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AGENDA Transcript: Lisa Owen IVs Trevor Mallard

17 June 2006

LISA OWEN interviews

Minister of Economic Development

LISA: Well the government has just unveiled another plank to its economic transformation programme, this would encourage state owned enterprises to invest in new areas of business that are linked to what they're already doing. National Finance spokesman John Key says if it's going to happen then the government needs to stop what he calls the culture of cronyism that surrounds the boards of SOEs, there's Miss New Zealand Chief Executive Phil O'Reilly has criticised the move saying most businesses will be frustrated, the government wants to use tax dollars to compete against them, the Economic Development Minister Trevor Mallard is driving the new policy and he's with me now. Good morning Minister.

TREVOR: Good morning Lisa.

LISA: Now this Mighty River Power potentially going into oil exploration, is that what you had in mind?

TREVOR: Well they're already there, I mean Mighty River Power already have at least two wells that I know of, one's called Goss one's called Trapper and they're in Taranaki, so because Mighty River Power need gas for their power station it's a logical extension but it's nothing new.

LISA: You said we're not gonna play fast and loose with public assets, is oil exploration a sort of dead cert is it?

TREVOR: No no it's not a dead cert but it's something which is very important for the economic base of the country, I mean if we have to go to importing LNG then that will be very very expensive and we'd have to set up an enormous infrastructure and we'll also be liable for a lot of payments overseas that would have a tremendously adverse effect on the balance of payments, the way that we do with petrol now, it would be like adding that to it and obviously the government wants to avoid that.

LISA: So if this was already on the boil I mean what is exactly your vision for how these SOEs are going to push us forward economically.

TREVOR: Well the first point is that it's part of a much bigger picture but what they are going to do is that they're going to look adjacent to what they're doing now, you know what are their strengths what are their skills what are the things that they could do, there's been a very good example of Meridian going into Australia building a very big wind farm and selling it, profit 600 million dollars that’s very good, but what I think will also happen is that there will be some smaller New Zealand companies or individuals with really good ideas that are beyond their ability to finance to take the risk. One example again is in Christchurch one of the SOEs is linked up with some people who know how to generate power out of oil fired boiler systems that are really important within Europe and see these systems what they do is that they generate power for a household and then feed it back into the grid.

LISA: But the two examples that you used there Minister the Meridian example and also Whispertech I believe is the thing that you're about with the generators, they're things that these companies SOEs have branched into before you’ve put out this change, so how are things different, they could invest before.

TREVOR: They could invest before but the attitude from Treasury and within their SOIs was still very much one of stick to your knitting, I think the big change is that we've been encouraging now rather than discouraging.

LISA: So in a week where hundreds of thousands of people went without power, people in Auckland had a blackout, they’ve got a blackout down south, how do you reckon the public's going to react to SOEs diversifying when the perception might be they can't get the knitting right, they can't get the core business right as it is.

TREVOR: Well I think it's very important for some SOEs like Transpower which has a major focus on improving the transmission lines right through the country that they do stick to their core business, I mean they have a major task on their hands over the next five or six years, there's already been quite a vamping up of the investment in transmission, there's going to be a lot more and I think they will focus on that, there are some others where frankly steady state is not good enough. I mean we own these companies we want them to go to work for the people of New Zealand.

LISA: So why aren’t there private companies who can do this, who can kick start the economy who can help in this transformation why are you having to rely on government companies?

TREVOR: Well I think we do have a problem in New Zealand, we have some very big cooperatives, Fonterra, meat companies, in the Kiwi area, we have a lot of overseas owned companies but we don’t have many, I mean in fact you can sort of start listing the big successful exporting privately owned companies, you sort of you go Gallaghers and you go Wrightsons and you go F&P and you have trouble getting the list to ten.

LISA: So rather than doing this with the SOEs what is it that you are doing to grow those companies here in New Zealand? I mean we're still waiting on the company tax review, do you imagine that there's going to be something in there that’s going to provide an incentive for these businesses, you yourself have admitted this kind of branch office concept that we have branch offices of say Australian business, what specifically are you doing to get those kinds of businesses here exporting and growing like you want the SOEs to?

