AgResearch Future Footprint Project: our targeted review of the updated business case

As a follow-up to our 2015 letter, which included the results of our review of the AgResearch Future Footprint Project business case, we have now reviewed the updated business case.

7 March 2017

The Future Footprint Project

AgResearch Limited (AgResearch) is New Zealand’s largest Crown Research Institute (CRI) by revenue. The company’s purpose is to enhance the value, productivity, and profitability of New Zealand’s pastoral, agri-food, and agri-technology sector value chains to contribute to economic growth and beneficial environmental and social outcomes for New Zealand.

The AgResearch Board approved the original Future Footprint Project (FFP) business case in October 2012. This outlined changes and proposed investments that would, in its view:

  • catalyse agriculture innovation centres, by co-locating and focusing AgResearch capability and resources into two key centres at Lincoln and Palmerston North, alongside research and industry partners – thereby delivering better innovation and realising greater economic growth for agriculture and related sectors; and
  • improve the quality and utilisation of AgResearch infrastructure by building new facilities, upgrading existing ones, and rationalising obsolete facilities – thereby improving AgResearch’s ability to deliver modern science effectively and attract talent.

The initial business case proposed $100 million of capital investment, to be funded through the sale of assets no longer needed for research purposes, operating profit, and increasing debt.

Our review of the original business case

In July 2014, the Auditor-General was asked to carry out a formal inquiry into the development and implementation of AgResearch’s FFP business case. We published our response in early 2015, in the form of a letter addressed to the three Members of Parliament who had made the request.1 This included the results of a review we commissioned from Martin, Jenkins & Associates Limited (MartinJenkins) of the 2012 FFP business case.

We concluded that the 2012 business case was sufficient to support decisions to move to more detailed planning.

However, the review identified a number of specific matters to be addressed if the business case was to be used to inform a final decision on proceeding with the capital investment. To bridge developments since 2012 and inform final decision-making about the required capital investment, we considered that an updated FFP business case with more detail was needed.

A business case consists of a number of elements, including the economic, financial, and management cases. In our view, there were five matters in particular in the original business case that needed to be addressed. These were:

  1. the assumptions underpinning benefits estimates;
  2. the assumptions underpinning revenue and capital cost estimates;
  3. assessment of different financing options;
  4. appropriateness of the commercial case for decision-making; and
  5. project management capability and coverage of benefits realisation.

An updated business case was subsequently prepared, and was conditionally approved by shareholding Ministers in June 2016.

Developments affecting the completeness of the updated FFP business case

The FFP business case was not updated in a vacuum. There were broader initiatives that the FFP was a part of, which affected AgResearch’s ability to be as definitive as it might otherwise have been in the updated business case.

Important AgResearch locations that are the primary focus of the FFP are also part of broader collaborative initiatives. In particular, the Lincoln campus development (which makes up the largest component of the FFP capital cost) is the focus of three separate but inter-related projects:

  • AgResearch’s FFP;
  • Lincoln University’s rebuild; and
  • the Lincoln Hub.

Advice on the collaborative initiatives was being prepared at the same time as the updated business case, with the participation of the same organisations and considered by the same Ministers. The acceptance and endorsement of the FFP business case by the shareholding Ministers was contingent on compliance with any conditions imposed through the Lincoln Hub project business case process.

This affects the commercial and management cases in particular. In the commercial case for the AgResearch Lincoln campus, for example, procurement is a process to be collectively managed by the five partners in the Lincoln development, and procurement strategy was specifically identified as being covered in the Lincoln Hub business case, which we did not review.

Although this potentially weakens the updated FFP business case as a stand-alone document, it confirms that the FFP business case was not the only source of information for the decisions that were made.

The targeted review of the updated business case

In 2016, we commissioned MartinJenkins to help us with a desk-top review of the updated business case to provide assurance that the five matters identified in the earlier review had been adequately addressed.

We reviewed only the updated FFP business case, not the business cases or documentation for the other initiatives. Where we identified gaps in the updated FFP business case, we sought assurance that these were filled with information provided to decision-makers through other processes.

Where there are areas in the body of the updated business case that could have included more detail, we are satisfied that the information was either:

  • disclosed in an annex to the updated business case; or
  • likely to have formed part of ministerial discussions around other accountability documents, or related initiatives that were taking place at the same time.

