Julian Wood

By Julian Wood - 08/04/2019

Julian Wood

By Julian Wood -

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Provincial Growth Fund Overview

The PGF, officially launched on 2 August 2018, is a three year, three billion dollar commitment by the current coalition Government to support regional economic development.

Purpose

As set out in the Investment Statement for the PGF, “the primary objective of the PGF is to accelerate regional development through increasing the productivity potential of and contributing to more and better-paid jobs in the regions.”[1] There are five supporting objectives taken from the guide to the PGF entitled “Powering up Aotearoa – New Zealand’s Regions:”[2]

  • creating jobs, leading to sustainable economic growth;
  • increasing social inclusion and participation;
  • enabling Māori to realise aspirations in all aspects of the economy;
  • encouraging environmental sustainability and helping New Zealand meet climate change commitments alongside productive use of land, water and other resources; and
  • improving resilience, particularly of critical infrastructure, and by diversifying our economy.

Parallel to this there is an additional operational objective: “to realise enduring benefits, in part by leveraging the capital of co-investors.”[3] This means that operationally the PGF is seeking to co-invest in the regions, rather than simply dispersing grants, as this means that capital is returned to the PGF as investments pay off. This then enables “further investment in regional development or other government priorities.”[4]

Geographic scope

The geographic scope of the PGF, outlined and agreed to by Cabinet, has excluded some areas and prioritised others. New Zealand’s three largest cities: Auckland, Wellington, and Christchurch have been excluded, unless the initiatives “are primarily for the benefit of the regions.”[5] This means that urban lower socio-economic areas like South Auckland are excluded, although Helensville and Wellsford are seen as marginally included. Similarly, Porirua, Upper Hutt, and Lower Hutt cities outside Wellington are excluded, but Kāpiti is included and Wairarapa is marginal. In the South Island Christchurch city is excluded although Selwyn, Hurunui, and Waimakariri are included. New Zealand’s fourth and fifth largest cities, Hamilton and Tauranga, are not excluded from the PGF, but the focus of any investments in these areas should be on benefiting the surrounding regions.[6]

Funding types

The PGF has three investment tiers, namely:

  • Regional funding which aims to support economic development projects and includes feasibility and capability building projects identified by the regions themselves;
  • Sector funding which targets high-value sector opportunities especially in the surge regions (including food and beverage, tourism and forestry via the One Billion Trees Programme); and
  • Infrastructure funding aimed at enabling regions to be well connected from an economic and social perspective.

There are also three exclusions from funding:

  • housing;
  • water and large scale irrigation; and
  • social infrastructure such as hospitals and schools.

Funding criteria, priorities and considerations

Aside from the geographic scope and surge regions above, there are a number of other key criteria for funding. Any funding initiative in question must:[7]

  • lift the productivity potential of a region or regions;
  • create additional value and avoid duplicating existing efforts;
  • link to regional priorities and have key local stakeholder support; and
  • be well managed, well governed and have an appropriate risk/reward trade off.

There are also a number of operational ranking priorities and additional requirements. Projects that are multi- regional in scope will also be given priority,[8] and there is also “a strong expectation that region specific proposals will form part of a region’s agreed action plan….”[9] These RAPs are the regions’ own thinking on what regional development actions best fit the region.

Similarly, because of the operational objective to “realise enduring benefits” via co-investing, there is a 50 percent minimum co-contribution requirement for commercial and quasi-commercial projects. In addition, while considering a range of co-investing financial instruments—including grants, debt, underwriting and equity—debt is ranked ahead of grants and equity, as debt provides a higher “means for return on capital.”[10] There is also an additional requirement that all “major commercial projects with whole of life costs in excess of $10 million will be required to submit a detailed business case using Treasury’s Better Business Case methodology.”[11]

All this suggests that different types of investments will be given different priorities, depending on the type of investment requested as well as the overall mix of non- commercial projects, quasi-commercial projects, and commercial projects in the investment pipeline.

Evaluation

At the time of writing the overall evaluation strategy for the PGF has not been made public—it is an ongoing stream of work. The goals of evaluation have, however, been outlined by Minister Jones: to “understand how the fund operates and contributed to regional outcomes; identify early markers of success; and identify opportunities on how the PGF can better achieve its outcomes.”[12]

Having said this, a range of evaluation indicators and tools are outlined in various parts of the PGF investment strategy. Officials have been directed, for example, to track a wide range of indicators aimed at measuring a range of established outcomes.[13] Due to the time lag between data and evaluation and the difficulty of discerning causation, it is unlikely that it will be possible to observe any causative change in these indicators in the short term:[14]

[t]he Fund is only one of the many factors that will contribute to regional outcomes, so these outcomes are not measures of the performance of the funds. Cabinet noted it will be at least 2-3 years after our investment before the improvement in regional outcomes will be observable and agreed that the success over the term of this government be measured in the terms of the effectiveness of the investment activity of the fund.

There is also a commitment to monitor the outcomes of each individual project, with “each funded project having a set of contracted outcomes” and officials have been tasked with assessing the “impact of our portfolio of investments at a more aggregated level e.g. by region, sector….” [15] Funding is generally provided on the basis of specific conditions being fulfilled and on the achievement of specific milestones. These funding conditionalities require ongoing monitoring to see if the conditions are being met.[16]


This is an extract from Julian’s research paper “A Risk Worth Taking | Ensuring the Provincial Growth Fund is Fit For Purpose” Policy Paper. (Released 2019) 

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ENDNOTES

[1] Provincial Development Unit, 4.
[2] Provincial Development Unit, Powering up Aotearoa – New Zealand’s Regions – The Guide to the Provincial Growth Fund (New Zealand Government, 2018), 5.
[3] Provincial Development Unit, ‘Investment Statement for the Provincial Growth Fund’, 21.
[4] Provincial Development Unit, 21.
[5] Hon Shane Jones, ‘Further Decisions on the Provincial Growth Fund’, Cabinet Paper, August 2018, para. 32(a), https://www.mbie.govt.nz/info-services/sectors- industries/regions-cities/document-and-image-library/pgf-cabinet-paper-further-decisions-provincial-growth-fund-august-2018.pdf/view.
[6] Hon Shane Jones, para. 32(a).
[7] Provincial Development Unit, Powering up Aotearoa – New Zealand’s Regions – The Guide to the Provincial Growth Fund, 6.
[8] Provincial Development Unit, 7.
[9] Provincial Development Unit, ‘Investment Statement for the Provincial Growth Fund’, 9.
[10] Provincial Development Unit, 26.
[11] Provincial Development Unit, 22.
[12] Hon Shane Jones, ‘Further Decisions on the Provincial Growth Fund’, paras 27.
[13] These indicators include: regional GDP growth; tourism expenditure; retail spending; number of businesses; value of building consents; number of Māori businesses; returns on Māori assets; regional productivity; unemployment rate and growth; underutilisation rate; proportion in skilled employment; median earnings; sustained employment; take-up of income support by people in work; youth NEET rates (by ethnicity); youth employment rates (by ethnicity); take-up of broadband; transport infrastructure resilience; travel times; passenger and freight throughput; greenhouse gas emissions; waste tonnage to landfills; and nitrate levels in fresh water. See Hon Shane Jones, para. 23 for more detail.
[14] Hon Shane Jones, ‘Further Decisions on the Provincial Growth Fund’, para. 22.
[15] Hon Shane Jones, para. 26.
[16] Ministry of Business, Innovation and Employment, ‘RE: Draft Smarter Specialisation Paper from Julian Wood for Review’, 29 January 2019, para. 8.

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