Part 7: Results of Crown Research Institute audits

Central government: Results of the 2010/11 audits (Volume 1).

7.1
In this Part, we provide background information about Crown Research Institutes (CRIs) and recent changes to their accountability arrangements and performance framework. We also report on the results of our annual audits of CRIs for 2010/11 and our assessments of their management control environment and financial systems and controls.

Background

7.2
CRIs were established in 1992 under the Crown Research Institutes Act 1992. They are Crown entity companies with a primary purpose to carry out research for the benefit of New Zealand.

7.3
CRIs also provide a range of scientific and advisory services. They are expected to work with industry, firms, and other organisations to encourage and support the sharing of new technology and knowledge.

7.4
CRIs receive funding from different sources, including contestable and non-contestable government funds, contracts for services with local and central government agencies, and commercial work. They are expected to maintain their financial viability and their scientific capability.

7.5
There are eight CRIs, listed below with a brief description of their focus:

  • AgResearch Limited (AgResearch) – pastoral, agri-food, and agri-technology sectors;
  • Industrial Research Limited (IRL) – industrial, chemical, and pharmaceutical manufacturing, and engineering and medical technologies;
  • Institute of Environmental Science and Research Limited (ESR) – scientific and research services in public health, food safety, and forensics;
  • Institute of Geological and Nuclear Sciences Limited (GNS) – natural hazards, geologically based energy and minerals, industrial and environmental applications of nuclear science;
  • Landcare Research New Zealand Limited (Landcare Research) – terrestrial biodiversity and land resources, greenhouse gases, biosecurity, and pest management;
  • National Institute of Water and Atmospheric Research Limited (NIWA) – climate and atmosphere, oceans, and marine and freshwater fisheries, systems, and associated resources;
  • New Zealand Forest Research Institute Limited (Scion) – forestry, wood products and wood-derived materials, and other biomaterials; and
  • New Zealand Institute for Plant and Food Research Limited (Plant & Food Research) – value and productivity of the horticultural, crop, seafood, and food and beverage industries.

7.6
Many CRIs have set up subsidiary companies or joint ventures to develop and exploit intellectual property or carry out commercial activities. As at 30 June 2011, there were 35 public entities controlled or owned by CRIs.

7.7
For the year ended 30 June 2011, the eight CRIs reported combined total revenue of $685 million and total assets of just under $739 million. Together, they employed almost 4000 full-time equivalent staff.

7.8
Figure 7 shows the size of each CRI, with total staff, revenue, assets, and equity as at 30 June 2011.

Figure 7
Total staff, revenue, assets, and equity of each Crown Research Institute, as at 30 June 2011

CRI Total staff Revenue
$million		 Total assets
$million		 Total equity
$million
AgResearch 780 158.3 257.6 195.1
ESR 325 51.8 53.7 35.5
GNS 370 72.2 47.8 23.4
IRL 330 63.7 52.2 39.2
Landcare Research 415 63.8 50.9 27.0
NIWA 643 117.9 139.8 90.2
Plant & Food Research 810 113.7 99.0 68.2
Scion 313 43.7 37.7 25.9
Total 3986 685.1 738.7 504.5

Note: Total staff shows the number of full-time equivalent staff. Figures are for CRI Groups and are from the 2010/11 annual reports. Revenue figures include Crown and commercial revenue and other income (such as interest income).

Governance and accountability

7.9
The governance structure for all CRIs is the same: the Shareholding Ministers (the Minister of Finance and the Minister of Science and Innovation) appoint the board of directors (the Board), which is accountable to the Shareholding Ministers for the CRI's performance.

7.10
CRI boards are required to produce an annual statement of corporate intent, an annual report, and a half-yearly report, all of which must be presented to the House of Representatives by the responsible Minister (currently the Minister of Science and Innovation).

7.11
Since 2008/09, CRIs have been required to hold annual general meetings with shareholding Ministers or their representative, where the Board describes and accounts for its activities during the past year.

7.12
Since 1 February 2011, the Ministry of Science and Innovation (MSI) has been the primary monitoring department for all CRIs, with the Treasury's Crown Ownership Monitoring Unit (COMU) having a secondary role in monitoring CRIs' financial performance. Previously, COMU was the primary monitoring department for CRIs.

7.13
In our view, effective monitoring of the CRIs by MSI will enable better identification of, and responses to, risks and opportunities.

