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Video transcript: Investing for New Zealand – Insights from 2015/16

Transcript for a video about investment and asset performance.

Title: Investing for New Zealand: Insights from 2015/16, Ricky Utting, Manager Investment and Asset Performance, The Treasury

Ricky Utting, Manager, Investment and Asset management, The Treasury

I’m here to talk to you about a – I’ll just get this working – no… here we go – about a report that we released earlier this year which is around analysis and an overview of the state sector – predominantly investment in New Zealand. I have to confess that I’ve never worked for Audit NZ, and most of you probably haven’t heard of our team, Investment Management and Asset Performance, but we cover a whole raft of different areas. Some of you may have been engaged with us around better business cases, gateway reviews, major project monitoring, investor competence ratings, or if you’ve ever looked for new capital funding in the budget, you have to come through us. We cover a raft of different areas. Even if you haven’t been engaging with us you may have seen some of our products – we release a report every three months around the performance of the major monitored projects, and these are the riskiest, most challenging projects that the government’s undertaking. And we usually get quite a lot of flak from the ministers from releasing this information. So things like the Cricket systems upgrade, or the national bowel screening, or the convention centre in Christchurch – that last one we got labelled ‘dopey’ from our Minister Brownlee for releasing that information. We were proved to be right in the end, but it’s actually quite a challenge to actually get that free and frank advice out there. So it fits in with the theme that Stephen was talking about earlier about the transparency and integrity.

So this report that we were looking at that we released in January was for the last financial year, so I’m also adding some additional information into this because that was ten months ago. So when we talk about investment, we mean the commitment of resources with the expectation of receiving future benefits. It’s not just about the decision to invest but the entire investment life cycle. So the idea about giving your attention to these investments means that they have the greatest opportunity to succeed, and you need to keep your attention on them right until the point that you exit that investment. So in the report we said that there are 508 significant investments that we have on our radar – that has now gone up to around 690, so it’s a large number of significant projects, programmes, pieces of work going on. At this stage, combined costs of $87 billion, 53 agencies, 11 sectors, and a lot of these working across organisations. It’s really easy for us to spin off a number of data points and pieces of information but we need to keep in mind that the things that we’re producing – whether they are buildings or roads or whatever – it’s not the reason we’re investing, we’re investing to actually have people connect, to have learned, to be able to get jobs, so a lot of the things that we are measuring are a means to an end, those benefits and those outcomes are what we’re actually trying to focus on.

Okay. We use this very simplistic diagram to try and explain how we think about the world when you’re talking about investment. It’s primarily about how we move from intentions to outcomes, and if you take a traditional sort of project approach, the diagram bit in the middle – there’s a wedge which is a pipeline of stuff going through, there’s a decision point, there’s a circle, which is the stuff which is underway, and what pops up the other end are benefits and capabilities and assets. And you can look at it in a linear way, but in effect if you take a system perspective there are iterations and there’s feedback loops and we need to keep learning as we go. Paul was talk about strategic financial management and the need to actually understand your business – those feedback loops are a part of understanding your business. So the think/plan/do/review is our communications tool about how we think about investment systems. If we talk to people around project management and project life-cycles you see their eyes glaze over, they start yawning, but if you start talking about simple processes and actually trying to achieve things, which is a change from how things are now, then that’s a different conversation altogether.

Remember this diagram, because a lot of the stuff I’ll be talking through this morning will be referring to different parts of this diagram, whether it’s at the beginning of the process or whether it’s the benefits realisation at the end. I’ll try to be quick through this.

OK, part – one of the roles we have is looking at the capital proposals which come through in the Budget. So this graph shows in Budget ’15, the blue area was the amount of our allowance in the Budget and the total area with the green was how many proposals we had in that capital budget – we go look, this is more than over-three times oversubscribed, let’s keep going with this and see how we’re going. Budget ‘16 was about a similar proportion as well and we were going, ooh, we really do need to probably put some more money into this, we’re kicking the tyres really hard on some of the stuff which comes through, we probably need to put some more money into it. So we convinced the government to put more money in for Budget ‘17, as you can see in that bottom line, and the amount of proposals that came in went through the roof. So we’ve just been working on Budget ‘18 and we think that… ah, sorry yeah working on Budget ‘17, and we’re looking forward to Budget ‘18 – we already know that the amount of an allowance, if it follows patterns in the past, is probably going to be committed before the end of this calendar year, let alone getting to the Budget. So we’ve got that ongoing challenge. And there’s a whole lot of reasons for that: underinvestment in the past, the constraints that were put in after the GFC, but also the expectations and the growth that’s going on.

