Part 5: Quality of information and due diligence
5.1
In this Part, we discuss the importance of good-quality information to inform investment decisions. We discuss how:
5.2
The Investment Management System aims to optimise value from new and existing investments and assets for current and future generations of New Zealanders. To achieve this, it is expected that agencies prepare all significant investment proposals in keeping with published guidance from the Treasury about business cases (the Better Business Case model).
5.3
Even for smaller scale or lower-risk projects, agencies will generally need to prepare at least a single-stage business case that encompasses all five aspects of the Better Business Case model.26 Significant capital expenditure usually requires a two-stage approval process and both an indicative and detailed business case.
5.4
We accept that there will be trade-offs to these processes in circumstances where decisions need to be made quickly. In our view, it is important that those trade-offs are proportionate to the scale of the investment and the risks involved.
5.5
We expected that:
- decision-makers would have been given adequate information about proposed projects to make good investment decisions; and
- due diligence would have been carried out to a level that was reasonable and proportionate to the level of funding being allocated.
Summary of findings
5.6
For both programmes, it appears that Ministers relied on an assumption that most projects would be "investment ready" or "shovel ready". This means that business cases would have already been prepared and projects could be announced and started quickly.
5.7
We were told that for NZUP this was not the case. Where there were business cases, they were at varying stages of development and quality.
5.8
Consequently, the information that was available to Ministers to make investment decisions was limited.
5.9
This was particularly so for NZUP investments. Ministers relied on many transport projects already being part of the National Land Transport Programme, which meant that they had already been prioritised but not yet funded.
5.10
In our view, the lack of good-quality information meant that the risks to delivery and value for money might not have been well understood when funding decisions were made.
5.11
This has already had consequences. In mid-2020, an officials' Oversight Group was set up to provide programme-level assurance and regular reporting to joint Ministers on the progress of transport projects within the NZUP. The Oversight Group identified significant risk and uncertain delivery.
5.12
This led to Cabinet approving additional Crown funding of $1.9 billion to fund agreed projects at their new cost estimates and provide contingency for transport projects within the NZUP.
5.13
Similarly, the speed of the process carried out to select projects for the SRP meant that much of the initial project information that applicants provided had to be taken at face value.
5.14
However, Crown Infrastructure Partners worked hard to test applications as best it could. It drew on advice from a range of government agencies as well as engineers and other experts from the private sector.
5.15
Engineers were asked for advice on project achievability, costs, and benefits. They were also asked for advice on regional capacity to support the work.
5.16
Even so, Crown Infrastructure Partners was not able to carry out formal value-for-money assessments of the projects given the available time frames. Instead, it weighed up the level of employment that was likely to be generated, any co-funding or other contributions by the project owner, and the likely public benefit of the programmes.
5.17
Delivery agencies were also involved in due diligence processes carried out as part of the SRP. Once Ministers had decided to support a project, delivery agencies collected additional due diligence information and carried out further analysis.
5.18
Crown Infrastructure Partners collated the information from delivery agencies and provided it to Ministers to seek their agreement to release funding. This additional process was an important risk management step. Delivery agencies could not spend any of their appropriated funds until Ministers had received advice and agreed to funding being drawn down.
Information to support New Zealand Upgrade Programme investment decisions was limited
5.19
To identify projects for inclusion in the NZUP, agencies were given high-level direction and were expected to quickly provide Ministers with lists of projects that could be announced.
5.20
The nature and intent of the NZUP suggests that the projects that agencies proposed needed to be "investment ready". This usually means that a business case has been prepared and appropriate due diligence completed. This ensures that, if selected, the project could be announced and started quickly. As we discussed in Part 4, this was not the case for some projects.
5.21
Agencies told us that they generally do not have unfunded projects that have reached the stage where an appropriate business case has been prepared.
5.22
For example, the Ministry of Health told us that it does not have investment-ready capital projects waiting to be approved and funded. It told us that this is largely because of the complexity and expense associated with planning health infrastructure investments.
