CO (19) 6: Investment Management and Asset Performance in the State Services

1This circular sets out Cabinet's expectations for the management of investments and both physical and intangible assets by the following types of organisation (agencies):

2The circular supersedes Cabinet Office Circular CO (15) 5, and gives effect to Cabinet's intention to make the best investment choices for current and future generations, ensure there is active stewardship of government resources, and maintain a strong alignment between individual investments and the government's long-term priorities.

3The focus of this policy is on:

4This circular applies to agencies in different ways depending on their organisational form, the nature of their investments, and the scale and criticality of assets under management. In particular:

5Ministers and chief executives should ensure that:

6In this circular:

7This circular is comprised of three sections and two annexes:

8The investment management system (the system) is a subset of the public finance system.  It encompasses a set of processes, rules, capabilities, information and behaviours that work together to manage investments through their life cycles.

9The system is complex with interrelated cycles spanning months and years.  It converts business unit, agency, sector, system, and all of government needs into outcomes in a way that optimises value to New Zealand, working within financial and other constraints.

10The system operates across the State services and through similar processes, capabilities and behaviours in agencies.  For the system to be effective there needs to be a strong alignment of investment management interests at all levels.

11The primary objective of the investment management system is to optimise value from new and existing investments and assets for current and future generations of New Zealanders.

12To that end, the system must:

13As each agency or party performs its roles in the system it should meet the following expectations:

14The investment life cycle comprises four recognisable phases: thinking, planning, doing and reviewing.  These can be sequential but there is also an ongoing dynamic as ideas are tested, refined and adopted or discarded within an agency, across government, and with a wide range of stakeholders.

15Each phase has different implications for agencies and decision-makers.  Among these is the need to observe the approval thresholds (such as those in Annex 1).

The thinking phase

16This phase involves identifying investment proposals that could deliver benefits to New Zealand over an agreed timeframe.  This is an increasingly important part of agency planning that also helps inform the government's fiscal strategy. This phase involves revealing and challenging the assumptions that underpin current policies, strategies and business plans.

17The purpose is to fully understand and define the underlying causes and effects of the problems or opportunities, the benefits that would accrue if these were addressed, and identify a broad range of potential responses.

18Decision-makers want to understand why the issues need to be resolved and the array of potential investments available.

The planning phase

19This phase involves further developing investment proposals, assessing these and prioritising investments according to the value of the proposal.  In this phase there is a deeper examination of options through business case processes, and the government budget process.

20The purpose is to make investment choices that create the best value investment portfolio from an all-of-government perspective.  Given financial or other constraints, this phase involves making difficult trade-offs between options and investments with different merits and costs.

21This phase may result in divestment as well as investment decisions, and targeting resources to their best effect.

22Agencies have to test the merits of an investment from different perspectives (for example, agency, system, sector or all-of-government).  Before committing to the next phase, decision-makers need to consider:

The doing phase

23This phase involves implementing the investment decision while focusing continuously on delivering the required benefits.

24The purpose is to give investments the greatest possibility of success while maintaining control to avoid loss of value.

25Decision-makers want assurance that the investments are delivering and will deliver the expected value, and advice on further actions that may be required to secure the expected value.

The reviewing phase

26This phase involves reviewing the actual performance of investments against expectations and reviewing benefits, the performance of assets, and the investment portfolio, in relation to current and emerging needs.

27The purpose is to ascertain what else needs to be done to optimise levels of customer service and levels of asset performance over time.

28Cabinet, with support from its Cabinet Committees, will consider matters relating to government policy, commitments and expenditure on infrastructure, investment, and procurement proposals.

29Cabinet has investment decision rights on all investment proposals where the investment requires new Crown funding[1] or support.

30Cabinet must also be given the opportunity to consider investment proposals that have significant fiscal and policy implications and can affect the government's reputation in the marketplace.  In particular:

Cabinet Committees

31Cabinet Committees will support Cabinet to perform its role under this Circular by:

32Ministers can help create the conditions for effective investment and asset management by:

33Ministers responsible for Crown entities and shareholding Ministers responsible for Crown companies will invite boards of those agencies to adopt and apply Treasury assurance and business case guidelines. 

Investments requiring Ministerial approval

34Cabinet has agreed that responsible Ministers may approve investments or asset divestments in an agency as set out in Annex 1, Table 1, subject to any Cabinet-approved changes arising from the Investor Confidence Rating.

