and iwi have the potential to more effectively find solutions to local problems and achieve their own well-being.

1.6
We carried out a performance audit to determine whether the Department's administration of grants is consistent with the principles and expectations that we outlined in our 2008 good practice guide Public sector purchases, grants, and gifts: Managing funding arrangements with external parties.

1.7
We examined the Department's administration of two grant schemes: the Lottery Grants scheme, funded from the profits of Lotto and Instant Kiwi, and the Community Organisation Grants Scheme (COGS), funded directly by the Government. Administration is carried out largely by the Department's advisory and support staff (about 100 people).

1.8
Funding for the Lottery Grants scheme is distributed through 19 funding streams, or Funds.2 There are national, regional, and specialist committees appointed to consider applications to the different Funds (see Figure 1). The Minister of Internal Affairs appoints the members of these committees.

Figure 1
How funds in the Lottery Grants scheme are distributed through committees and statutory bodies

Diagram of the committees and statutory bodies in the Lotteries Grants scheme.

Note: The distribution of funds to statutory bodies is shown for completeness but was not part of our audit.

1.9
The committee structure for COGS is less complex. Local communities elect the members of their COGS committees (called Local Distribution Committees), which are governed by elected representatives on the National COGS Committee.

1.10
Decision-making committees for both schemes decide which applicants will receive a grant and allocate funding to grant recipients. These decision-making committees are known as "distribution committees". In this report, we usually refer to Lottery Grants committees and COGS Local Distribution Committees as "the committees".

1.11
The Department's administration of grants involves:

Processing, assessment and monitoring of grant applications, provision of administration, training and support services to boards on grant distribution committees, advising Ministers on appointments to boards, committees and trusts.3

1.12
Many community organisations, such as clubs, charities, cultural bodies, and small incorporated societies, depend heavily on these grants for operational funding or special projects.

Scale and cost of grant administration

1.13
The size and number of grants administered by the Department under these two grant schemes is significant (see Figure 2). During 2009/10, the Department processed 10,912 applications and processed payments for 7643 grants.

1.14
Appendix 1 includes more information about the two grant schemes.

Figure 2
Scale and costs of the Lottery Grants scheme and Community Organisation Grants Scheme in 2009/10

  Lottery Grants scheme COGS
Total value of grants approved $102,637,000(1) $13,873,000(3)
Administration costs $10,889,000(5) $1,428,000(4)
Number of applications 5800(1) 5112(2)
Number of grants approved 3500(1) 4143(2)
Average value of grant $29,325 $3,350
Administration costs as a percentage of grants approved 10.6% 10.3%
Number of decision-making committees 19 (1 national, 11 regional, 7 Fund committees*) 37 (local**)

* The Lottery Significant Projects Fund is not currently operational.
** The National COGS Committee is not a distribution committee.
Sources:
(1) Draft 2009/10 Lottery Grants Board Annual Report.
(2) Department of Internal Affairs Annual Report 2009-10, page 42.
(3) New Zealand Treasury (2009), The Estimates of Appropriations for the Government of New Zealand for the year ending 30 June 2010, page 47.
(4) Department of Internal Affairs communication to the Office of the Auditor-General.
(5) 2009/10 Lottery Grants Board Memorandum of Understanding.

1.15
The Lottery Grants Board governs, and provides the funding that is distributed through, the Lottery Grants scheme. The Secretary for Internal Affairs is a trustee of this money. The Department recovers the costs of its administration of these grants from the Lottery Grants Board. In 2009/10, these administration costs were $10,889 million, or 10.6% of the value of the grants that were distributed.

1.16
The Department receives funding for COGS directly from the Government. This includes funding for administering the scheme. The administration funding is part of a wider grants administration appropriation that the Department receives. The Department has estimated that in 2009/10 it spent about $1.4 million of this wider appropriation on administering COGS. This estimate includes only direct costs, so the actual cost is higher.

Decision-making committees and the Department of Internal Affairs

1.17
The Department's Local Government and Community Branch administers the two grants schemes. Staff in this branch work in the national office in Wellington and in 16 regional offices. The Department's staff do not determine which applicants will receive a grant. Instead, they are responsible for the organisational policy and business planning for systems and criteria for considering applications.

1.18
The Department provides support and advice to the committees (see paragraph 1.11).

1.19
The Minister of Internal Affairs sets out the purpose of each Fund within the Lottery Grants scheme. The Lottery Grants Board sets out the overall funding objectives and policy for the scheme. Priorities specific to each Fund are set by the individual Fund committees. A Memorandum of Understanding between the Minister of Internal Affairs and the Department (as Secretariat to the Lottery Grants Board) sets out the relationship and responsibilities of the parties.

1.20
A separate Memorandum of Understanding between the Minister of the Community and Voluntary Sector and the National COGS Committee sets out:

  • the governing principles of COGS;
  • the process COGS committees follow to give effect to these governing principles; and
  • the respective roles and responsibilities of the parties and the relationship and boundaries between them.

1.21
We visited four of the Department's regional offices and interviewed staff at the Department's national office. We also spoke with representatives of the committees for both schemes, with members of the National COGS Committee, and with the Lottery Grants Board.

Our expectations about balancing accountability, costs, and benefits

1.22
For effective and efficient administration of grants, a public entity needs to balance holding grant recipients accountable against the costs and benefits of doing so, for both the recipient and the administrator. This can be challenging, particularly when there are large numbers of grants involving relatively small amounts of funding made to a wide range of organisations. Some of the recipient organisations also have limited infrastructure. It is important to have accountability requirements that are reasonable given the size of the grant and the capability of the organisation.

1.23
Getting the balance right requires good processes and judgement, and an understanding of the environments in which the public entity and grant recipients operate.

1.24
We expected the Department's administration of grants to be consistent with the principles and expectations outlined in our 2008 good practice guide. Appendix 2 sets out those principles and grant-related expectations from our guide.

1.25
Our expectations relate to four stages in the process of making a grant. These are:

  • planning – the design of the grant scheme and the alignment of the scheme's objectives with the relevant policy or legislation;
  • selection – the systematic process for considering grant applications and the conditions set to manage risk and ensure suitable accountability (in this case, supporting the committees in their decision-making);
  • monitoring – payment, reporting, and monitoring arrangements proportional to the risk, scale, and nature of the relationship, which enable the Department to assess the performance of the grant recipient; and
  • review – the reporting of achievements against the purpose of a grant and ongoing improvement to grant processes.

Scope of our audit

1.26
We did not examine the decision-making of the committees to assess whether decisions had been made correctly. However, we did review whether the Department provided the committee members with enough guidance and effective systems to help them follow due process when making their decisions.

1.27
We did not examine the Department's systems for administering the Minister's Discretionary Fund because it involves relatively small amounts of money and because the Minister uses his discretion when allocating the fund.

1: The reports about our previous audits of three grant funding bodies (Te Puni Kōkiri, Foundation for Research, Science and Technology, and New Zealand Trade and Enterprise) are available on our website, www.oag.govt.nz.

2: The 19 Funds do not include the Lottery Significant Projects Fund because this Fund is currently not operational.

3: New Zealand Treasury (2010), Information Supporting the Estimates of Appropriations for the Government of New Zealand for the year ending 30 June 2011, Wellington, page 50.

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