New Zealand: Treasury takes investment management to new level
Brief Counsel

Much work has been going on behind the scenes at The Treasury to improve the public sector's investment management capability.

Some of the fruits of that effort have now been released in the first of what will be annual reports on " Managing Government Investment Projects".

The report provides a useful insight into Treasury thinking and will be of interest to the public sector and to businesses which contract with public sector clients.

A big player in the economy

Government procurement accounts for expenditure of around $39 billion each year.

Currently the public sector is engaged in 409 projects with a whole-of-life cost of $74 billion. Investments in continuing to run core services (property and equipment maintenance or replacement, software procurement) make up around half of the investment portfolio by both volume and value.

To ensure most effective use of the capex budget, the Treasury has developed and is continuing to refine an "investment management system". A foundation part of this is the "Better Business Case" initiative, introduced in 2011 to give decision-makers better frameworks for making investment decisions.

Treasury maintains a list of " investment-intensive" agencies, the composition of which may vary over time.

• Tier 1 comprises organisations with asset portfolios or investment intentions over $1 billion, or with a monitoring role over large investment portfolios in Crown Entities, or which manage critical assets.
• Tier 2 comprises organisations with asset portfolios in the $500 million to $1 billion range or which manage assets with a moderate level of service criticality.

As from 1 July 2015, listed agencies have been required to develop a Long-Term Investment Plan outlining their capital intentions to at least ten years.

Currently on Tier 1 are: the Ministries of Education and Health, the New Zealand Defence Force, the Department of Corrections, IRD, ACC, Housing NZ Corporation, NZ Transport Agency and the Auckland and Canterbury DHBs.

Investment decision-making

The Treasury encourages agencies to evaluate proposed investments according to a "Five-Case Model" which asks:

• Is this the best value for money option achievable and can it be delivered successfully?
• Is this the best value for money option affordable?
• Is this the best value for money option commercially viable?
• Do the options optimise value for money?
• Is there a compelling case for change?

To enable better assessment of the investment case, Treasury has also released a common model (known as CBAx) for agencies to use when undertaking investment analysis.

Procurement

The New Zealand Government Procurement Branch sits within the Ministry of Business, Innovation and Employment and is responsible for reviewing procurement plans for purchases over $5 million. It also provides commercial expertise, endorses collaborative procurement, leads all-of-government contracts and builds workforce capability.

Over the coming year, the branch's priorities are to:

• increase the focus on supplier markets when forming investment intentions. This includes identifying whether new solutions or market entrants are needed and, in the case of complex projects, seeking to provide enough time and information to ensure markets, especially New Zealand companies, can respond
• measure the commercial maturity of agencies through a Procurement Capability Index, and
• assist with the Canterbury rebuild.

Measuring project management performance

Treasury requires agencies to self-assess their portfolio performance and report this three times a year. That reporting showed as at 30 June 2015, that 71% of projects by value were on track against only 0.1% which had breached project tolerances.

In addition to this, Treasury monitors directly the most complex and risky investments. At this time, there are 38 projects in that subset, with a combined whole-of-life cost of $20.5 billion.

The three performance categories are:

Only one of the 38 projects has a green rating but Treasury explains that it is difficult for monitored projects to achieve green status because they have significant inherent risks and, as they achieve green, they are typically removed from the group and passed back to the lead agency.

A red rating means that successful delivery appears to be unachievable and that the project may need re-scoping or to have its overall viability reassessed. The only project rated red is the Christchurch Central Delivery Programme (responsible for ensuring delivery of the Christchurch anchor projects).

Treasury says it is "highly likely that additional funding will be needed" due to unanticipated costs, typically driven by land remediation delays and scope changes".

Investor Confidence Rating

The Investor Confidence Rating (ICR) is being introduced in a phased approach over 18 months from July 2015 to December 2016. The "Investor" is the Cabinet. The rating is based on four lead and four lag factors and is intended over time to determine the level of delegated authority, scrutiny and support an agency will have over its investments.

Chapman Tripp comment

This regular investment reporting from the Treasury will increase the transparency of the procurement and contracting process.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.