OK. So we split our overall portfolio into some categories: running the business, or keeping the business running; growing the business – so this is areas like in schools and hospitals where if there’s a population or demographic change there needs to be some initiatives to actually accommodate that, and there’s the transformative stuff as well. So this is things we’re actually changing the way we’re working on stuff. So, for example, the creation of the new Vulnerable Children’s entity, Oranga Tamariki, is a transformative programme. Over the years, we’re seeing a greater increase in these transformation programmes. About four years ago, most of the stuff was in run and grow. Still most the stuff, if you put those together, is in run and grow, but proportion of the transformative stuff is going up increasingly, which is great – and part of the joy of having constraints around you means you do need to innovate. We need to innovate.

One of the things that we look at as well is we have 25 investment-intensive agencies. These are the agencies with the greatest number of dollar-value of assets on their balance sheets, or the most strategic assets on their balance sheets. So we need to look at these agencies closely because if these agencies aren’t working then there’s a serious problem, and some of you in the room are part of those agencies that we’ve been looking at in the investor confidence rating. So we’ve been asking for long-term investment plans from these agencies. For those in local government, you’ve been doing long-term planning for a lot longer than central government, central government was a little bit hypocritical – asking local government to do long-term planning and not doing it itself. So yeah, we’re sort of trying to address that. So this is an analysis of the 20 long-term investment plans we’ve seen so far. This is the first time these agencies have done this so it’s their first step.

You see from this diagram that most of the focus is on business-as-usual. There’s lots of assumptions that the world today is the way the world is going to be in the future, and the expectations that you see down the side here – no wage pressures, continued efficiency gains, the Crown will always cover shortfalls – and we’re going, that’s nice, but we actually need to start being a little bit more challenging about how we think about the future – and so we’re encouraging people to think about future scenarios and that planning, as local government does as well.

So, first steps – there’s a wee way to go for us. Regional investment – so, I’m a bureaucrat from Wellington, we aren’t only Wellington focused as you’ll see, from where the spending’s occurring. The two big areas of expenditure are Canterbury and Auckland – Auckland mainly around the growth that’s going on, so roading and the pressures up here, and Canterbury as a result of the Canterbury earthquakes, and that will continue to have spending there because of the Kaikoura earthquakes as well. If you’re in Nelson, don’t worry, there is going to be some spending there at some stage (laughs).

So we can slice and dice the information that we have. So what sectors are attracting investment: transport’s a big spender, defence is a big spender, when we did this the previous year we had housing combined with other social sector – it’s such a scale now we have split it up and said, look housing is a big enough chunk by itself. Canterbury recovery is still there, and there’s still a number of years of work down in Canterbury to actually get that completed. You can see the proportions here anyway.

And how are they performing? So if we look at agencies’ self-reporting – 2015 we had 409 projects and programmes on our radar, now we’ve got – sorry, end of 2016 we had 504, got about 690 now. And this proportion is about the same but there’s this optimism bias that – most of it’s green, and there’s some amber, and a tiny few that are red – this is self-reporting. When we actually monitor the top 55 biggest, scariest, ugliest projects, we get a different proportion – we use a slightly different scale where we look at the reds and amber reds, and greens and amber greens, just for some variation – but you see much more of a bell-curve in everything being towards the green end of stuff. And you’ll also see that the number of those significant projects, which are the biggest, scariest, ugliest ones, is increasing as well. And we’re groaning under the capacity constraints that we have to actually monitor those as well as we would like to, and we’ve just got agreement that we can actually start doing different tiers of monitoring on the projects.

But we release Major Projects Performance Reporting three times a year, and if you keep your eyes out for it, the media usually picks it up on it really quickly, and we get flamed by politicians. One of the new things we’ve implemented since 2015 is something called the Investor Confidence Rating. This is where we look at those 25 investment intensive agencies, the most, with the most assets on their balance sheets, the most critical assets, and come up with a rating for them - like a credit rating - which affects things such as their autonomy, how much they can spend, the limits they can spend to, and the attention that’s given to them. So, there are some requirements for central government agencies, if they have projects of a certain size there’s certain assurance regimes. If agencies are actually performing really well, get a high investor confidence rating, then some of those requirements drop off. Because there’s an expectation that those agencies are performing. This has actually been a really, really useful tool in terms of raising performance, the incentives effects, and for moving away from anecdotal conversations to ones which are much more evidence-based. So we’ve done – looked at 20 investment-intensive agencies, out of the 25, and you can see that four of them are rated A, it says provisional across the bottom but hopefully Cabinet signed these off yesterday, so these are quite new information; B-rated agencies, C-rated agencies, and – if they’re really bad – D- and E-rated agencies. We haven’t got any Ds or Es, the expectation from Cabinet is that these investment-intensive agencies are at least a B-rated agency. So it’s a really good incentive, it’s a really good measurement tool if we’re talking about strategic financial management, the information we know about the businesses, it’s not just the financial stuff, it’s about performance.

