The Value for Money (VfM) gap

What is the Value for Money gap?

The value for money gap is a lack of confidence that money is being spent on the right things and in the best way to get desired outcomes. It arises when spending choices do not reflect perceived priorities and when spending is seen as wasteful. It is subjective but it can be influenced by the quality of investment decisions, the effectiveness of strategy delivery and the quality of reporting and communication.

How do we measure value for money?

Value for money (VfM) is “bang for buck” or the relationship between economy, efficiency and effectiveness.  We can measure it with tools such as cost benefit analysis (CBA) and return on investment (ROI). We also need to look at the extent to which intended outcomes are achieved. It is not enough to assess value for money at business case stage. It requires ongoing monitoring and action, including updating scope and cancelling projects if necessary.

Measuring VfM in the public sector can be hard. Public agencies are funded to produce outputs which produce outcomes (the impact on society). Health system outputs include vaccinations, primary care consultations, medicines, outpatient procedures, surgeries etc. Outcomes are higher standards of health, longer life expectancies etc and can be measured by a Quality of Life Year (QALY) which measures the value of medical interventions. NZTA uses a monetised benefits and costs manual to assess cost and benefit of investments in the transport system.

What is an example of a VfM gap?

A recent example of a value for money gap exists in Wellington City, New Zealand. Citizens of the city are questioning investment decisions by the City Council. The Prime Minister stood in its new NZ$180M Takina Convention Centre yesterday and called it a white elephant, saying the money should have been spent on leaking pipes. Some of the other projects by the city that have attracted criticism include:

• Strengthening of the 3000-seat Town Hall, started in 2018 with a NZ$85M budget. The project is ongoing with a revised budget of NZ$330M.
• A decision to strengthen the 10,000m2 central library at a cost of NZ$180M when some felt it should have been replaced instead. That project remains on budget.
• A NZ$55M project to create cycle-lanes and six pedestrian crossings on Thorndon Quay, a secondary arterial route into the CBD. The project has upset fire and ambulance services, transport operators and local businesses. The water company said to replace failing pipes first but that hasn’t happened.

The merits of specific projects can always be debated but the VfM gap is that citizens see underspending on basic infrastructure while discretionary spending has ballooned. Ratepayers face rates increases of 30-50% while water mains burst all over the city.

How do we improve effectiveness of public spending?

We improve the effectiveness of public spending by joining up the dots. We connect strategy to investment analysis (business case) then we connect the business case to project delivery of outputs and we connect those outputs to outcomes and formal benefits realisation – which may occur over years of operation. If that sounds like a lot of bureaucracy it isn’t. Most of this work is done anyway – it just doesn’t connect up very well and it isn’t just me saying that. Central agencies in Government see it too.

Is the Value for Money gap real?

Yes. It is a real problem that the Treasury and the Office of the Auditor-General identify. In its 2022 budget advice, The Treasury told the Government that “Limited capability and capacity in agencies mean that the quality of VfM information in past Budgets’ initiatives has usually been low”. In 2024, the Auditor-General has said “We often see a lack of appropriate processes and information for identifying and demonstrating VfM, including:

• issues with understanding the cost to deliver services, impacts, or outcomes;
• a lack of clarity in describing and evaluating effectiveness;
• little analysis of VfM or related measures, such as cost effectiveness or productivity;
• a lack of efficiency measures; and
• incomplete, frequently changing, or complicated performance measures

What to do about the VfM gap?

At Hague our work centres on implementing strategy – helping clients identify options, make good investment and procurement decisions and get things done well. My Masters research report was on effectiveness of health and disability services. I have held senior roles at Health and ACC and worked with executives across the private, public, and not for profit sectors so I know that measuring value for money well can be hard – but it is worth doing.

My fellow director Jacquie Hamer and I understand that to achieve and demonstrate value for money we need to collaborate with people doing great work in central and local government organisations. That is why we are working with Karen Clarke and Craig Pattison at Capability Collective on an initiative to help raise capability in this area. Please get in touch with any of us if you would like to hear more.

Phil Guerin, Consultant/Director, Hague Consulting Ltd. © Hague Consulting Ltd 2024. If you like this content, subscribe to our blog – it’s free!

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