Victorian Auditor-General's Report 
15 August 2012 

Investment Attraction
Audit summary
Background
Governments compete to attract business investment to support the economic growth and stability of their jurisdictions. Attracting new investments and encouraging established businesses to invest further enables governments to stimulate employment and develop the economy.
Governments attract investments primarily by developing a business environment that is attractive to investors, by promoting the attributes of their region as an investment location and by providing financial incentives and other services to individual investors.
The Department of Business and Innovation (DBI) is Victoria's lead economic development agency, however, the operations of other government agencies also affect Victoria's business environment. DBI's primary role is to deliver the government's vision of a dynamic, innovative and sustainable economy in which business is encouraged to grow. Attracting investment is therefore one of DBI's key activities.
Over the past 15 years, Victoria's business environment has been sound. This is evidenced by a number of factors including its ranking as the best of all Australian states and territories based on national benchmarks for competitiveness; its relatively high economic growth; its increased workforce participation; and its supportive pro‑business environment. Although Victoria has been an attractive place for businesses to invest for a number of years, maintaining the competitiveness of Victoria's business environment poses significant challenges. 
If recent productivity trends continue, they will impact adversely on Victorian living standards. The government's response to the 2011 Victorian Competition and Efficiency Commission's (VCEC) report, Victorian manufacturing: Meeting the challenges, Inquiry into a more competitive Victorian manufacturing industry, acknowledged Victoria's low productivity as a problem and agreed that the government should focus on facilitating productivity improvements in the manufacturing industry. 
The objective of this audit was to determine whether DBI's investment attraction and facilitation programs are effective and provide value-for-money, including whether DBI:
·	adopts a strategic approach to investment attraction
·	has facilitated a sound business climate and actively promoted Victoria as an investment destination
·	has robust processes for providing financial and non-financial assistance to industry
·	has robust, reliable and transparent processes for monitoring, evaluating and reporting on industry assistance initiatives.
Conclusions
Victoria has had a strong and stable economy and an attractive business environment for most of the past 15 years. It is likely that DBI's investment attraction activities have contributed to this outcome, even though it has not undertaken any analysis to demonstrate the influence its activities have had.
DBI's advocacy role appears to be working effectively. Its advocacy processes are assisting businesses to address regulatory and other issues they face. However, it could enhance this function by reviewing its existing arrangements with other regulatory authorities and documenting its advocacy process.
DBI's promotional activities are well planned and organised, and appropriately targeted to priority industries and investment markets.
It is clear that projects that have received government grants have generated benefits for the state in terms of jobs, capital expenditure and exports. However, DBI's investment assistance programs are not focused on achieving a broader range of economic benefits such as productivity and innovation, which have been key features of government policies over the past ten years, and still are. Both independent and interdepartmental reviews over the past four years have criticised DBI's investment assistance criteria for not focusing on key outcomes related to innovation and productivity. As a result, DBI cannot demonstrate that these grants have generated the best outcomes for the state.
DBI does not clearly define objectives for investment attraction and does not have a comprehensive strategic plan governing the various activities it performs to attract investment to Victoria. Without such a strategy, DBI cannot accurately determine whether its actions to attract investment are working in a coordinated way and whether each of its investment attraction activities is contributing appropriately to the achievement of its objectives. DBI has made improvements since 2010, however, more work is needed to demonstrate a cohesive approach to investment attraction.
A lack of effective monitoring and evaluation means that DBI is unable to assess whether its activities are achieving desired outcomes, or to adequately demonstrate the benefits generated from this expenditure.
Findings
Strategy
DBI's corporate plan sets out its priority activities and identifies associated performance measures. However, without a comprehensive investment attraction strategy with specific, clearly defined objectives, there has been no mechanism to:
·	focus DBI's investment attraction activities on those that will deliver the best returns for the state
·	allocate resources efficiently between investment attraction activities
·	monitor, evaluate and report on investment attraction activities.
Without a comprehensive strategic plan and effective evaluation processes, DBI does not have the information it needs to assess the appropriateness of its current resource allocations, nor the ability to reallocate resources between activities to improve the effectiveness of its investment attraction activities.
DBI believes that its corporate plan provides sufficient guidance and direction to its business engagement staff to drive its investment attraction activities and identify suitable projects for financial assistance and/or facilitation services. DBI acknowledges that the corporate plan could more clearly articulate each of these activities and their purpose.
However, VAGO does not believe that the corporate plan is an adequate substitute for a comprehensive investment attraction strategy. The corporate plan is not sufficiently detailed to drive investment attraction activities at an operational level.
Monitoring and reporting
DBI's internal and external reporting is selective and does not provide for a comprehensive understanding of the scale, cost and impact of investment attraction activities.
