Part 5: Where to next?

Managing the Provincial Growth Fund.

5.1
In this Part, we describe the next steps for the Fund and the further work that we are planning to do on:

Repurposing of funding for the Covid-19 recovery

5.2
As part of the planning for the Covid-19 recovery, the Minister for Infrastructure announced that funding would be made available for investments in infrastructure after the lockdown was lifted. The PDU reviewed existing investments and proposed reinvestment of any unused funding.

5.3
On 4 May 2020, Cabinet decided to redeploy funding to accelerate investment to support the Covid-19 recovery. Relevant financial authorities were agreed by Cabinet.44 By this stage, $113.1 million of the Fund was unallocated.45 To accelerate investment to support the Covid-19 recovery, Cabinet increased the proportion of a loan facility that is available on contract signing to a minimum of 50% and changed the expected time frames for applicants to complete contract negotiations to 30 working days.46

5.4
On 24 May 2020, the Government announced that up to $600 million of funding was being repurposed from the Fund to support the Covid-19 recovery.47 The PDU reviewed investments to identify funding available to invest in supporting the recovery from Covid-19, and is developing the systems and processes to manage this reallocation of funding.

5.5
In May 2020, the Government announced contingency funding from the Covid-19 Response and Recovery Fund for another $3 billion in Vote Business, Science and Innovation for infrastructure projects for Covid-19 recovery.48 An initial list of projects using the $3 billion earmarked for infrastructure projects was released on 1 July 2020.49 It is not yet clear to us what role the PDU will have in administering this additional funding.

5.6
In 2020/21, our focus will be looking at the repurposing of some of the Fund for Covid-19 projects. We will carry out further work to review the reprioritising process, the implications of the reset of the Fund for management of its funding, and the likely effect of the reset on achieving the Fund's objectives. In our annual audit work, we will look at contract management and follow up on the other matters noted in this report.

5.7
In 2021/22, we intend to examine the work done by officials to evaluate the effectiveness of the Fund.

Evaluating the Provincial Growth Fund

5.8
In 2018, Cabinet agreed on an evaluation framework of broad objectives and regional indicators. Cabinet also directed officials to track a set of 25 regional indicators (for example, regional gross domestic product (GDP) growth by industry, median earnings, regional productivity, and returns on Māori assets). There is baseline data for some outcome indicators, such as the regional economic development indicator data collected by Statistics New Zealand.50 It would be useful for the PDU's detailed evaluation information to be reported at both a national and a regional level.

5.9
Cabinet noted that officials would do further work to prepare robust indicators in areas where these were lacking. They would also prepare a plan for evaluating the Fund's performance, with substantive evaluation completed by the end of 2020.51

5.10
The PDU and the other departments have been planning how to evaluate the Fund's investments. The PDU provided us a copy of the draft evaluation plan that it commissioned and is in the process of finalising it. The scope of the plan is evaluating investments that the PDU administers, and not the investments administered by the other departments or, more importantly, the Fund as a whole. We understand that the PDU will focus on processes and early results rather than outcomes at this point. This is because many projects are still under way.

5.11
The PDU, as part of its work to develop an evaluation plan, has been working on how to show the links between individual projects and the Fund's broad objectives. In our view, the time taken to prepare an evaluation plan has affected the PDU's ability to demonstrate clear links between the projects and the Fund's objectives. In the interim, the PDU could improve transparency by providing information to the public about how individual projects are performing and what effect the Fund's investments as a whole are having, based on key indicators.

5.12
The Ministry for Primary Industries has a draft evaluation framework in place. It is satisfied that its systems and procedures for evaluation will provide evidence of grants and partnerships meeting the sustainability, social, environmental, and economic objectives of the One Billion Trees programme.

Reporting overall success
For example, the number of marae connected to broadband networks and the effect on local communities could be used to help evaluate the benefits from Fund investments in digital connectivity. Lessons learned from these projects can be shared with others.

5.13
The PDU needs to incorporate the available information across the Fund from all three departments into a plan to evaluate the Fund as a whole.

5.14
Our future interest will be in how well the evaluation plans address the ability to report on the overall success of projects and the effectiveness of the Fund as a whole.