We also acknowledge that appropriate assurance processes were in place and followed by AgResearch in updating the business case. These included:

  • using an independent Better Business Case reviewer in the updating of the case;
  • external expert advice on procurement practice, probity audit, and annual “health checks”;
  • independent checks of financial projections and scenario testing;
  • external property experts to manage the development of master plans with involvement of architects and laboratory design specialists; and
  • making cost estimates based on quantity surveying.

We did not review the assurance processes.

Our comments on the matters we identified in the 2012 business case

The five matters that we identified in the 2012 business case, and the results of our targeted review of how they were addressed in the updated business case, are summarised below.

1. Assumptions underpinning benefits estimates

Specific issue

The original business case estimated a range of benefits, which rested on a series of assumptions. However, it was not clear that the assumptions had been thoroughly tested. This needed to be addressed as part of the economic case.

Extent to which the matter has been addressed

Overall, we consider that the economic analysis is now sufficiently robust, given the information available, and presented with sufficient discussion of the risks and uncertainties for Ministers to have made an informed decision. It would have been useful for the business case to include more of the caveats raised in the separate cost benefit analysis report – for example, the large ranges in estimates of the net economic benefit. However, this was not a critical omission, as the full cost-benefit analysis report was attached as an annex to the business case.

2. Assumptions underpinning revenue and capital cost estimates

Specific issue

A range of assumptions also underpinned estimates of capital costs and revenue, but more information was needed to explain the basis for these assumptions. This needed to be identified in the economic and financial cases.

Extent to which the matter has been addressed

The updated business case does not fully address the issues raised in our earlier review, particularly regarding the assumptions underpinning the capital cost estimates. There was slightly more detail provided in relation to revenue projections.

Sensitivity analysis of the financial projections was undertaken and this included testing components of both capital and revenue. Though valuable, the results of this analysis were not presented as clearly as they could have been and there was no explanation about the extent to which factors were tested in the sensitivity analysis.

It was not clear in the updated business case what work had been done to support the estimates of the FFP benefits. We sought further information on this, and found that additional detailed work had been done. This could have been included in the updated business case to fully address the issues raised in our earlier review.

We understand that decision-makers may have received further information about the financial assumptions from other sources; for example, through related, but separate, business cases and/or development of the Statement of Corporate Intent (which used the same financial projections and was agreed to by shareholding Ministers). We note that the financial modelling, including assumptions, was shared by AgResearch with officials during the preparation of the business case.

3. Assessment of different financing options

Specific issue

The financial impact of the FFP was covered in the original business case but more work was needed on financing options as part of the financial case.

Extent to which the matter has been addressed

Overall, the updated business case focuses on the same mix of funding sources that were included in the original business case, with an emphasis on ensuring no further direct Crown investment is required for the company to remain sustainable. It thus addresses the affordability of the preferred option, as required. A discussion of alternative funding sources would have provided a fuller picture. However, an earlier report back to Ministers included discussion of this.

4. Appropriateness of the commercial case for decision-making

Specific issue

The commercial attractiveness of the investment proposal to potential suppliers needed to be assessed, and critical factors that might affect the commercial viability of the proposal should have been identified. These requirements were not covered in the original business case, but needed to be addressed in the commercial case.

Extent to which the matter has been addressed

The updated business case reflects a more mature and robust approach to procurement than the original case did. In some areas, the level of detail is still less than what might have been expected. However, we are aware more analysis was undertaken that informed the business case even though it was not directly included in the business case.

The commercial case is somewhat complicated by the other collaborative initiatives. In respect of the Lincoln development, procurement is documented in the separate Lincoln Hub business case, and is a process to be collectively managed by the five partners involved with the Lincoln Hub development.

5. Project management capability and coverage of benefits realisation

Specific issue

In 2012, when the original business case was prepared, AgResearch had only limited project management capability in place for the FFP. Given the size and complexity of the FFP, the need for significantly greater capability was identified, and this needed to be covered in the management case.

Extent to which the matter has been addressed

Overall, our view is that robust project management methodology, controls, and governance are in place, as stated in the updated business case.

The updated business case includes some aspects of benefits management planning. However, the benefits realisation plan that was developed subsequently still needs to be fully aligned with the updated business case to ensure that the benefits that informed the decision to proceed are delivered.

In summary

The five matters we raised in our initial review of the FFP business case have been addressed, to varying degrees, in the updated business case. Overall, we are satisfied that the matters raised in our earlier review have been adequately addressed. We thank the staff and senior managers of AgResearch for their assistance in providing the data for our review.

Martin Matthews
Controller and Auditor-General

1: Office of the Auditor-General (2015), Auditor-General’s findings about AgResearch’s Future Footprint project.