DBI's information systems capture departmental costs, but relevant costs are not allocated to investment attraction activities or to government assisted projects. 
The selected information that is disclosed publicly does not provide a reasonable or sufficient account of the full cost and benefits of DBI's investment attraction activities. Reporting on what funding has been provided to whom, and the outcomes it has generated, is necessary to achieve transparency and maintain public confidence that this use of public funds is benefiting the state.
Evaluation
There have been interdepartmental reviews of DBI's Industry Support Program in 2008 and 2011 and of the Industry Transition Fund in 2010. DBI has also undertaken reviews of a number of its promotional activities. However, DBI has not conducted any other broader evaluations of investment attraction activities. Evaluations that have taken place have not adequately assessed the outcomes of these activities, and consequently DBI does not have a comprehensive understanding of their effectiveness.
Without these evaluations, DBI cannot accurately determine whether the benefits derived from investment attraction activities are greater than their costs, or that it is making the best use of government funding. The recent interdepartmental review of the Industry Support Program also identified the need to determine the impact of projects receiving government assistance.
Business environment
Investment attraction reporting in DBI's annual reports and State Government Budget Papers implies that DBI's investment attraction activities have made a major contribution to the positive trends in Victoria's broad indicators of economic health, such as capital expenditure, jobs and export growth. However, DBI has not undertaken any analysis designed to clearly demonstrate how its specific activities have directly contributed to these, or any other, broader economic outcomes. Consequently, DBI cannot demonstrate the impact of its activities. 
VAGO acknowledges the difficulty in linking broad indicators of economic prosperity with investment attraction activities such as promotion, facilitating an attractive business environment, and facilitation services. However, without proper assessment, it is difficult to evaluate the effectiveness of DBI's investment attraction activities.
DBI has ongoing contacts with relevant local, state and Commonwealth Government agencies and makes representations to these agencies on behalf of businesses. While these relationships are important for raising business concerns within government and assisting companies to establish businesses in Victoria, DBI has not reviewed these relationships in the past three years.
DBI's advocacy services were useful in improving Victoria's business environment. However, its advocacy processes are not formally documented and its actions to facilitate regulatory reform are not prioritised or documented.
Promoting Victoria
DBI's promotion and marketing activities are well planned and organised. It has developed clearly defined objectives for its promotion activities which align with its key responsibilities. DBI has also developed a marketing communications plan.
DBI's promotion and marketing strategies reflect detailed research and analysis of Victoria’s strengths and weaknesses and they identify the investments, locations, and markets Victoria intends to target. They also outline the communication and advertising mechanisms proposed to engage with the target markets.
Government assistance provided
Over the period from 2008–09 to 2010–11, 336 projects received grants and/or non‑financial assistance. Of these, 63 per cent were in the Melbourne metropolitan area and 37 per cent in regional and rural Victoria. According to departmental records, these projects were expected to generate $8 billion in capital expenditure, create 18 000 full time equivalent jobs and increase exports by $1.5 billion.
Grants
DBI has established grant assessment and approval processes, including formal selection criteria to align its financial assistance with government industry policy and to establish appropriate governance arrangements. The eligibility criteria for the Investment Support Program and the Industry Transition Fund are reasonable. However, there is a need to provide more guidance on the application of these criteria, particularly those relating to innovation and productivity.
The effectiveness of the assessment process is brought into question as over 50 per cent of the applications examined in this audit received grants despite:
·	criteria being assessed as not met
·	applications not providing sufficient information to enable all the criteria to be assessed.
Facilitation services
DBI does not have a formal process for assessing and approving access to facilitation services. DBI advised that in selecting projects for facilitation, departmental staff consider such factors as project size and location. Consequently DBI cannot be assured that the services are consistently applied in accordance with government policies and priorities, and are allocated to those projects providing the best return for the state.
Recommendations
Number	Recommendation	Page	
	The Department of Business and Innovation should:		
1.	·	develop an overarching investment attraction strategy for its investment attraction activities with clearly defined objectives
·	review its internal and external reporting, including the need for greater public disclosure of investment attraction activities
·	undertake regular evaluations of its investment attraction activities	18	
2.	·	evaluate the impact of its investment attraction activities on Victoria's business environment
·	document its advocacy procedures and develop a plan to coordinate actions proposed to improve the state's business environment	28	
3.	·	limit financial assistance to those projects that meet eligibility criteria, and place greater emphasis on productivity and innovation
·	adequately justify, support and document assessment decisions
·	formalise its selection and assessment process for facilitation services.	46	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994, a copy of this report was provided to the Department of Business and Innovation with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments are included in Appendix A.