Facing this pressure, it has never been more vital for government departments to nail this balancing act – especially given skyrocketing levels of appropriations. Across 23 appropriations we reviewed, the total funding allocated has jumped 45% since FY19.
So the question is, how can government departments minimise the risk to their agency, reduce uncertainty, and create a safe and more standardised funding process? An effective tool for this is risk-based due diligence.
This process is designed to help agencies evaluate potential funding decisions and focus their efforts on investments that will deliver the greatest benefit for New Zealand. This enables a focus on optimal investments for your department, rather than trying to “weed through” all funding possibilities.
So, what does robust risk-based due diligence look like? In our experience, the following five steps are a good place to start if you want to strengthen your due diligence process, minimise risk and optimise the delivery pace for your department and funding partner.
1. Clarify the intent of your due diligence process
Holistically, the outcome of an effective due diligence process should demonstrate your department is a good custodian of public money. Departments understand the importance of this but can lack clarity about how it can be achieved. This is where having clear intent is important; due diligence should give you the assurance recipients of funding can deliver the proposed project/programme. It should also give you the confidence needed to engage with such an entity. Recipients are expected to be good custodians of public funding. It can often come back to hurt the funding department when this expectation is not upheld.
If your intent is clear and well understood across your department, your due diligence approach can be tailored to achieve the desired outcome.
2. Tailor your due diligence process to align with your intent
When your intent is clearly defined, you can create a tailored due diligence approach to directly align with this. For example, if ensuring the funding recipient can deliver the project/programme is of most importance, a due diligence process focussed around organisational and project-specific capability, project complexity, and stakeholder management may be best suited. Alternatively, if engaging with the funding recipient who aligns with your department’s strategic imperatives, a due diligence process focussed on financial strength, reputational track-record, and governance arrangements may be more appropriate.
3. Strike the balance between funding risk and cumbersome internal processes
It is often easy to say, “but everything is important, we need absolute certainty.” Unfortunately, “absolute certainty” is impossible to achieve, and attempting to provide it will be a time consuming and extremely cumbersome process. Instead, consider how much assurance you really need and how much risk you are willing to wear.
Create a risk-based process to easily determine the extent of due diligence actually required. This process could be a simple five-minute evaluation, considering the following factors:
- Has the applicant received Crown funding previously, and successfully delivered the project?
- Has the applicant demonstrated their ability to deliver projects of a similar size and complexity?
- How much is the funding amount requested from the Crown?
Depending on the answers to these questions, you may need to consider other factors until a tailored due diligence process can be defined. Although this is an additional step within the process, it can save substantial time in the long run; time is spent on the greatest areas of risk to your department, rather than bogging your team down with stacks of paperwork.
4. Leverage external information sources.
Often a due diligence process is reliant on information provided by the funding applicant. Although we’re a pretty trust-worthy bunch in New Zealand, it is best to use external information sources throughout your due diligence process where possible. If this isn’t already part of your process, here are some useful sources of information:
- Credit checks demonstrate the applicant’s ability to service debt and is a good indicator of financial strength (eg, Veda advantage).
- Health & Safety resources provide information related to incidents, investigations, and infringements (eg, Worksafe).
- Externally audited financial statements validate the overall financial position of the applicant.
- Google – (almost) everyone has access to the internet – use it!
5. Embed the due diligence process within your funding decision process
You now have a clear intent for your due diligence process, a tailored approach for each applicant based on a risk assessment and defined external information sources. Now it’s time to embed this within your funding decision process.
Often government departments will receive a range of applications for funding, some that can demonstrate alignment to the funding requirements, and others that may be stretching. We recommend due diligence is performed after an initial shortlist of funding recipients is determined. This avoids an unnecessary process for projects that may never see the light of day.
However fair warning – only once the due diligence process is complete and evaluated, should a contract be put in place with the applicant. Otherwise, you might end up being stuck in an arrangement with a less than desirable recipient.
Set your agency up for success
Again, these steps are only the starting point in evaluating what can be a confusing, high-pressure, but potentially high value process. However, should risk based due diligence be implemented in your funding process, you are positioning your department well to weather the storm of volatile funding decisions while delivering the value for money New Zealand has so frequently sought. Conversely, should due diligence be overlooked it could be the difference between an effective relationship with a third-party or ending up on the front page of the newspaper.