Part 3: The Growth Services Fund

New Zealand Trade and Enterprise: Administration of grant programmes.

Introduction

3.1
Grants are available under the Growth Services Fund (GSF) to support firms with high potential for growth to purchase external advice and expertise, market intelligence, and development services. The GSF replaced Industry New Zealand’s Business Growth Fund scheme.

3.2
We examined a sample of grants approved between 1 July 2003 and 31 March 2004. This period allowed for the merger of Industry New Zealand and Trade New Zealand from 1 July 2003. We also examined whether our recommendations, from the earlier inquiry into the Business Growth Fund, had been implemented.

3.3
In the 2003-04 year, $9.705 million was available to be distributed under this Fund. Between 1 July 2003 and 31 March 2004, there were 84 approved GSF applications.8 NZTE does not keep a list of GSF applications that are declined, and enters only approved applications into its system. Figure 6 below sets out a summary of applications approved under the Growth Services Fund for the 9 months ended 31 March 2004.

Figure 6
Approved applications under the Growth Services Fund


 Number of applications approved Total ($)
Approved Paid
All applications 84 2,311,495 683,548
Applications we examined 36 1,686,430 556,459

3.4
Grants ranged in value from $1,881 to $75,000. NZTE was able to provide us with adequate data for all of the GSF grants that were awarded during the period we examined.

Cabinet criteria for the award of Growth Services Fund grants

3.5
Grants are available to both firms and groups of firms, to facilitate access to:

  • new business opportunities;
  • skills and expertise;
  • innovation and new technologies; and
  • finance.

3.6
Applicants must:

  • demonstrate how the funding will add value to existing activities;
  • have no more than 100 full-time equivalent employees and/or annual turnover of no more than $50 million;
  • be operating in a commercial environment, resident in New Zealand, and registered for GST purposes;
  • be financially viable and have a management team with a sound track record;
  • have high growth potential and a demonstrated commitment to growth;
  • demonstrate how the funding will lead to a net economic benefit – i.e. beyond private benefits to the applying firm alone (this may be in terms of, for example, new jobs created or “spill-over” benefits to other firms); and
  • have proposals and business concepts that are consistent with New Zealand’s laws and regulations.

3.7
NZTE has defined businesses of “high growth potential” as those with the ability to generate either 20% revenue growth sustainable for 5 years, or revenue growth of $5 million within 5 years.

3.8
GSF grants can be for up to 50% of approved costs on a reimbursement basis. The upper limit for funding is normally $100,000. NZTE may approve funding of more than $100,000 in exceptional circumstances.

What can Growth Services Fund grants be used for?

3.9
The types of activities that NZTE would expect to fund under the GSF include:

  • new business opportunities –
    • feasibility studies – including technical assessments, advice on regulatory requirements, and scientific advice,
    • e-commerce strategy and implementation;
  • skills and expertise –
    • assistance to fund external professional mentors or project managers,
    • assistance with international business exchanges to facilitate transfer of international business skills that are not readily available in New Zealand;
  • innovation and new technologies–
    • development of prototype design and testing,
    • development of intellectual property protection and establishing the project as a commercial venture; and
  • finance–
    • preparation of documentation to obtain finance for business development.

3.10
Organisations can access funding for international travel-related activities, where these have been identified as important within the client’s growth development plan. Funding is limited to a daily allowance for accommodation, transport and incidental costs, and an airfare allowance for international travel based on NZTE standard flat rates for the region(s) visited.

What can Growth Services Fund grants not be used for?

3.11
There are a range of costs that are not eligible for funding. These include:

  • “business as usual” expenses;
  • costs incurred on a project before approval was received from NZTE;
  • capital items;
  • internal costs of a business;9
  • expenses of related/associated parties (for example, project activity undertaken by the immediate family or employees of the applicant);
  • the costs of applying for funding from other sources; and
  • activities more appropriately funded from other agencies.

Were the Cabinet criteria met?

3.12
We noted 17 approved applications that did not address key criteria explicitly enough. For example, under the eligibility criteria set by Cabinet, applicants are required to demonstrate how funding will lead to a net economic benefit beyond any benefits for the applying firm.

3.13
In our view, 8 of the 17 applications did not make a clear enough case for the expected net economic benefit to New Zealand. In 2 of those cases, it seemed that benefits would be limited only to the applying firm – one of these approved applications explicitly stated that no benefits were expected “beyond benefits to the [applying] firm.”

3.14
Cabinet also requires applicants to demonstrate how the funding will add value to existing activities. NZTE’s guidance regarding this criterion states that–

The fund is available for additional activities only – not to subsidise the cost of activities that would have occurred without assistance.

In our view, 10 applications did not address this criterion in enough detail.

3.15
The GSF Advisory Panel appropriately excluded elements of requested funding in one grant application, as the elements did not meet eligibility criteria. An amended application was subsequently approved.