Recent changes in the sector

7.14
Science and innovation are important to New Zealand's economic growth. The two high-level (government priority) outcomes for this sector are growing the economy and building a healthier environment and society.21

7.15
Several initiatives and changes have been introduced in the past two to three years to increase the benefits of science and innovation for New Zealand. They include:

  • implementing a reform programme for CRIs as a result of the recommendations of the Crown Research Institute Taskforce (the Taskforce);
  • establishing MSI;22
  • initiatives to support business investment in research and development; and
  • a review of the high-value manufacturing and services sector, including a review of the role of IRL.23

Taskforce reforms

7.16
The Government established the Taskforce in October 2009 to assess how to get the best out of CRIs, including delivering on national priorities and responding better to the needs of research users, industry, and business.

7.17
In February 2010, the Taskforce published its report, How to enhance the value of New Zealand's investment in Crown Research Institutes.24 In that report, the Taskforce recommended several changes that were endorsed by the Government in March 2010 and are now being implemented. The Taskforce's recommendations included:

  • making the purpose and strategic role of each CRI more explicit;
  • direct funding to help CRIs deliver their core purpose; and
  • enhancing CRI governance and accountability.

More explicit purpose and role of CRIs

7.18
In November 2010, the Government released Statements of Core Purpose (SCPs) to provide greater clarity of the purpose and strategic role of each CRI. They set out the operating principles that describe the way a CRI must conduct itself, and the outcomes for each CRI to focus on in contributing to the well-being and prosperity of New Zealand (the SCP outcomes).25

7.19
SCPs are public documents that describe the unique purpose of each CRI. They set out which areas a CRI will lead to achieve the SCP outcomes, and the areas a CRI will contribute to that are led by another CRI to achieve its SCP outcomes.

7.20
SCPs are expected to be enduring and have a 10- to 15-year life span. They will be reflected in each CRI's annual statement of corporate intent.

Funding to achieve their core purpose

7.21
In response to the Taskforce's recommendations, the Government introduced Core Funding in the 2011 Budget, with a total of about $215 million for 2011/12 (for all eight CRIs). This represents about 28% of the $774 million Vote Science and Innovation. This Core Funding was mainly re-allocated from contestable funds previously awarded to CRIs, with some also from existing non-contestable funds (such as Capability Funding).

7.22
Figure 8 shows a breakdown of Core Funding for each CRI for 2011/12.26

Figure 8
Core Funding for each Crown Research Institute for 2011/12

Crown Research Institute Core Funding
$million
Plant & Food Research 43.1
NIWA 42.9
AgResearch 38.9
GNS 27.1
Landcare Research 24.2
Scion 17.7
IRL 13.5
ESR 7.7
Total 215.1

7.23
Core Funding is non-contestable annual funding that CRIs can expect to continue receiving. The funding is intended to support each CRI to fulfil its core purpose and to contribute to the outcomes set out in its SCP.

7.24
Each CRI's Board is responsible for deciding how to invest its Core Funding and is accountable for the CRI's success in fulfilling its core purpose, carrying out its strategy, and achieving its SCP outcomes.

7.25
Core Funding is not the only revenue source that a CRI is expected to use in achieving its SCP outcomes. Nor does each CRI have to spend all of its Core Funding internally – a CRI can invest in another research provider, such as another CRI or a university, to help in achieving its SCP outcomes.

7.26
Each CRI's reporting from 2011/12 will have a new focus of reporting the CRI's impacts and progress towards its SCP outcomes.

7.27
Monitoring will also change, to cover financial viability as well as a range of science and innovation indicators.

A new performance framework

7.28
The statements of corporate intent for 2011-2016 introduced changes in response to the Taskforce's report, including:

  • an outline of the CRI's five-year strategy and how that strategy will contribute to the CRI's SCP outcomes; and
  • a performance framework for measuring and assessing progress.

7.29
The new performance framework sets out what resources a CRI will use, the activities it will carry out (outputs), the difference it will make (impacts), and its contribution to goals for New Zealand (its and other CRIs' SCP outcomes).27

7.30
The new CRI performance framework is similar to that for government departments under the Public Finance Act 1989 (PFA) and for Crown entities under the Crown Entities Act 2004 (CEA), to report on outputs, impacts, and outcomes.

7.31
There are statutory requirements under the PFA and the CEA for the Auditor-General to assess whether the statement of service performance in the annual reports of government departments and Crown entities (excluding school boards of trustees) is accurate and fairly represents the entity's service performance for the year.

7.32
CRIs are Crown entities, but are exempt from the provisions of the CEA that require the Auditor-General to assess service performance information. Instead, under the Crown Research Institutes Act, CRIs are required to report their performance against their statement of corporate intent. During the annual audit, our appointed auditors will check that CRIs meet this statutory obligation.

7.33
In 2011/12 and thereafter, CRIs will be reporting more performance information and reporting on their progress towards their SCP outcomes.