5.15
We acknowledge that there are significant practical challenges with evaluating the outcomes and benefits of individual projects, as well as the whole Fund. These challenges include:

  • identifying when best to evaluate projects' outcomes (Cabinet noted that it would be at least two to three years after investments had been made before improvements in regional outcomes would be observable to measure the effectiveness of Fund investments);52
  • having adequate measures and data, including baselines, with which to make evaluations; and
  • difficulties with the degree to which observed changes with some indicators can be attributed to projects' specific interventions.

5.16
The PDU had not completed its work on the evaluation plan by the end of March 2020, when it was interrupted by Covid-19. The PDU now has the draft evaluation plan, and has advised Ministers that the evaluation will be delayed until mid-2021.

5.17
Covid-19 will make it more difficult to obtain consistent data and evaluate the effectiveness of the Fund's investments. There is some risk that officials will not be able to establish the extent to which the $3 billion of investment represents value for money or contributes to improved regional and national outcomes.

5.18
There is nevertheless still scope for evaluating the Fund's investments. This includes assessing whether the projects, as an aggregate, have delivered on the objectives as contracted, and what we can learn from individual projects and the implementation of the Fund.

5.19
We will also continue to provide feedback on the systems and processes for managing and monitoring the Fund, including those for managing maturing investments, and any additions to the Fund.

Recommendation 3
We recommend that the Ministry of Business, Innovation and Employment complete and publish, as quickly as possible, a plan for evaluating the overall effectiveness of the Provincial Growth Fund to ensure transparency of how officials plan to give assurance to Parliament and the public about what it is achieving, both regionally and nationally.

The increasing pressure on contract management

5.20
A high proportion of the projects are already under contract. At the same time, much of the funding is yet to be paid out. This is because the funding is linked to projects being implemented and contract milestones being achieved.

5.21
As a result, contract management capability in the PDU and the three departments administering the Fund will come under more pressure. We have commented elsewhere that contract management is an important aspect of procurement that the broader public sector needs to pay more attention to.

5.22
We have discussed contract management capability with the PDU in the context of our suggestion that MBIE consider better integrating its appropriation and risk management as part of a Ministry-wide approach to contract management. We will focus on contract management capability in our further audit work with MBIE and the other departments.

5.23
Although the initial $3 billion is expected to have been fully allocated by the end of the Fund's three-year period, there will be ongoing contractual and project management responsibilities for the three departments. Continued monitoring and reporting on all projects after 2020 will be important for evaluating whether the Fund achieves its longer-term objectives. Some funding should also come back – from loan repayments, for example – and that will need to be managed and possibly reinvested.

5.24
A new entity, Provincial Growth Fund Limited, was established by the Government to hold loan and equity investments made through the Fund. It is not yet clear how ongoing contractual obligations for grants and possible reinvestment will be managed. As we were preparing this report, the PDU was working through what its own and Provincial Growth Fund Limited's future could be after the Fund's three-year period ends.

Ongoing management of riskier and longer-term contracts

5.25
When setting up the Fund, Cabinet acknowledged the risk that some projects would not deliver the benefits expected when they were approved. The PDU acknowledges that individual projects might fail. We accept that seeking innovation will always involve a level of risk that projects might fail. These projects might need to be replaced by other projects, or their remaining funding might need to be diverted to projects with a lower risk profile. This will require ongoing management.

5.26
Some projects will not finish before the end of the Fund's three-year period. The Ministry for Primary Industries already has ongoing arrangements, for management of forestry contracts, which it will use for the One Billion Trees programme that will continue after the Fund's three years. We understand that long-running projects will not require any special arrangements, when the Fund ceases to provide funding for operational support. It will continue to report on these to the relevant Cabinet committee.

5.27
The PDU is currently considering the provision for managing contracts after the Fund's three-year period. We understand that any funding requirements will be considered as part of future Budget processes. We will draw this matter to Parliament's attention when advising select committees during future Budget processes.

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

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

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

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

48: The Wellbeing Budget 2020, Wellington at page 6. Speech available on the Treasury's website at treasury.govt.nz.

49: Media release (2020), "Infrastructure investment to create jobs, kick-start COVID rebuild" at www.beehive.govt.nz.

50: Ministry of Business, Innovation and Employment (2017), Briefing for the Incoming Minister for Regional Economic Development, Wellington.

51: Cabinet paper (August 2018), Further decisions on the Provincial Growth Fund at page 6.

52: Cabinet paper (August 2018), Further decisions on the Provincial Growth Fund at page 4.