35Departmental chief executives can help create the conditions for effective investment and asset management by supporting Ministers to take a system-wide view, including considering the broader implications of agency investments on other parts of the state sector.

36Each departmental chief executive is responsible for the performance of the department's investments and assets, and for any non-departmental assets they manage on the Crown's behalf.

37Departmental chief executives may approve investments or asset divestments as set out in Annex 1, subject to any Cabinet-approved changes arising from the Investor Confidence Rating.

38Departmental chief executives must ensure their agency's current medium-to-long-term plan provides relevant, high quality information on the performance of current and future investments to inform all-of-government processes such as government's fiscal strategy, reviews of the affordability of current policies and the value of service delivery options.

39Departmental chief executives will ensure agencies plan for and accumulate sufficient funding within existing balance sheets to retain the appropriate asset capacity needed to underpin current levels of service. Any projected shortfall in capacity should be incorporated in long term plans.

40Chief executives will ensure agencies adopt and apply, as good management practice, Treasury guidance on investment management.[3]

41Each board is responsible for the performance of its agency's investments and assets. Boards will provide Ministers with relevant, high quality information on the expected and actual performance of investments to inform all-of-government processes such as the government's fiscal strategy, reviews of the affordability of current policies and the value of service delivery options.

42Boards should adopt and apply, as good management practice, guidance on investment management published by the Treasury.[4]

43The Treasury leads the government's investment management system.  The Treasury is responsible for developing and maintaining the integrity of the system as a whole.  In this capacity it will:

44The Treasury will perform the above roles in consultation with relevant agencies, functional leaders, and the New Zealand Infrastructure Commission, Te Waihanga, as appropriate.

45SSC has an overall system leadership role in relation to the State services.  In relation to the investment management system, SSC will:

46The NZIC has been established to lift the quality of infrastructure procurement and delivery in New Zealand.

47The NZIC has two main roles in its empowering legislation, covering the provision of advice to:[5]

48The NZIC provides a first point of contact for interested parties in the infrastructure sector to receive information on current and future infrastructure projects.

49From time to time the Head of State Services appoints functional leaders to improve the effectiveness and reduce the overall costs to government of common business functions. 

50Agencies need to be aware of the mandated roles of functional leaders, which apply in differing ways in the system.

51Details on the specific mandates for functional leaders can be found on the SSC website.[6]  

52In general terms the roles include:

53Monitoring roles (in relation to a statutory entity) are provided for in the Crown Entities Act. Monitors may be departments or Crown entities.

54As part of monitoring agency performance on behalf of the responsible Minister, monitors will adopt and apply guidance on investment management published by the Treasury, the NZIC and functional leaders.

55LINZ is the department charged with maintaining geographical information and surveying functions as well as handling land titles, and managing Crown land and property.

56The Crown estate comprises all publicly-owned land across New Zealand. LINZ supports agencies to optimise value from their land.

57No financial commitments or expenses will be incurred, projects commenced, settlements offered, or orders placed unless authority exists or has been specifically authorised by the responsible Minister or Cabinet, consistent with the requirements of this circular and companion Cabinet Office circular CO (18) 2 Proposals with Financial Implications and Financial Authorities.[7]

58Agencies must promptly seek an additional authority when it becomes clear that an approved financial authority is likely to be exceeded. 

59An additional or revised authority should also be sought where a change is proposed to the scope or timing of the investment, or the nature and scale of benefits compared with what had previously been represented to, or agreed by, Cabinet or the responsible Minister.

60Notwithstanding the Investor Confidence Rating of a department, Cabinet may reallocate funds from asset disposals by a department to other parts of the State services, consistent with its investment strategy.

61Agencies must have a current medium-to-long-term plan that meets the Treasury strategic planning and reporting guidelines.[8]

62The effectiveness of the investment management system depends on high quality information on agency investment intentions and performance linked to outcomes.  This information provides the strategic context for individual investment decisions and informs government planning and prioritisation processes, as well as decisions on fiscal policy settings.

63Whether applied at agency, system or sector level, strategic planning and reporting processes must apply the system expectations set out in this circular to reveal the potential impacts of strategic options, a pathway forward and a reliable basis for tracking performance over time.