So back to the long-term planning. I mentioned that it is early days for central government agencies doing long-term planning and the assessments of the plans basically say: look, they’re more at the lower end here, bit of work needs to improve those as well. But a similar sort of profile to the 4-year plans, which have been around for about 4 or 5 years now, in central government, so there’s a big effort – we need to up the game in the long-term planning and the medium-term planning. Ties in very nicely with what Paul was saying about, you know, it’s not just about the finances – we need to tell this story about the whole of the business and how it works together.

Strengths and weaknesses: the two areas – the lowest areas here are of concerns to us, one’s around that second one in, which is about specificity over desired results, so a lot of the long-term investment plans basically don’t know where they’re going, and they’re going: OK, we’re planning a fuzzy target and – you know, what’s that Alice in Wonderland saying, that saying you know – if you don’t know where you’re going then it’s fine, something to that effect. So we’ve got big concerns over that. The fourth one in there is around clarity over the implications for others, so this is a problem for government agencies, you know, if they make a call about where they’re going, what’s the knock-on effects, because often that’s not just for other agencies but for the wider public as well. And the other two low ones are procurement choices and assets in relation to service performance.

We also measure P3M3. This is portfolio, programme, project management maturity. And so we can separate out the programmes, the portfolios, and our projects/profiles, and once again there’s big areas of concern here. One is at the lowest area, once again is benefits management. Right at the beginning of the talk I said, Government invests not to build buildings but to actually achieve outcomes. The benefits stuff as a real concern to us. So we’re actually putting a fair bit of effort into the benefit stuff to actually raise awareness of it, but also raise capability there. The P3M3 stuff – it’s a mixed bag across government, some agencies are really good at it, some are not so good at it, the dots at the top show the highest scores that we see, so there is capability out there, they are project profiles. If you look at the purple dots down the bottom, this is the portfolio stuff and the lowest ratings, some of these are zero, so there’s some serious concerns we have there as well.

OK. Asset performance data. So – this is the area where it’s part of my role to actually raise performance around asset performance and management as well. We have asked government agencies, core government agencies, to provide us data around the asset performance and their targets - meaningful asset performance measures, targets for those measures and their actual performance. What we’ve found – and again this is a journey and an emerging area, is that there is a lot of capability and development that’s needed in this area. Where we’re really interested in is that people actually start using asset performance information, to inform their decision-making and management, not just at an operational level but at a more strategic level as well: are our assets in the right place, are they performing, are we using them, what does that mean in terms of where we invest and divest. So once again there’s a mixed bag across Government – some agencies do this better than others – but overall there’s a lift that needs to happen in this space. And there’s a lot of money tied up in assets but property, plant, and equipment on the balance sheet is around – social investments have about $150 billion worth of assets on the Crown balance sheet, and property, plant and equipment is around $120 billion. So a fair amount of money tied up with that. If we can get efficiencies in there, it's a good deal.

OK. Looking forward, focusing on benefits. I think our team’s been up here, working with the Auckland Council about setting up a benefits community of interest – the first meeting was in March, and I think that’s possibly moving forward with Auckland Council taking a bit more of a lead role. So this is an area – as I say – this is what we’re focusing on for core government agencies if they’ve had a project which has been signed off by Cabinet, approved by Cabinet, and they completed the project, they have to report back now to Cabinet committees on what benefits have been realised from those projects. Big change, big incentive for people to focus on that. We – in our assessments of investor confidence ratings, we look at benefits realisation in there as well, that’s part of that assessment, and we will be – in our next report – which is due out later this year, we will be looking at the information that we’ve gathered around benefits information and performance as well. So an area that we are leaning into – we absolutely need to get there, it’s an area of low maturity.

Key takeaways – just looking at the time, you get the slide deck anyway, so you’ll be able to work through these. The early ones here are around planning, talking about busting the siloes so that ties in quite nicely with Paul’s speech as well, it’s not functional siloes that you should be looking at; make sure investment proposals are strong; identify and manage the benefits; looks wider; and link asset management to service performance. 

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