7.34
We will continue to check that a CRI meets its statutory obligations of reporting against the targets in its statement of corporate intent, including, now, its progress towards achieving its SCP outcomes.

7.35
MSI will co-ordinate in-depth reviews of each CRI by an independent panel of New Zealand and international experts at least once every five years. The panel will assess and report on the CRI's contribution towards achieving its outcomes and company performance.28

Audit results for 2010/11

7.36
We issued standard unmodified audit opinions for all eight CRIs for 2010/11.

7.37
As part of the annual audits, our appointed auditors assess and grade the management control environment of CRIs and their financial information systems and controls. (As noted earlier, we do not assess the service performance of CRIs.) We report our assessments of each CRI to its management and board, MSI, the Minister of Science and Innovation, and the Treasury. The grading scale is show in Figure 2 in Part 6.

7.38
Figure 9 shows a summary of the grades for 2010/11. Our appointed auditors' assessments for 2010/11 continue to show strong performance by CRIs.

Figure 9
Summary of Crown Research Institutes' grades for 2010/11


 Management control
environment		 Financial information
systems and controls
Very good 8 4
Good 0 4
Needs improvement 0 0
Poor 0 0

Management control environment

7.39
We graded all eight CRIs' management control environments as "Very good" in 2010/11, consistent with 2009/10. This means that our appointed auditors did not recommend any improvements. This is particularly commendable because our appointed auditors can identify different matters for improvement during the course of an audit which, along with a range of other factors, can result in grades fluctuating from year to year.

7.40
Figure 10 shows the grades for the management control environment since 2006/07.

Figure 10
Grades for Crown Research Institutes' management control environment, 2006/07 to 2010/11

Figure 10 - Grades for Crown Research Institutes' management control environment, 2006/07 to 2010/11.

7.41
The grades for CRIs' management control environments since 2006/07 have all been either "Very good" or "Good", with a steady improvement to 100% "Very good". We congratulate the sector on this excellent result.

Financial information systems

7.42
In 2010/11, all eight CRIs were graded as having either "Very good" or "Good" financial information systems and controls. A "Very good" grade means that the appointed auditors did not recommend any improvements. A "Good" grade indicates that we do not have any significant concerns but that the appointed auditor recommended improvements that would be beneficial.

7.43
The grades for CRIs' financial systems and controls since 2006/07 have all been either "Very good" or "Good". Four of the eight CRIs were graded as "Very good" in 2010/11 for their financial information systems and controls compared with one in 2009/10. The three CRIs that improved their grades from "Good" in 2009/10 to "Very good" in 2010/11 all responded fully to our 2009/10 recommendations for improvement.

7.44
The other four CRIs, assessed as having "Good" financial information systems and controls in 2010/11, were also all assessed as "Good" in 2009/10. These CRIs responded in part to our recommendations for improvement. The grades and responses to our recommendations for improvement show that CRIs have continued to maintain, and if necessary to improve, their systems and controls.

7.45
Figure 11 shows the grades for CRIs' financial information systems and controls since 2006/07.

Figure 11
Grades for Crown Research Institutes' financial information systems and controls, 2006/07 to 2010/11

Figure 11 - Grades for Crown Research Institutes' financial information systems and controls, 2006/07 to 2010/11.

7.46
We are very pleased at the significant increase in the number of "Very good" grades this year and congratulate the sector on this improvement.

Focus for 2011/12 audits

7.47
As discussed above, changes are being implemented that will affect the performance and reporting expectations for CRIs. In 2011/12, CRIs will, for the first time, report on their progress towards achieving their SCP outcomes under the performance framework set out in their 2011-2016 statements of corporate intent.

7.48
Next year, we intend to report on the implementation of these changes (as well as reporting our audit findings).

21: Information supporting the Estimates 2011/12, B.5A Vol. 2, page 109.

22: MSI began operation on 1 February 2011, after the integration of the functions of the former Ministry of Research, Science and Technology and Foundation for Research, Science and Technology.

23: Powering Innovation: Improving access to and uptake of R&D in the High Value Manufacturing and Services Sector. The 2011 report was commissioned by MSI. The report's recommendations include transforming Industrial Research Limited into an advanced technology institute.

24: Available on MSI's website (www.msi.govt.nz).

25: The Statements of Core Purpose are available on MSI's website (www.msi.govt.nz).

26: Response to 2011/12 Estimates Vote Science and Innovation, Post hearing questions, Question No. 122.

27: Ministry of Research, Science and Technology (2010), Guidance for CRI Statements of Corporate Intent, Wellington.

28: Response to 2011/12 Estimates Vote Science and Innovation, Post hearing questions, Question No. 130.

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