Part 1: Introduction

Managing the Provincial Growth Fund.

1.1
We are carrying out a multi-year programme of work looking at the Provincial Growth Fund (the Fund). This report focuses on our work looking at the systems and processes used to manage the Fund.

1.2
The Fund was launched in February 2018. It was announced as a $3 billion fund "to invest in raising the productivity potential of regional New Zealand" over a three-year period.1 The costs of administering the Fund were expected to be funded from within the $3 billion.

1.3
From 2018 to 2020, the Government made further announcements that presented the Fund as a single investment fund2 consisting of "a range of projects [and] larger sector-led initiatives and infrastructure investments".3 The Fund is administered principally by the Ministry of Business, Innovation and Employment (MBIE), the Ministry for Primary Industries, and the Ministry of Transport (the three departments). Cabinet gave the Provincial Development Unit (PDU), a business unit of MBIE, the responsibility for administering, monitoring, and reporting on the Fund as a whole.4

1.4
The Fund's investments have a common purpose: to accelerate regional development, increase regional productivity, and help create more and better-paying jobs in the regions. To support this purpose, the Fund has several objectives:

  • Create jobs, leading to sustainable economic growth.
  • Increase social inclusion and participation.
  • Enable Māori to realise their aspirations in all aspects of the economy.
  • Encourage environmental sustainability and help New Zealand meet its climate change commitments while productively using land, water, and other resources.
  • Improve resilience, particularly of critical infrastructure, and diversify our economy.5

1.5
The Fund was intended to develop a portfolio of investments during its three years that were to be spread throughout the regions, with particular focus on six regions (see paragraph 1.7). Cabinet expected an Independent Advisory Panel (IAP) to provide advice on the balance of investments throughout the Fund6 and senior regional officials to advocate for their regions and co-ordinate government support.7

1.6
In July 2018, the Minister for Regional Economic Development released an investment statement and guidance for the Fund that described the categories and process for applications. The investment statement acknowledged that, to avoid a "first come, first served" situation, less well-resourced regions would need support to develop proposals to access the Fund and that they would need to submit those proposals before the funding ran out.8 Such support has been given by the senior regional officials9 in the regions, and by the PDU.

1.7
Projects in Auckland, Wellington, and Christchurch are not eligible for funding. Six regions, called "surge regions", were identified as most in need of government investment to address social and infrastructure deficits.10 The surge regions are:

  • Tai Tokerau/Northland;
  • Bay of Plenty;
  • Tairāwhiti/East Coast;
  • Hawke's Bay;
  • Manawatū-Whanganui; and
  • West Coast.

1.8
Although the Fund's criteria gave priority to applications from the surge regions, the criteria did not specify the amount of funding they would receive. Applications from all regions were still considered based on their individual merits.

1.9
The Fund has been presented as a new initiative and a single investment fund. However, it is made up of several different allocations of money in different appropriations that different government departments manage. Some of the announced funding is not new. In its first year, the Fund included about $215 million that was already going to be spent in regional New Zealand on forestry and tree planting, tourism infrastructure, and road and railway projects. Those funds are now considered part of the Fund's $3 billion.

Our work to date

1.10
Because of the Fund's scale and profile, there has been a high level of public interest in it. We paid particular attention to the processes and controls for allocating, monitoring, and evaluating the effect of funding distributed through the Fund.

1.11
Much of that work has focused on the three departments: MBIE, the Ministry for Primary Industries, and the Ministry of Transport. Within MBIE, we focused specifically on the PDU.

1.12
Figure 1 sets out the work we have done to date. We have further work planned, some of which will be part of the annual audits of the three departments and some of which will be looking at the changes to the Fund and its management in response to Covid-19. We will report on this work when it is complete.

Figure 1
Our annual audit and other work to date on the Provincial Growth Fund

2017/18 2018/19 2019/20
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Annual audits in the three departments tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark
Additional annual audit work in the three departments tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark tick mark
Review of the PDU's work tick mark tick mark tick mark tick mark tick mark tick mark tick mark
Advice to Parliament tick mark tick mark tick mark tick mark

1.13
Because of the speed with which the Fund was established, we wanted to answer two questions:

  • Is there a framework that supports good decision-making throughout the term of the Fund?
  • Is there an appropriate evaluation framework and plan for properly assessing the effectiveness of the Fund?

1.14
We expected the decision-making framework to include:

  • clear roles and responsibilities for the Fund;
  • clear and appropriate policies and guidelines that all the government departments and agencies managing the Fund use to support consistent administration;
  • fit-for-purpose systems and processes for managing and monitoring the Fund and that hold recipients of funding accountable, including consistent assessment criteria and due diligence in approving applications;
  • fit-for-purpose systems and processes for dealing with potential conflicts of interest; and
  • clear guidance for applicants.

1.15
Our work was designed to give officials timely recommendations about the arrangements needed to strengthen how the Fund is managed. We wanted, where possible, to highlight any concerns early rather than comment on matters once issues had arisen or when it would have been too late for officials to take corrective action.

1.16
After the Fund was announced, we carried out preliminary work to review how MBIE, through the PDU, was administering the Fund. Acknowledging the short time frame that MBIE had to set up the necessary systems, processes, and controls, we made our first recommendations in December 2018. These recommendations were aimed at improving the overall management of the Fund as it developed.11

1.17
During 2018 and 2019, and for the first half of 2020, we continued to focus on how MBIE (specifically, the PDU), the Ministry for Primary Industries, and the Ministry of Transport implemented and administered the Fund.

