Three Basic Mistakes that will Hound the Provincial Growth Fund

I spent 3 years working in regional development in the United Kingdom. I started working there in 2005, 7 years after the Blair Labour Government first set up the Regional Development Agencies. This and other experiments in regional development have yielded some lessons that this coalition Government seem to have roundly ignored in setting up the Provincial Growth Fund (PGF).

Recent decisions have highlighted many of these problems. It has become clear that the Provincial Growth Fund was hastily set up, and now the focus is on shovelling money out the door. It was intended to be the jewel in NZ First’s crown but could prove to be an albatross around their neck.

Lesson #1: Do we even need the PGF?

Good regional development isn’t just about the money. It is about taking a holistic view of a region’s economy, seeing what the roadblocks are and how that might be overcome. Sometimes not much money is needed at all to solve a problem, it can be done by coordinating what different parts of government are already doing.

By contrast, the Provincial Growth Fund seems to be all about the money. Little thought has gone into what will actually make a difference to the target regions.

A good example of this is yesterday’s announcement that the Provincial Growth Fund will put $20m into Predator Free New Zealand. This allowed NZ First to make a song and dance about finding alternatives to 1080, but this announcement was really an acknowledgement of the failure of the PGF. Predator Free NZ is a great idea, and is already happening. Research into alternatives to 1080 is a great idea, and is already happening. Giving them more money is a great idea, but we didn’t need the PGF to do it.

This announcement was an admission that PGF has run out of ideas already. You have to wonder why it exists.

Lesson #2: Spending Money Well Takes Time

Regional Development in the UK started in a similar fashion to the PGF with money spent in a random, shotgun way. This is typical of new government initiatives where the pressure is to get money out the door. The easiest way to spend government money is by doing lots of little projects. This is usually not the way to get best value for money.

I started working for the Regional Development Agency 7 years after it was set up. My job was to look at all the things they had done on business support, and work out which had worked and which hadn’t. By the time I left, 10 years after they set up, that job was done and we were only funding the stuff that had worked. The short story is that we had a few, large, very effective projects.

By contrast the PGF has to get $1b out the door every year for 3 years. This doesn’t leave much time for careful thinking, and the lack of thought becomes clear when you look at what the the PGF has turned up so far. There are no clear outcomes for what different projects should achieve and how that should be measured. The cost per job of different projects is vastly different. It is hard to know what they are trying to achieve other than getting the money spent.

Lesson #3: How To Avoid Doing What Would Have Been Done Anyway

The last, and most important lesson is how to avoid funding stuff that would have happened anyway. The flip side to this is how to avoid funding stuff that shouldn’t get funded regardless - but this stuff eventually tends to come out in the media anyway.

Businesses make investments all the time without government help. The ones that don’t probably don’t deserve to be invested in. Which are the investments that should happen but would only happen with some government help? This is a tricky area and requires careful thought.

The short answer is that to justify government intervention the investments need to generate measurable environmental and social benefits alongside their financial benefits. The financial benefits alone might not be enough to justify the investment, but the social and environmental benefits might be. These sorts of investments are known in the business as “Impact Investments”.

A good example of how the PGF could have been used for Impact Investment would be to underwrite a Permanent Forest Bond. This would harness private sector funding to encourage landowners with erosion prone land to plant their land in permanent forestry by funding the up front costs of planting and fencing. Carbon credits and manuka honey can then give the landowner a return on their land while also paying back the initial investment. The community benefits through reduced erosion and cleaner rivers. If the government manages the carbon price and manuka honey industry well, they could make their money back or even make a profit on such a bond.

This is where the PGF could have made a real difference. Instead we see them putting money into questionable stuff that probably would have happened anyway, like thermal baths in Methven or a loan to Westland Dairy.

Good regional development takes time and careful thought. At this early stage the PGF seems to have neither, and little wonder when they have $3b to get out the door in 3 years. In short, it looks like a mad dash for cash than a well thought through approach to regional development.