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A quiet revolution in government investor management

The Prime Minister devoted his first major speech of the 2016 political year to an announcement that the government will put up the funding to bring forward two major transport projects in Auckland.
So far, so traditional, just part of the normal business of government. But behind the scenes, the New Zealand Treasury has been developing the tools to hone the public sector’s investment management capability. Late last year it released the first of what will be annual reports on this work programme.

Broadly, the government’s objectives are to achieve value for money and to attract more private sector capital into social service provision.

Procurement and project management
Government procurement accounts for around $39 billion of spend a year. To ensure the most effective use of this expenditure, the Treasury has developed and is refining an “investment management system” for staged introduction starting last year.

Key to this is what Treasury calls the “Five-Case Model” which asks entities to evaluate proposed investments according to five criteria:
•    is there a compelling case for change 
•    is the best value for money option achievable and can it be delivered successfully
•    is the best value for money option affordable
•    is the best value for money option commercially viable, and
•    does it optimise value for money.

Treasury maintains a list of “investment intensive” agencies, the composition of which may change over time. Tier One comprises organisations which own, or have a monitoring function in relation to, asset and investment portfolios over $1 billion, or which manage critical assets (this includes the Ministry of Education and the Department of Corrections). Tier Two covers the $500 million to $1 billion portfolio range (for example, the Ministries of Justice and Social Development).

All listed agencies are required to develop a Long-Term Investment Plan outlining their capital intentions over an horizon of at least ten years. They must also self-assess their portfolio performance and report this to Treasury three times a year.

The first round of reporting showed that, as of 30 June 2015, 71 percent of projects by value were on track against only 0.1 percent which had breached project tolerances.

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

The three performance categories for Treasury monitored projects are:

Green     on track, no forecast breach
Amber    forecast breach of at least one tolerance
Red        tolerance breached.

Only one of the listed projects had a green rating but Treasury explains that this is to be expected because once a project achieves green status, it is 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 to be re-scoped (as to the expected deliverables or the required budget) or to have its overall viability reassessed.  

An Investor Confidence Rating is also being phased in this year. 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 be able to exercise over its investments.

In a separate initiative in which Treasury has had a role but which is being led by the Ministry of Social Development (MSD), an actuarial model is being applied to evaluate future welfare liability as a guide to where the government should put its investment in welfare-to-work services. The approach is modelled on the system used by the Accident Compensation Corporation, which is responsible for workplace injury insurance, rehabilitation and prevention in New Zealand. 

Social investment
The stand-out policy in this area is the government’s plan to divest a proportion of its state housing stock to Community Housing Providers (CHPs) – in reality likely to be a consortium that includes a CHP. The first tranche of transfers will be in Tauranga and Invercargill – markets chosen because demand is relatively stable. The government has signalled that it will consider both lease or sale options.  

Any transaction must involve a registered CHP, and only CHPs will be eligible to receive the Income Related Rent Subsidies paid by the government on behalf of low income tenants renting in the private sector.  

The government will not provide low interest loans or chip in cash equity to help CHPs with the purchase price. But it will allow them to enter consortia with developers and financial backers. And it accepts that the sale price will reflect the fact that the properties must be kept for social housing and that the government will retain an interest so that it can capture a share of any value upside if the property is ultimately sold.

It is expected that CHPs will enter two contracts with the government:
•    a Capacity Contract with the Ministry of Social Development (MSD) for tenancy and property management services paid through an Agreed Rent per property, a proportion of which will be paid by the tenant and the remainder through the rent subsidy, and
•    a Sale and Purchase or Lease Agreement with Housing New Zealand through Treasury’s Transactions Unit.   

Another mechanism for attracting private capital to support the provision of social services is ‘social bonds’ (also referred to overseas as ‘social investment bonds’). The investors, which may be financial institutions, charities or individuals, fund a social service provider to provide the contracted for service and the government pays by reference to the success of the intervention and the level of ‘savings’ (both financial and social good) that accrue to the government.  

Potential areas of focus are interventions to reduce recidivism rates, help people manage long-term health problems and assist the mentally ill to find employment. 

Matt Yarnell is a partner at Chapman Tripp specialising in infrastructure and commercial projects.