TREVOR: Well I think there are some macro things and the business tax review is part of that, and clearly there's going to be some tradeoffs there, do we focus on the headline rate of tax or do we – which would be of real advantage to the Australian owned companies, I mean all we'd be doing would be sort of giving a tax deduction which would be an advantage to companies which are owned offshore, or do we focus in on some of the research and development, some of the market development deductions, do it in a way that a number of countries do so that our tax system does focus on those companies that are going forward rather than being steady state.

LISA: What can we expect, can we expect headline tax rates to go down in this review?

TREVOR: Well I think we can expect a document coming out in July from Michael Cullen and Peter Dunne that gives us some options and gives us some choices to discuss so that we can build a consensus around that sort of change, but there are some things that we are doing, I mean for example the fifth venture investment fund that has been increased in the last budget, it's actually working very very successfully to build venture capital around some of the best innovators in New Zealand. Now our market development funding gone from six million dollars to 20 million dollars a year, that’s designed to build Kiwi firms that export.

LISA: Critics of this new brave new world if you like with the SOEs would say that actually what you're doing is you're going to squeeze investors out that these government companies have an advantage, what's your response to that, are you going to squeeze investors out?

TREVOR: No I don’t think we are because a couple of reasons, one within the statements of intent you know what they're going to do the direction they're going to take has got to be approved and it's gotta be published, now that’s all out there for people to look at and if the policy was to squeeze businesses out then it wouldn’t get approved. The other and I think more important is the requirement that there'd be spill over benefits that – a requirement that the community or other companies benefit as well, and if you think about it if we have some major firms being really innovative making a difference, sort of working doing things that we haven’t done before, going to markets that we haven’t done before, then there will be spill over benefits and private sector firms will do better as well.

LISA: If you wanted to be really bold, if you wanted this to be a real transformation a bold transformation why not float some of these companies, a percentage of some of these companies and then you'd have real transparency wouldn’t you?

TREVOR: What we would have is a selling of the silver of the type that occurred in 19...

LISA: No, twenty five percent.

TREVOR: It doesn’t really matter, we've got a dividend flow at the moment averaging about 300 million dollars a year which is an offset against the tax that we have to raise. We've had in the last year about a 10% return on the SOEs, if you sold that off then what – it would help you with tax for the first year but then what do you do in the second year, do you then sell another 25%, I mean my view is that New Zealanders considered selling off the silver in 1999, they clearly rejected it, all the polling shows that they don’t want to do it and this government won't, but something that we could do and something that I'm quite keen on is that as the SOEs develop the new businesses especially those that are done in partnership with people in the private sector we could well have floats of the subsidiary so that they could be listed on the stock exchange, that could help give a bit of depth to our capital markets and get some transparency around those companies and I think that would help.

LISA: So mum and dad New Zealanders might get a chance to have shares in subsidiary companies that spring off this idea?

TREVOR: I hope that they can although you’ve gotta realise that mum and dads might get them first but if they're listed on the stock exchange of course then there's no way of keeping them in New Zealand.

LISA: Isn't part of the problem with this whole concept that SOEs are really political bodies I mean caucus okays the boards, I mean why does that happen?

TREVOR: I think one of the things I got grumpiest about around this was John Key calling the chairs of the SOEs boards cronies, I mean who are these people, they're Wayne Boyd, they're Allison Patterson, they're DAVID: Gascoigne, they're Jim Bolger.

LISA: They're also Ken Douglas you know New Zealand Council of Trade Unions, they're also Stan Roger former union chairman and Labour MP, there is a mix and some of them are strong Labour supporters.

TREVOR: I'm sure some of them are strong Labour supporters but anyone who says that Stan Roger former Minister of SOEs is a soft left wing person just doesn’t know Stan Roger.

LISA: So do you think these boards that you have have the acumen to push you forward into these areas, you're choosing the best people because your critics would say the boards aren’t robust enough.

