Part 3: Managing applications and contracts

Managing the Provincial Growth Fund.

3.1
In this Part, we discuss how the PDU, the Ministry for Primary Industries, and the Ministry of Transport managed applications and contracts.

3.2
In particular, we comment on:

Implications of using broad criteria for funding applications

3.3
The way that the Fund was designed and set up has created particular challenges for how it has been administered. The Fund's criteria, set deliberately broadly, has resulted in a diverse range of applications. This makes the task of assessing applications challenging, which increases the importance of robust assessment and approval processes and effective risk management.

Due diligence needed strengthening

3.4
The PDU included due diligence steps as part of its assessment process. Due diligence validates aspects of the application and provides a level of assurance about the risks to an investment. We would normally expect to see due diligence taking place before any commitment is made or announcement of an application's approval. In our early work, we found instances where "in principle" announcements had signalled approved funding for a project before due diligence was complete, funding arrangements were worked out, and contracts signed.24 In one instance, a decision was reversed because not enough due diligence had been done earlier.

3.5
We found that sometimes there was not enough evidence about how, when, and where the PDU addressed questions raised during due diligence processes. In the early stages of the Fund, the PDU sought an external review of its processes to verify that it was following good practice, including matters of probity.

3.6
The PDU has since responded to recommendations that we and others have made about due diligence processes. To further strengthen the processes, we have suggested that the PDU systematically track matters raised during due diligence that require following up.

Assessing value for money is challenging

3.7
Because of the variability in the types of projects and the different risks, values, and complexities associated with them, the three departments have focused on developing assessment processes to establish the merits of each application guided by the overall objectives of the Fund.

Business case requirements

3.8
Cabinet required projects that cost more than $10 million over the life of the project to have detailed business cases that use the Treasury's Better Business Cases methodology.25 The methodology includes a formal cost-benefit analysis. As at 31 January 2020, 55 (8.8%) of the Fund's active projects were approved for a whole-of-life cost of $10 million or more.

3.9
Although most applications would not have been required to use the Treasury's Better Business Cases methodology, the PDU has worked to ensure that its analysis of costs and benefits of proposed projects of all sizes is fit for purpose. To achieve this, it incorporated the main aspects26 of the Treasury's Better Business Cases methodology into the Fund's application form, the project assessment process, and advice templates for all projects.

3.10
Applicants were expected to outline the strategic case (in particular, how well the project matches the Fund's overall objectives, industry strategies, and regional plans), and the commercial, financial, and management cases for individual projects. Well-established frameworks for cost-benefit analysis, such as the New Zealand Transport Agency's approach to evaluating transport investments, were applied wherever relevant.27

Verifying applicants' claims for their projects

3.11
We expected a robust assessment process in place that would test whether assertions made by applicants about future benefits were reasonable. We checked whether, from the outset, those assertions were thoroughly assessed.

One application initially claimed nine sustainable jobs and nine temporary jobs would be created. At the contract phase, it was six and five jobs. We could not see documentation to support how the PDU satisfied itself about the claimed job numbers.

Another application claimed it would increase local employment, productivity, and growth, providing a year-round visitor attraction. We could not see whether or how these claims had been assessed.

3.12
The assessment process relies heavily on individual assessors to determine to what extent applicants' claims about estimated benefits – such as the number of jobs to be created – were achievable. The process also includes elements of peer review at various stages, including technical advice from other government agencies, internal consultation and review by the PDU, consultation with senior regional officials, and the IAP's review of proposals that go to the RED Ministers for approval. We saw evidence of a high degree of interaction with applicants about the expected benefits. However, there was not always enough documented evidence for us to determine how the assessor had considered the claims made in the applications.

Recommendation 1

We recommend that the Ministry of Business, Innovation and Employment further strengthen transparency about the operation of all parts of the Provincial Growth Fund's application, assessment, and decision-making processes.

Timeliness of processing applications

3.13
It is good practice to have target turnaround times and to track the timeliness of an application process. This gives applicants some idea of when their application will be processed. During the setting-up phase, the PDU focused on giving appropriate attention to establishing effective assessment and contract negotiation processes. This was particularly important because the scale and complexity of applications varied significantly.

3.14
The PDU told us that it now has staff dedicated to reducing the time it takes for the applications it manages to go from approval to contract. The PDU reports to the RED Ministers weekly on approved projects to show progress towards a signed contract.

