Auditor-General's overview

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

In December 2017, the Government announced that it was setting up the Provincial Growth Fund (the Fund) to increase growth and development in regional New Zealand. The Fund was launched in February 2018 with $3 billion to invest over a three-year period.

Although the Fund is usually described as a single investment fund, it is actually a collection of separate initiatives and hundreds of projects that several government departments manage separately. Included in the Fund's $3 billion was $155 million set aside for administering the Fund and $215 million that was already going to be spent on regional economic development. Co-funding is a common feature of the Fund.

The main three government departments responsible for administering the Fund are the Ministry of Business, Innovation and Employment, the Ministry for Primary Industries, and the Ministry of Transport. The Provincial Development Unit, a business unit of the Ministry of Business, Innovation and Employment, is responsible for administering, monitoring, and reporting on the Fund as a whole.

There has been a high level of public interest in the Fund. It was established at pace and included a range of different types of funding arrangements. Therefore, as well as completing additional annual audit work on the three departments, we decided to do a more in-depth review of the systems and processes for managing, monitoring, and evaluating the Fund.

During the last two years, as well as briefing select committees about aspects of the Fund, we have provided several reports to the departments involved and made many recommendations (see Appendix 1). We did this to provide early and ongoing feedback on ways to improve Fund management. Despite the significant pressures they were under to achieve the Fund's objectives, the departments have responded positively to our recommendations, and there have been many improvements to the way the Fund operates.

The inherent complexity of the Fund, coupled with the evolving nature of its systems and processes, has created challenges for the departments and for our work.

This report brings together the results of all of our work to date on the Fund.

Systems and processes have improved over time

Because the Fund was established at pace, it was initially administered using systems and processes in place at the time. This led to some deficiencies in the Ministry of Business, Innovation and Employment's systems and processes in the Fund's early stages. For example, improvements were needed in how appropriations were administered, how conflicts of interest and contracts were managed, and how investments were tracked and reported. These systems and processes have improved over time.

Achieving balance in investments when funding criteria are broad

Cabinet set broad criteria for assessing applications to the Fund. I understand that this was to encourage and support a wide range of ambitious and innovative proposals. Because the Fund has broad criteria, applications for funding have been diverse.

The Fund was intended to develop a portfolio of investments spread throughout the regions, with particular focus on six "surge regions". An Independent Advisory Panel was expected to provide, among other things, advice to Ministers on the overall balance of investments across regions and sectors. However, it has been difficult to see how consideration was given to the overall balance of investments, in terms of the Fund's objectives and regional coverage, and therefore whether the balance sought has been achieved.

Manifesto commitments to the regions

Soon after the Fund was established, $30 million was approved by Cabinet and set aside for "manifesto commitments to the regions". After the first year, Cabinet approved adding another $40 million to this allocation for "emerging priorities".

By May 2020, seven projects totalling more than $45 million had been approved from this part of the Fund.

We were interested in the processes used to apply for and approve access to this funding. It was not always clear from the documentation why certain projects were considered for funding from this part of the Fund.

For these funding applications, the Provincial Development Unit provided the Regional Economic Development Ministers with information about the proposed projects. However, it was difficult to find evidence of how projects had fully met the normal criteria for the Fund. And, unlike other areas of the Fund, the Provincial Development Unit did not provide the Regional Economic Development Ministers with a recommendation for a decision. Ultimately, the Regional Economic Development Ministers made decisions on these projects in accordance with delegated authority given by Cabinet. However, given the different way these projects were considered, "manifesto commitments to the regions" were in effect operating as a "fund within a fund".

In my view, in the interests of the transparency of the overall process, it is important for the public and Parliament to have better visibility of how all the parts of the Fund operate.

Reporting on the Fund as a whole could be further improved

Cabinet saw the Fund as a single investment fund and set objectives for it as a whole. In my view, this means that Parliament and the public should expect to see how the Fund works, where money from it is being invested, and what it is achieving, both regionally and nationally. Despite recent enhancements to reporting, there are still improvements needed.

We acknowledge that the departments that administer the Fund have each reported on the parts of the Fund they are responsible for, in accordance with the requirements of the Public Finance Act 1989. They have also made publicly available additional information at the project level and by region. While all of this is necessary and helpful, it is not yet sufficient for a fund of this nature.

Although there have been many Fund announcements relating to individual projects, there needs to be full and relevant reporting about the nature and purpose of the Fund's investments and the impact of those investments against the objectives set for the Fund when it was established. In my view, this will strengthen the trust and confidence that the public has in how the Fund is being administered.

What has been achieved so far?

Cabinet asked officials to evaluate the Fund in 2020. The evaluation was expected to focus on the operation of the Fund to date, and assess the early impacts of projects, where these are available.

A draft evaluation plan was being finalised by the Provincial Development Unit as we prepared this report. The scope of the plan covers evaluation of only the investments administered by the Provincial Development Unit. The Provincial Development Unit's current draft plan will therefore not result in an evaluation of the Fund as a whole.

We understand that Ministers have been advised that an evaluation of the Fund, originally timed for 2020, will be delayed because of Covid-19 until mid-2021. In my view, evaluation is critical, given the Fund's ambition, size, and profile. The public is entitled to know how well the Fund has met its objectives and what benefits have been achieved for the public money spent.

I have recommended that a plan for evaluating the overall effectiveness of the Fund be completed and published as quickly as possible. We need to see how officials plan to give assurance to Parliament and the public about how the Fund's investments will affect regional and national outcomes.

I acknowledge that evaluating the outcomes of some projects can be difficult. This includes the challenge of working out how soon to evaluate projects' results after their completion. The extent to which observed changes can be attributed to specific investments can also be difficult. Covid-19 is likely to create even more challenges for officials evaluating the effectiveness of the Fund as a whole. Given the broad objectives that the Fund is seeking to achieve, this will require careful consideration. However, there is scope for evaluating and reporting on how well individual projects' contracts have been fulfilled, whether outputs announced when the projects were committed to were delivered, and early signs of the results being achieved by each project.

Despite the difficulties involved, I expect officials to demonstrate, to the extent possible, the effectiveness of the $3 billion investment.

In my view, the basis on which public money is allocated and spent, and what value is obtained from that expenditure, should be transparent to the public whose taxes are being spent.

Our ongoing focus on the Fund

The next phase of our multi-year work on the Fund will focus on how the three departments manage the Fund after a decision to redirect up to $600 million from the Fund to the Covid-19 response package. We then intend to examine how officials evaluate the Fund's overall effectiveness and the results of that evaluation.

Acknowledgements

Before becoming Auditor-General, I was a Deputy Director-General at the Ministry for Primary Industries. Matters involving that Ministry have been dealt with by the Deputy Controller and Auditor-General, in keeping with the policy of my Office.

I thank the many staff working in the government departments for their co-operation as we carried out our work and their responsiveness to the recommendations we have already made.

Nāku noa, nā

John Ryan
Controller and Auditor-General

31 July 2020