5.23
Some agencies were better positioned to provide lists of potential projects within the required time frames. Waka Kotahi and KiwiRail were better positioned because existing planning and funding processes had already identified a pipeline of future high-value projects.
5.24
Waka Kotahi and KiwiRail also had experience with receiving Crown funding from a range of sources outside normal budget processes and the National Land Transport Fund. However, the extent and currency of the business cases for proposed projects were variable. Waka Kotahi told us that some of the information it relied on was up to 10 years out of date.
5.25
As we discussed in paragraph 4.143, a limited number of officials were involved in the decision-making that led to setting up the NZUP. It is not clear whether agencies were able to adequately identify interdependencies or other considerations, such as regional impacts or impacts for Māori, Pasifika, or other communities.
5.26
The lack of good-quality information to support initial investment decisions has meant that some risks about the NZUP that officials raised are now being realised.
5.27
An Oversight Group was established in mid-2020 to strengthen risk management and provide greater assurance for transport investments. Te Waihanga was involved in the group, along with the Ministry of Transport, the Treasury, and three independent sector experts.27
5.28
Ministers told us that the Oversight Group's purpose was to provide programme-level assurance and regular reporting to joint Ministers about the transport components of the NZUP Programme.
5.29
At the Oversight Group's initial meeting in August 2020, it assessed that there was significant risk and uncertainty throughout the transport component of the NZUP.
5.30
In April 2021, the Treasury and the Ministry of Transport highlighted a range of issues with the original decision-making process for the NZUP. They noted that "overall, confidence in the baseline information is much lower than would be expected from the Crown's normal capital management process" and that the NZUP "should include more of the Crown's usual steps for management of risk".
5.31
The Treasury and the Ministry of Transport also advised that "there are no projects where there is clarity on all of benefits, scope, costs and schedule information". All but one of the projects were assessed as having medium or high levels of risk and uncertainty.
5.32
Significant cost increases and uncertainties were identified through a "re-baselining" exercise on the transport projects that had been announced. Ministers were advised that, of the 26 transport projects in the NZUP that had been announced, 21 projects could not be delivered within the funding amounts that had been allocated. They were also advised that the original programme could not be delivered with the $6.8 billion of funding.
5.33
Some projects were rescoped, and cost estimates for others were revised. On 31 May 2021, Cabinet agreed to provide additional Crown funding of $1.926 billion to take forward a revised package of transport investments that "balances the delivery of the majority of projects in line with their original scope and manages the fiscal cost for taxpayers".
5.34
Cabinet also authorised joint Ministers to make further investment decisions on rescoped versions of three projects in the transport programme subject to "more satisfactory information regarding scope, cost and schedule" and "the completion of a satisfactory Detailed Business Case".28
5.35
These projects were the Whangārei to Port Marsden Highway Project, Mill Road, and State Highway 1 Papakura to Drury South Stage 2 transport projects. These projects had a combined funding allocation of $1.566 billion.
5.36
Waka Kotahi advised that detailed business cases for the Whangārei to Port Marsden Highway and various South Auckland projects have subsequently been completed and submitted to Ministers.
5.37
Cabinet approved the disestablishment of the Oversight Group in September 2021. We were told that this was because of concerns that the Oversight Group arrangements were complicated, duplicative, and inadvertently slowing down progress.
Much better information was provided for Shovel-Ready Programme projects
5.38
Applicants to the SRP were asked to provide a range of information in a project information form. Appendix 2 summarises the application requirements set out in the form.
5.39
The speed of the SRP process meant that much of the initial project information that applicants provided had to be taken at face value. However, Crown Infrastructure Partners worked hard to test applications as best it could.
5.40
For example, although time constraints meant that Crown Infrastructure Partners did not engage formally with experts in Māori economic development or with iwi and hapū in the relevant regions where projects were being considered, it sought advice from the Director of Te Ao Māori Strategy and Performance at the Treasury. Similarly, it asked Kānoa to provide a "regional" view on investments.
5.41
These might have been reasonable steps to take given the time constraints, but they had limitations.