3.15
The Ministry for Primary Industries is focused on timeliness when processing applications and has a target turnaround time. It is also working on several initiatives (simplification of application forms, clearer guidelines, and a web-based spatial application tool) to improve the application process.28

3.16
The Ministry of Transport is also focused on timeliness when processing applications. It has targets that cover both the average number of days to provide feedback to applicants and the average number of days to providing infrastructure funding once approved.

Managing conflicts of interest in assessing applications

Officials

3.17
We expected conflicts of interest to be managed using a three-step process:

  • recognising that there is an actual, potential, or perceived conflict;
  • disclosing it; and
  • managing the risks that might arise.

3.18
Each department and agency has its own systems, processes, and practices for managing conflicts of interest. The PDU has relied on the conflict of interest processes in departments and agencies that participate in the application assessment process.

3.19
We are satisfied that MBIE has well-established policies and processes to manage conflicts of interest. During our annual audit of MBIE, we recommended that the PDU continue to reinforce expectations about managing conflicts appropriately. This includes reinforcing expectations to other departments that the PDU relies on to manage conflicts well. During our audit, the PDU was working with those departments about managing conflicts of interest and had shared some training material.

3.20
In March 2019, an internal audit report on the Crown Forestry Joint Ventures Programme identified risks with conflict of interest processes and systems for officials and contractors. The Ministry for Primary Industries told us that it has addressed these risks in the Joint Ventures Programme and in other parts of its business that involve funding for the One Billion Trees programme. We will review the robustness of these systems in our ongoing annual audits of the Ministry.

3.21
The Ministry of Transport has well-established policies and processes to manage conflicts of interest. We understand that its conflicts register was to be updated after a review in November 2019. In the meantime, no issues have been brought to our attention. We will follow up progress on this in our ongoing annual audits of the Ministry.

Advisory panel members

3.22
In meetings of the IAP set up by Cabinet to advise on the Fund, we saw evidence that appropriate action was taken to review members' conflicts.

3.23
The three departments also used other advisory panels to help decision-makers consider applications for funding. We did not examine the processes these panels use. However, it is important that advisory panels manage conflicts of interest so they can demonstrate that the advice they give is independent.

Potential conflict between advisory/support and decision-making roles

3.24
There is a potential systemic conflict between the advisory/support and decision-making roles of the senior regional officials.

3.25
Senior regional officials and others do extensive work to engage with regional and local councils, iwi, and business groups. The PDU has relied on the senior regional officials to help potential applicants transition to the Provincial Growth Fund and develop regional plans. Those officials might be involved in preparing applications and making decisions about those applications.

3.26
The Ministry for Primary Industries told us that this was not the case with the funding it manages, where there is a separation between its funding assessment processes and the senior regional officials.

3.27
For the funding administered by the PDU and the Ministry of Transport, senior regional officials make decisions about applications for projects up to $1 million. Therefore, there is a risk (actual and/or perceived) to the fairness of the process if the person helping with the application also participates in, and has influence on, the decision to award funding.

3.28
The PDU told us that it has strengthened its processes for managing conflicts of interest. The senior regional officials manage fairness and impartiality through separating their pre-application, assessment, and decision-making activities, and make decisions as a group. However, if a senior regional official with a conflict of interest is present during the decision-making, they could, or could be perceived to, exercise their influence. We consider that MBIE needs to continue to strengthen its management of this type of potential conflict.

Manifesto contingency funding

3.29
In April 2018, Cabinet approved $30 million of the Fund to be set aside as contingency funding for "manifesto commitments to the regions".29 In June 2019, Cabinet approved an additional $40 million for "emerging priorities", making a total of $70 million for manifesto commitments to the regions.30 This was to be funded out of the existing appropriations for the Fund. By May 2020, seven projects totalling more than $45 million had been approved from this part of the Fund. As part of the Fund reset, on 4 May 2020, Cabinet agreed that the remaining manifesto contingency funding (almost $25 million) was to be drawn down to contribute to the Fund's Covid-19 response.31

3.30
It was not always clear from the documentation why these projects were considered for funding from this part of the Fund.

3.31
For these funding applications, the PDU provided the RED Ministers with information about the proposed projects. However, unlike other parts of the Fund, the PDU did not provide the RED Ministers with a recommendation for a decision. We were also told that the IAP was generally not asked to advise on the applications for the manifesto contingency funding.