TREVOR: Well we can always improve boards and I've done one round and I think you know we're making progress, I didn’t renew a couple of contracts and took a lot of care to get some good people in, people with experience but there's also I think an important role for the SOE boards and that is to have people who are training as part of it, I mean I'm deliberately trying to get one spot on each of the boards for someone who's got quite a lot of other life experience but doesn't have governance experience so that we can test them and then I think they’ll be available for private sector boards as well because I think another important point is that our private sector companies haven’t been going that well either.

LISA: Now in this diversification with the state owned enterprises what do you think the Minister's role's going to be, what's your role going to be?

TREVOR: I have a final role, sign off the statement of intent and for significant transactions together with the Minister of Finance and I will have to approve them.

LISA: Have you got the nerve to take risks, cos nothing ventured nothing gained?

TREVOR: Well I've certainly got the nerve to back an innovative scheme, schemes which are going to grow New Zealand and help transform our economy.

LISA: You can't always tell what the successes are gonna be can you though I mean look I want to give you this one example, Solid Energy investing 15 million dollars in a bridge to Spring Creek Mine, I don’t know if this rings any bell but it's one of the cases the Treasury raised, the mine's had a 45 million dollar write down and looks like it might be closed, it goes past the Blackball Miners Hall actually where apparently the Labour Party was founded, and you'll be down there next week, that doesn’t sound like it worked out too well.

TREVOR: We make mistakes, businesses make mistakes all the time, state owned enterprises aren’t exempt from making mistakes, it's our job to make sure that there are good processes there. No on complained when Auckland roads got an extra 600 million dollars from Meridian's exercise out of Australia, but we do know that if you are adventurous, that if you do go into new areas, if you take some risks that tiny wee New Zealand companies can't take because they don’t have the capital behind them there will be some failures.

LISA: But how far are you prepared to take that risk, would you see an SOE go bust?

TREVOR: Well we already have Terralink went bust.

LISA: Would you though I mean under this regime?

TREVOR: No we certainly will if they do but you’ve gotta remember with the SOEs that going bust doesn’t quite mean what it might mean for some other companies, you know for example if Meridian went bust you'd still have a lot of windmills and a lot of damns, so it's a financial rather than putting all the assets at risk.

LISA: Alright, let's bring the panel in see what's on their mind, let's start with DAVID: Beatson.

DAVID: BEATSON – Political Commentator
Well happy birthday Trevor, that’s number one. Two, you said that there were SOEs where steady state was not good enough, which SOEs are in a steady state and it's not good enough?

TREVOR: Well there are a number of them I think where they could do a lot better than they are. An example would be that other than the DHL change which is I think about 18 months ago we haven’t seen a lot of progress from New Zealand Post since they did Kiwi Bank so I think we could make some more progress there, I think the energy companies obviously other than Transpower have some room to move and there are some of the smaller ones the Learning Media a very good publishing company knows a lot about literacy, there's room for it to do a lot more too.

DAVID: However at the same time there are some really basic things about New Zealand that need fixing, roading, power supply, water and sewage, communications infrastructure, why don’t you stick to your knitting, why don’t you really get the basics right instead of saying let's have a bit of jolly new venturing and see what turns up?

TREVOR: Because there are some real gaps in the way our system works as far as business is concerned, we just don’t have in New Zealand the businesses of scale that Australia does that the United States does and you do need those businesses of scale with the ability to take some risk and to have some misses in order to move forward economically and the SOEs are not the total answer, there are a whole pile of macro economic factors that we've gotta get right, but they can make a difference at the margin.

DAVID: How are you going to capitalise all this?

TREVOR: Well at the moment there's quite a lot of room on many of the SOE's balance sheets, they can borrow some more than they are at the moment, it might be in some cases a matter of the government forgoing some dividends and there's about 300 million dollars a year that comes in that way, I really think the sort of thing that we're doing major capital is not going to be a big factor.

LISA: Let's bring CLAIRE: Harvey in here.