1.18
We advised Parliament on the composition of appropriations12 for the Fund and on the performance of the three departments in administering the Fund. We also carried out additional work alongside the annual audits of the three departments and reviewed processes and systems for the Fund as a whole.

1.19
During this period, we continued to look at whether systems and processes were sound. We made recommendations to provide the three departments with timely feedback on their systems and processes, including those used to administer the Fund as a whole.

1.20
Appendix 1 lists the recommendations that we made to the three departments as a result of our 2017/18 and 2018/19 annual audits. We made recommendations about a range of matters. For example, we recommended that MBIE improve how appropriations were administered, how conflicts of interest and contracts were managed, and how investments were tracked and reported.

What we did not look at

1.21
For this report we focused on the systems and processes used to assess and administer the Fund. We did not:

  • evaluate the merits of individual applications or whether the decisions made about them were the right ones;
  • evaluate the costs and benefits of projects in terms of their contribution to the Fund's objectives; or
  • assess the effectiveness of the Fund as a whole.

1.22
So far, our work has not involved dealing directly with funding recipients.

Further audit work

1.23
We plan to complete further work to examine the nature of, and processes supporting, "other spending" (see page 9).

1.24
By 31 March 2020, through Ministerial decisions, Cabinet papers, and policy positions, almost all of the Fund had been "ring-fenced" for a particular purpose. In early April, the Minister for Regional Economic Development announced that the PDU "is working through applications and projects to see where the Fund's money can be repurposed for initiatives deemed more critical to fighting the economic impacts of the COVID-19 pandemic".13 A further announcement in May 2020 signalled that the amount for investments in infrastructure would be "up to $600 million" for projects with more immediate economic benefits.14

1.25
The newly formed Infrastructure Implementation Reference Group15 and the PDU have advised Ministers on proposals for infrastructure and other projects to assist in the Covid-19 recovery. We understand that the PDU will continue to review existing investments and reinvest any funding that is unused, no longer delivering the agreed services, or invested in a project that is no longer relevant. This funding is expected to support recovery from Covid-19 in regional New Zealand.

1.26
As we were preparing this report, the PDU was developing systems and processes to manage this reallocation of funding. As a result, we expect to review and report on this reset in 2020/21. This work will assess the effectiveness of the reprioritising process, the management of any additional funding, and how it has affected the achievement of the Fund's objectives.

1.27
Once more projects have been fully implemented, we also plan to assess the work done by officials to assess the overall effectiveness of the Fund in delivering the expected benefits.

Structure of this report

1.28
In Part 2, we discuss how the PDU, the Ministry for Primary Industries, and the Ministry of Transport have implemented the Fund.

1.29
In Part 3, we discuss how the three departments have been managing applications and contracts.

1.30
In Part 4, we discuss managing and reporting on the Fund as a whole.

1.31
In Part 5, we describe the next steps for the Fund and the further work that we are considering.

1.32
Appendix 1 sets out the recommendations that we made to the three departments as a result of our 2017/18 and 2018/19 annual audits, and Appendix 2 provides more background information about the Fund.

Footnotes

1: Provincial Development Unit (2018), Investment Statement for the Provincial Growth Fund at page 21. The Fund's proposed purpose, structure, and operation were set out in three Cabinet papers in December 2017, February 2018, and August 2018.

2: See www.beehive.govt.nz and Provincial Development Unit (2018), Investment Statement for the Provincial Growth Fund at page 21.

3: Provincial Development Unit (2018), Investment Statement for the Provincial Growth Fund at page 21.

4: Cabinet paper (February 2018), Operational design of the Tuawhenua Provincial Growth Fund, at page 2.

5: Ministry of Business, Innovation and Employment, Powering up Aotearoa – New Zealand's regions: The guide to the Provincial Growth Fund, Wellington at page 5. The objectives for the Fund have not changed – see CAB-20-MIN-0197, Provincial Growth Fund: COVID-19 Response: Redeployment and Acceleration.

6: Cabinet paper (February 2018), Operational design of the Tuawhenua Provincial Growth Fund, pages 2 and 13.

7: Cabinet paper (December 2017), The Provincial Growth Fund, page 7.

8: Provincial Development Unit (2018), Investment Statement for the Provincial Growth Fund at page 10.

9: MBIE has relied on the small network of nine senior regional officials to help potential applicants transition to the new fund, to develop regional plans, and to help with their applications. The senior regional officials make decisions about applications for funding of up to $1 million.

10: Cabinet paper (December 2017), The Provincial Growth Fund, page 1.

11: The recommendations are listed in our December 2018 paper to the select committee, which is available on Parliament's website at parliament.nz. See Annual Review briefing to the Economic Development, Science and Innovation Committee: 2017/18 Financial Year.

12: An appropriation is an authority given by Parliament to the Crown or an Officer of Parliament to spend up to the amount of the appropriation for a specified purpose.

13: Media release (April 2020), "Work to repurpose PGF funds begins" at www.beehive.govt.nz.

14: Media release (May 2020), "PGF reset helps regional economics" at www.beehive.govt.nz.

15: Announced 1 April 2020, the Infrastructure Implementation Reference Group is a group of industry leaders tasked with advising the Government on projects that are ready to start as soon as the construction industry returns to normal in order to reduce the economic effects of Covid-19.