64The Investor Confidence Rating provides an objective basis for confidence in an agency's investment performance and for expanding or constraining investment authorities.

65The Treasury will use relevant investment performance information to determine an Investor Confidence Rating for investment-intensive agencies or sectors and report the results to Cabinet.  The types of information and procedural expectations are published on the Treasury website.[9]

66The Treasury may modify the Investor Confidence Rating methodology to ensure it is fit for purpose.

67The level of investor confidence may affect an agency or sector in one or more of the following ways:

68The level of investor confidence for an agency or sector will not directly affect the extent of any capital withdrawal to reduce the level of net assets held by a department.

69The Treasury will periodically report on the performance of all significant investments that have had or require Cabinet-level consideration.  This report will cover:

70Agencies will report to the Treasury on agency investment intentions and performance.

71In respect of any Cabinet-approved investment, unless otherwise agreed by Cabinet, agencies must:

72Agencies must manage assets to ensure they deliver current and intended levels of service.

73Agencies must demonstrate a level of asset management practice and performance that is appropriate to the scale of assets under their management and the criticality of those assets to the delivery of key public services.

74Agencies must have current asset management plans to inform strategic, tactical, and operational choices.

75Agencies must capture and use, in internal management and decision-making processes, relevant indicators of past and projected asset performance, such as asset utilisation, condition and fitness-for-purpose. 

76Agencies must report on relevant asset performance indicators in their annual reports.

77Agencies must plan for the eventual withdrawal or sale of assets and use approved asset disposal processes.  Beyond the requirements set out in this circular, asset disposals can be subject to legal, statutory and Government policy requirements that must be fulfilled prior to disposal.  This could require specialised assistance.[10]

78Agencies must apply the Government Procurement Rules.[11]  These Rules are supported by published guidance that agencies should use where appropriate.

79Agencies should engage early with the supply market to understand potential solutions and test ideas.  Agencies must actively manage the supplier relationship to ensure delivery of the investment and to seek continuous improvement during the contract life.

80Agencies must evaluate all procurement options, including innovative and non-traditional approaches to procurement and alternative financing arrangements, and should select the procurement approach that best delivers the investment objectives while optimising whole of life costs.[12]

81Agencies must consult early with the Treasury in the planning for any significant investment (including any arrangements with Local Government Authorities seeking Crown funding or support).

82Agencies must consult early with the NZIC, and follow any relevant guidance published by the NZIC, if they are:

83The Treasury, the NZIC and relevant functional leaders (as appropriate) will determine the form of support for an investment, including identifying, evaluating and delivering commercial, procurement and financing options.

84Agencies must identify as early as possible all significant investment intentions in multi-year investment plans and in central government reporting processes.[13]

85Agencies must develop all significant investment proposals in accordance with published Treasury business case guidance.[14]

86Agencies must complete risk profile assessments (RPA)[15] for all significant investments identified in multi-year plans.  Agencies must provide to Treasury an RPA for any investment proposal that has a medium or high risk profile.

87Ministers may also request that a project or programme be subject to appropriate assurance oversight by the Treasury or functional leader, or relevant monitoring department.

88All investment proposals that are determined high risk by the RPA will have an appropriate level of assurance applied, including Gateway reviews.[16]

89Agencies are expected to adopt and apply central agency and functional lead assurance guidance for all investments, including non-significant investments.[17]

90Agencies responsible for any significant investment must develop and implement an assurance plan.  At a minimum the assurance plan must cover the next stage of the investment of the project or programme.  The assurance plan must be updated on a regular basis, usually prior to the end of each stage.

91Agencies may use a single integrated assurance plan for multiple investments within an agency or for multiple investments across agencies provided this is agreed with the Treasury, relevant functional leads and the monitoring department.

92The Treasury or functional lead may at its discretion require the agency to provide the assurance plan (and any revisions) for review and, if necessary, make recommendations to the agency, or Cabinet and the responsible Ministers on changes that may be required.

93By agreement in advance, central agencies or functional leads may commission and recharge agencies on a cost recovery basis for costs incurred in the provision of independent assurance services.

94Agencies must provide the Treasury with a copy of Cabinet-approved business cases that can be shared with other agencies on the PSI, taking account of grounds for withholding information under the OIA.

95The Treasury will develop and support specialist communities of investment practice or forums as a means of promoting good agency practice and lifting capability.[18]