Part 1: Introduction

Medium-term planning in government departments: Four-year plans.

1.1
Since 2011, Cabinet has required each government department to prepare a plan each year that provides a medium-term perspective of the department's intentions.1

1.2
We have done extensive work auditing the long-term plans of local authorities since they were first required to be audited in 2006. We consider that our work has contributed to improvements in local authorities' long-term planning. For example, we have seen improvements in the quality of forecasting and the underlying information and assumptions used.

1.3
We know that medium- to long-term planning is most important and relevant for entities responsible for assets and resources with long lives that affect the delivery of public services.

1.4
Given the importance of four-year plans to government departments and the Government's annual Budget process, we decided to draw on our local authority experience to review a selection of four-year plans.

1.5
As a tool for providing a medium-term perspective of a department, four-year plans are still evolving. Accordingly, the aim of our work was to review a small sample of four-year plans and identify where they could be improved and strengthened.

1.6
Forecasting is an essential component of good financial management, decision-making, and planning. It is important that the forecasts in four-year plans are based on information and assumptions that are reasonable and supportable.

1.7
Although generally accepted accounting practice (GAAP)2 does not directly apply to four-year plans, the principles are relevant and appropriate. GAAP requires an entity to use the best information available to prepare the prospective financial statements. It requires that prospective financial statements be understandable, relevant, reliable, and comparable and that the assumptions used in the prospective financial statements be reasonable and supportable.

1.8
Four-year plans that are prepared according to GAAP principles should provide good information about where a department is spending its money and how its resourcing might shift over time.

International context

1.9
New Zealand is not the only country to consider how to improve its medium- to longer-term strategic and financial planning. The United Kingdom and Australian national audit offices have identified strategic challenges to effective medium- to longer-term planning.

1.10
For example, in 2013 and 2014, the National Audit Office in the United Kingdom carried out work on forecasting in government. This work found that:

  • departments do not always make best use of forecasting (for example, to test potential options and scenarios);
  • decision-makers do not always understand the implications of forecasts or know how to use them to challenge and manage risks; and
  • there are often weak relationships between areas of technical expertise (asset managers and planners) and finance staff, increasing the risk of poorly informed budget decisions.

1.11
We took international developments and findings into account when planning and doing our audit work.

How we carried out our work

1.12
Our focus was on the financial information contained in each plan. We selected departments that had Vote responsibility for significant public sector assets or resources that interact with local government's planning and management responsibilities. On this basis, we selected:

  • the Ministry of Transport;
  • the Ministry for the Environment;
  • Land Information New Zealand; and
  • the Ministry of Business, Innovation and Employment.

1.13
Although we looked at only a small sample of four-year plans, we consider that they were representative enough to allow us to make suggestions for improvement that other departments preparing four-year plans could apply.

1.14
For each department, our work involved:

  • understanding how the department prepared its four-year plan;
  • understanding the context for the four-year plan – for example, how the department had incorporated its other plans and policies into the four-year plan;
  • evaluating the completeness of information about the activities of Crown entities in the Votes administered by the department;
  • assessing whether the financial forecasts were based on the best information available and whether the assumptions applied in the four-year plans were reasonable and supportable;
  • determining whether four-year plans provided a detailed analysis of the effect of any costs pressures or savings on the services the department delivers; and
  • assessing the extent to which the department was using its four-year plan to support sound decision-making and to manage risks.

1.15
To complete the reviews, we:

  • interviewed strategy, performance, and finance staff and also members of management to understand the processes and assumptions underpinning four-year plans;
  • reviewed whether the four-year plans aligned with the guidance produced each year by the Treasury and the State Services Commission (the published guidance);3
  • reviewed whether the four-year plans were consistent with a department's accountability documents;
  • reviewed supporting documentation for selected amounts included in forecasts; and
  • reviewed the main documents that departments used to prepare their four-year plans.

1.16
The four-year plans we reviewed were those prepared for Budget 2015, and our work used the published guidance for that year as its starting point. The published guidance has since been updated, for Budget 2016 and Budget 2017, so we have noted where we have used the updated guidance.

1.17
Our findings and recommendations are based on the 2015 four-year plans prepared by the departments we selected. Some of the four departments have already started to implement the changes that we have recommended.

What we did not do

1.18
We did not:

  • review how four-year plans aligned with the Government's Business Growth Agenda and Better Public Services priorities;
  • reconcile the numbers in the four-year plans to specific Votes;
  • analyse the cost of budget initiatives; or
  • assess the degree of alignment between a department's strategic direction and its non-financial capabilities.

Structure of this report

1.19
Part 2 describes the requirements for a four-year plan and how the plan fits into a department's broader strategic-planning process.

1.20
Part 3 looks at how departments prepare their four-year plans and concludes with our suggestions for improving their preparation.

1.21
Part 4 looks at whether four-year plans are based on the best available information and how departments integrate that information to plan services and address any cost pressures. Part 4 also concludes with suggestions for improvements.

1: In 2012, four-year budget plans were combined with a department's workforce strategy to become the department's four-year plan.

2: Generally accepted accounting practice is a common set of accounting principles, standards, and procedures that organisations use to compile their financial statements, including prospective financial information.

3: The people who act as functional leaders on property, procurement, and information communications technology – see www.ssc.govt.nz/bps-functional-leadership – are also involved in producing the guidance about four-year plans and working with departments as they prepare four-year plans.