3.32
It was difficult to find evidence that these seven projects had fully met the criteria that projects are normally assessed against. These projects required the approval of the RED Ministers who made decisions in accordance with delegated authority given by Cabinet.32

3.33
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. We have recommended that MBIE further improve its transparency about the operation of all parts of the application, assessment, and decision-making processes of the Fund. This would include processes for manifesto commitments to the regions.

Contract management processes

3.34
Contract management is now a major focus for Fund administration. As at 31 March 2020, 1130 of the 1416 approved PDU projects were under contract. Of the contracted projects, 741 had received some funding, with a little more than 21% of the approved amount paid out.

3.35
Each department or business unit involved in administering the Fund has its own contract management process.

Provincial Development Unit contract management

3.36
There were several instances of poor contract management described in the PDU's early reports on the projects it manages. This included projects under way before the contract was signed (although payments were made after the contract was signed and payment requirements were subsequently met). The PDU finalised its contract management guidelines in June 2019, more than a year after some contracts were drafted and signed.

3.37
We recommended in our earlier work that the PDU:

  • inform the contracted parties of their reporting and monitoring obligations;
  • expand the contract management plan to include information on how frequently the contract will be monitored and what form that should take; and
  • explicitly state expectations about contract management responsibilities and agree them with other departments administering the Fund.

3.38
The PDU has improved its processes and provided its contract managers with further guidance, templates, and training. It is sharing these improvements with the other departments and has reinforced expectations about good contract management with them. This should help the PDU and other departments to manage contracts more consistently and effectively.

3.39
Most PDU funding agreements require the party receiving funding to monitor and report on post-contract outcomes that align with the Fund's objectives. However, the PDU's reporting requirements in the first funding agreements were only about "deliverables" (for example, numbers of training courses to be delivered) and not on achieving the Fund's objectives (for example, the number of trainees getting a job). There is a risk that recipients of this early funding will not report on outcomes without a contractual obligation to do so.

3.40
The PDU is aware of this risk. It intends to ask those funding recipients that are not contractually required to report outcomes how the project has performed in terms of the Fund's outcomes.

Ministry for Primary Industries' contract management

3.41
When the One Billion Trees programme was set up, the Ministry for Primary Industries already had processes for managing the Crown's forest assets and administering grants programmes. The Ministry has amended these processes to match the objectives of the One Billion Trees programme so they can be used for that programme. They include a process for monitoring contracts and forestry investments over time.

3.42
Commercial forestry investments in trees typically last up to 30 years, so contracts need to be managed for a longer period than most other investment types. Funding for administering forestry investments and the One Billion Trees programme has generally been allocated for 10 years, giving some capacity to manage contracts in the longer term. Our annual audit work will continue to make recommendations where appropriate about managing contracts under the One Billion Trees programme.

3.43
Our 2018/19 audit of the Ministry identified, as a risk, delays to an upgrade of the Ministry's grant management system, because the One Billion Trees programme's spending on grants and partnerships was expected to increase in 2019/20 from $29 million to a proposed $213 million. We did not identify any issues with the processing of grant payments through existing systems in our 2018/19 audit. We will continue to check in subsequent audits on the robustness of these systems when managing significantly higher volumes of transactions.

Ministry of Transport contract management

3.44
We are satisfied that the Ministry of Transport has appropriate systems and controls for Fund-related payments to the New Zealand Transport Agency as project milestones were met. It has agreements and processes that support its administering of funding for transport-related projects, using the standard PDU contract templates.

24: These announcements were made on the Grow Regions website during the first year. The website no longer reports data on progress on "announced" funding. It now reports data on approved projects.

25: See the "Business Cases" section on the Treasury's website at treasury.govt.nz.

26: The PDU took the view that the economic case section of the Better Business Cases methodology is not applicable to individual investments because this was incorporated at the programme level.

27: Provincial Development Unit (2018), Investment Statement for the Provincial Growth Fund at page 22.

28: Te Uru Rākau (2020), One Billion Trees Fund 12 Month Monitoring and Evaluation Report, page 19, at www.mpi.govt.nz.

29: CAB-18-MIN-0158.03, 2018 Budget Package: Vote Business, Science & Innovation.

30: DEV-19-MIN-0178, Provincial Growth Fund: Amendment to Contingency Funding for Emerging Priorities.

31: CAB-20-MIN-0197, Provincial Growth Fund: COVID-19 Response: Redeployment and Acceleration.

32: CAB-18-MIN-0158.03, 2018 Budget Package: Vote Business, Science & Innovation.