5.42
Although Crown Infrastructure Partners contracted engineers and other experts from the private sector to support the rapid assessment of projects, some expert reviewers were assigned multiple projects to assess within a matter of days. Expert reviewers and officials worked hard to meet very tight deadlines. Despite these efforts, the speed of the process meant that, at times, it lacked depth.
5.43
Crown Infrastructure Partners also commissioned advice on the regional effects of the Covid-19 pandemic and on the capacity that different sectors and regions had to deliver projects. It provided this advice to Ministers to help inform subsequent decision-making about how projects should be distributed throughout the country.
5.44
For example, advice from Crown Infrastructure Partners noted that the Otago region would suffer the sharpest reduction in regional gross domestic profit because of the pandemic, with Queenstown being heavily affected.
5.45
Crown Infrastructure Partners prepared specific advice about the effects of the Covid-19 pandemic on Queenstown before the Infrastructure Reference Group longlist was completed. The first specific announcement of projects to be funded from the SRP was an announcement of two infrastructure projects in the Queenstown district on 26 June 2020.
5.46
Cabinet agreed to a shortlist of projects in June 2020 and authorised the Infrastructure Reference Group Ministers to make final decisions about projects. In July, Cabinet agreed that the delivery agency would need to seek final project approval from the Infrastructure Reference Group Ministers before it distributed funding to a project.
5.47
Delivery agencies were also to provide "appropriate assurances that the project can achieve the intended benefits, enabled jobs, scope and expedient delivery, and that the government funding is appropriate to enable the project and represents value for money to the Crown".29
5.48
The Treasury recommended this additional process, which was a key risk management step. Delivery agencies could not spend any of their appropriated funds without Ministers receiving advice and agreeing to draw down the funding. Advice from delivery agencies was developed and provided to Crown Infrastructure Partners, which co-ordinated briefings to Ministers.
5.49
Ministers were advised about the limitations of some of the due diligence work. For example, on value for money, approval briefings stated:
[Crown Infrastructure Partners] has not undertaken a formal value for money assessment of the projects given the available timeframes and the fact that the [Infrastructure Reference Group] is an economic stimulus programme. [Crown Infrastructure Partners] has assessed the amount of likely employment to be generated, any co-funding or other contributions by the project owner and the likely public benefit of the programme. These are key factors to be considered with respect to value for money, given the policy framework [Infrastructure Reference Group] was established under – with higher employment and/or public benefit projects representing the highest value for money under this approach. For private sector projects, where loans or equity are used, this improves overall value for money as the funds will likely at a future date be returned to the Crown.
5.50
We saw evidence that some projects were discontinued. We were told in late November 2023 that five projects had been withdrawn after shortlisting and approval, and six projects were shortlisted but then not approved for funding. We understand that $8.35 million was spent on the withdrawn projects prior to their withdrawal. However, Crown Infrastructure Partners told us that some of this funding has already been recovered, and more might yet be recovered.
5.51
Although the decisions to stop projects might have been sensible, they took place after the decisions to fund those projects had already been announced (albeit subject to some subsequent checks).
5.52
Stopping or descoping projects after investment decisions have been announced or when funds have already been spent is potentially a waste of public resources. Making decisions to stop or reduce a project's scope is also more difficult to do when public expectations have already been set by announcing investment in a project.
26: The Better Business Case model includes consideration of five cases:
- Strategic Case – What is the compelling case for change? What are the benefits?
- Economic Case – What are the options? What is the best option for New Zealand?
- Commercial Case – Is the proposed procurement commercially viable? Can the market deliver?
- Financial Case – Is the investment proposal affordable? How will we fund it?
- Management Case – How will the project organise for successful delivery?
27: The Oversight Group's external members collectively brought significant engineering, construction, and infrastructure experience to the group.
28: The joint Ministers were the Minister of Finance and the Minister of Transport.
29: Cabinet also agreed that for small low-risk projects the Infrastructure Reference Group Ministers could lower the requirements for due diligence and assurances, if appropriate.