3.16
In our view, grant applications should address all the key criteria. Where applications did not address the criteria, we expected to see evidence of Client Managers and other NZTE grants staff following these issues through to a satisfactory conclusion.

Recommendation 7
We recommend that NZTE require all Cabinet criteria to be explicitly addressed in Growth Services Fund applications. Decision-makers should ensure that they are satisfied that there is comprehensive documentation ensuring that all criteria are fully addressed.

The application process

3.17
NZTE undertakes an initial appraisal of the growth potential of businesses submitting a grant application. This will help NZTE to decide which aspects of the service range are most appropriate for the applicant.

3.18
Companies or groups of companies identified as having a high growth potential will undergo a more intensive capability assessment with an NZTE Client Manager. From this assessment, a development plan will be compiled for that company including projects that will assist the company to realise its growth potential. The Client Managers are located throughout the country and take different approaches when compiling documents to support a grant. Most applicants need help from their Client Manager to complete the template documents.

3.19
Once a proposal has been prepared, it is considered by the delegated authority appropriate for the size of funding requested:

  • if the proposal is for up to $25,000, a decision can be made by the General Manager Market Services;
  • if the proposal is for $25,000-75,000, it is considered by the GSF advisory panel, and a recommendation is made to the Chief Executive; and
  • if the proposal is for more than $75,000, it is considered by the NZTE Board Grants Sub-committee.

3.20
Another Client Manager peer reviews a GSF grant application before it is submitted for approval. Sector Team Leaders provide another level of internal review. The Senior Advisor Client Services carries out the final quality assurance check before sign-off is sought from either the General Manager Market Services or the GSF Advisory Panel. The approval process is summarised in Figure 7 on the next page.

Figure 7
Approval process for Growth Services Fund grants

Figure 7.

The Growth Services Fund Advisory Panel

3.21
The GSF Advisory Panel comprises 2 senior NZTE managers and one independent expert. The Panel meets monthly in Auckland, Wellington, and Christchurch to consider proposals put forward by Team Directors or Client Managers on behalf of applicant companies.

3.22
The Client Manager presents a proposal to the Panel. The Panel members ask questions, and then each member of the Panel completes a company risk matrix. A rating for the company is agreed.

3.23
The Panel may recommend approving an application subject to whatever conditions the Panel sees fit. Minutes of the Panel’s meetings are sent either to the Chief Executive or the Board Grants Sub-committee for approval, depending upon the amount of funding sought.

3.24
Once a GSF grant has been approved, NZTE’s Wellington office manages the approval and payment of claims, and the monitoring of progress against the project proposal. This team is responsible for the administration of all claims, ensuring contract compliance, and receipt of the final funding form.

Guidelines

3.25
NZTE has produced a set of operating guidelines for the GSF that describe:

  • the objective of the GSF;
  • the levels of assistance available;
  • what GSF funding cannot be used for;
  • the application and assessment process; and
  • how the eligibility criteria are to be applied.

3.26
Before October 2003, the guidelines presented an overview of the GSF and its criteria, but did not thoroughly address the interpretation of key eligibility criteria. From October 2003, NZTE has had satisfactory operating guidelines for the GSF. These guidelines provide instructions on how to interpret criteria, describe eligible and ineligible costs, and contain examples of typical funding options.

3.27
NZTE staff involved with preparing GSF applications have access to a series of templates for presenting:

  • background information about the applicant;
  • the financial performance/stability of the applicant;
  • key risks and threats to the project and the applicant; and
  • project scope and planning (including a breakdown of project components).

3.28
These templates are designed to ensure that each application addresses eligibility criteria, and also helps to ensure that GSF information is presented consistently within NZTE.

Documentation

3.29
We looked at 2 sets of files for each grant. These were:

  • the Client Manager’s file for the grant; and
  • the payment and contract management file for the grant (held in Wellington).

3.30
The Cabinet minute establishing the GSF states that –

… eligibility for the Growth Services Fund will flow from a methodical assessment of a client business’ capabilities, and the development plan subsequently drawn up for that client.

3.31
The clarity and completeness of documentation in the Client Manager’s files varied widely. For example, we expected to find a copy of the development plan on the files for each grant. However, only 8 of the grants we examined had either a copy of the development plan on file, or a reference to an electronic copy of the development plan in NZTE’s document management system.

3.32
Some files included general information about the client, with a number of different grant applications all stored in the same file. Key documentation relating to grants was missing from some Client Managers’ files.

3.33
Three applications referred to background checks being carried out, but the required documentation was not included in the file. It was unclear in one GSF application whether or not the required checks had occurred. We saw evidence of background checks being undertaken for all other applications, and no adverse findings were noted.

3.34
The GSF guidelines do not include any instructions for Client Managers on collecting and storing grant-related material.

3.35
The central payment and contract management files were complete. Each GSF grant had its own file, which contained copies of the key accountability documents.

Recommendation 8
We recommend that NZTE develop guidance for Client Managers to clarify the types of documents that should be held on each Growth Services Fund grant file and ensure that these files are checked periodically for completeness.

NZTE’s approach to risk for the Growth Services Fund

3.36
The GSF guidelines require Client Managers to thoroughly assess the financial viability and track record of each applicant. Template documents require the Client Manager to address the key risks and threats to the project and the company that are outside the company’s control. The guidelines advocate taking a risk-averse approach if there is any doubt about legal or ethical issues associated with an application.

3.37
All applications are reviewed centrally by the General Manager Market Services, which helps to ensure that the guidelines are applied consistently, despite applications being processed by different Client Managers.

3.38
In addition to the standard risk profiling undertaken for all applicants by their respective Client Manager, there are higher levels of accountability and sign-off for activities of higher value. All applications for more than $25,000 are reviewed at the monthly meeting of the GSF Advisory Panel.

3.39
Each member of the GSF Advisory Panel must complete a risk matrix template for all applications of more than $25,000. This requires each member of the Advisory Panel to rate 11 risk factors on a scale from one to 5, and for the panel to agree on a total risk profile score. The template describes the required standards for each risk factor to be scored. A very low total score indicates no need for the grant (because of the low level of risk attached to the company), and a very high score signifies an unacceptable level of risk.

Were NZTE’s assessment procedures satisfactory?

3.40
NZTE’s assessment procedures were satisfactory. We found that applications sent to the GSF Advisory Panel were thoroughly reviewed. We noted 4 applications where the Panel had either chosen to reduce the size of the grant, or had imposed extra accountability conditions on the grant recipient.

3.41
The risks attached to an application are identified by separate assessments of the quality of governance arrangements, management experience, and financial performance of the applicant. These assessments are complemented by the requirement for information to be checked with the New Zealand Companies Office and for credit inquiries to be undertaken for applying firms and for individual directors, if necessary.

3.42
The GSF Advisory Panel makes a formal assessment of risk through a risk matrix template. For one grant, we noted that the Panel discussed at length the viability of the applying company. NZTE commissioned an internal report in order to resolve the debate, and the eventual approval of the grant was undertaken by means of a special Board paper.

3.43
We found that appropriate payment controls, such as requiring original invoices to be submitted, had been exercised over all of the relevant grants that we examined. The Grants Administration team based in Wellington processes all claims against GSF Grants. This helps to ensure consistent control over payments.

3.44
We saw examples of claims being put on hold while the Grants Administration team obtained appropriate invoices and further evidence to ensure that the claim met the agreed purpose of the grant.

Monitoring of Growth Services Fund grants

3.45
Client Managers collect information about the progress of GSF grants as part of their ongoing engagement with the client. Our review of the grant files showed only some evidence of Client Managers monitoring and recording the progress of a grant. We were told that all communications are to be recorded under NZTE’s new Client Management System.

Recommendation 9
We recommend that NZTE ensure that all significant conversations or meetings with Growth Services Fund grant recipients are recorded throughout the life cycle of the grant.

3.46
At the completion of a grant, all applicants are required to complete a template final funding form. This form requires the applicant to detail:

  • outcomes achieved as a result of the funding;
  • impact the funding has had on the company’s capability;
  • what the funding has enabled the company to do;
  • level of satisfaction with NZTE’s service; and
  • any suggestions as to how NZTE could improve its service.

3.47
NZTE intends that the information collected will be used for programme management, audit and evaluation purposes. The information sought in template forms is generally high-level. We noted 2 final funding forms that did not include much detail and we did not see evidence of further detail being sought.

3.48
In the GSF contract signed by NZTE and the approved applicant, the projected outcomes from the funding are noted. These include projected sales revenue and staff numbers for the next 5 years. The contract requires applicants to report against these projections for the next 5 years, within 60 days of the end of their financial year. The grants in the files we examined had been awarded since 1 July 2003, so no such projections had been collected yet.

3.49
Our review of the monitoring of grants was limited, as 12 of the 36 grants we examined had not been claimed against at the time of our audit.

3.50
Of the 24 grants claimed against, 22 had the required monitoring documentation. In 2 instances, the final funding form was not in the Grants Administration files. We were told that final funding forms were not sent in for about 20% of grants, and that final GSF grant payments were withheld while the missing reports were followed up.

3.51
Under the previous Business Growth Funding Scheme, the Grants Administration team produced summary reports from the accumulated final funding forms. We were told that this exercise would be repeated for the GSF, with results fed back to Client Managers and also made available to NZTE’s Strategy and Evaluation team.

8: This does not include Business Growth Fund and Fast Forward Fund applications fund approved after 1 July 2003. Both of these Funds were phased out by October 2003.

9: Up to 15% of total funding can be incurred on internal costs, if it can be demonstrated that the project will have a negative impact on “business as usual” activities that may need to be offset through the re-allocation of internal resources.

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