CLAIRE: HARVEY – Features Writer, NZ Herald
Minister you're talking about companies of scale and deepening the capital markets and that’s something that business has been crying out for you know forever, wouldn’t a sort of quicker way to do that rather than waiting for subsidiary companies of something like Transpower be to encourage compulsory super, I mean that’s been enormously successful in Australia for example, diverting money from real estate into the stock market.

TREVOR: I mean there are a lot of areas that we could work on to get that sort of change, clearly the development of the Cullen Fund, Kiwi Saver, are steps towards building a better savings regime in New Zealand, there's a lot of debate going on at the moment around compulsory superannuation, I think that we last had a go at it nearly ten years ago, so there's a further discussion to be had on that, there are also some questions around the difference between the taxation treatment of property in New Zealand and in Australia.

CLAIRE: Do you think New Zealanders want to invest in companies or are they – you know is this obsession with real estate just something that New Zealanders do because of the ramifications of the 87 stock market crash, can they be encouraged to invest again?

TREVOR: Well I think it's part of our job to give them some exciting examples and to work with the stock exchange and work with individual companies to try and rebuild interest in capital markets in New Zealand, not only in the stock exchange but also in venture capital and private equity, I think there's room for a lot of both breadth and depth in our capital markets. Part of the problem is of course one of scale, we are a pretty small country and a lot of our people prefer to diversify the risk offshore but even then not enough I mean a lot more of New Zealand is owned by people from overseas than we own overseas.

LISA: Mr Mallard I just want to raise a point there, it's always a good time to stock take so do you see yourself being Finance Minister at some point?

TREVOR: I'd like to be you know when that will be you know next term, term after that I mean Michael's in his early 60s we've seen a lot of Asian leaders go on for quite a period of time but I'm trying to do the understudy role.

LISA: So standing for – putting yourself up for the deputy position next year?

TREVOR: No plans.

LISA: No plans at this point?

TREVOR: No plans at all.

LISA: Well it's official New Zealand is moving into the digital era. Digital technology means better picture quality, better sound, and better coverage across more channels but what will that mean for programme content? New Zealand's free to air broadcasters have worked together to produce a shared digital strategy and I'm joined now by RICK: Friesen Chief Operating Officer for TV3. Well why should tele watchers why should the public be feeling excited about this announcement?

RICK: FRIESEN – Chief Operating Officer, TV3
They probably shouldn’t be, in fact this is a technological announcement and probably bores a lot of people, it's the future that will be much more exciting once the content gets announced.

LISA: So what's gonna be the incentive in the first instance for them to sign up to this, to pay for the box that they need to view?

RICK: The first incentive of course is the quality, the fact is that the television pictures that people are receiving at home are from a system that was developed in the 1940s it's a very very old and antiquated system and the pictures that you put out at TV1 and that the rest of us put out are incredibly sharp crisp pictures with great quality sound but aren’t being received at home, that’s going to change with digital, it's going to be like a comparison would be the quality you get off your DVDs.

LISA: How much is the quality of programming on these channels going to be a driver for people to sign up, I mean you’ve gotta give them something they want to watch so what can they expect?

RICK: Yeah in the end content will always be the driver of course, the main driver of course is the fact that the main free to air channels will be on that and eventually you will see the analogue system shut off, it's a conversion if you will. Along with that though comes because the VHF frequency was very limited you could only have a certain number of channels, comes the opportunity for each of the broadcasters to provide more content more channels and so that’s what's going to happen. Unfortunately, I mean I'd like to discuss content but neither TVNZ nor ourselves nor any of the others can really talk about content, (a) it's too early and (b) it's competitive, it's very competitive.

LISA: Competition aside though I mean generally what, are we gonna see more niche and minority programmes do you think, generally what could people expect?

RICK: I think you will see niche and minority channels, you will see channels that are aimed at specific groups of people that’s very likely, and that could be you know anything from nature lovers to news lovers you know that sort of thing, I think you're likely to see that sort of thing, but the broadcasters which is an appropriate name are covering that broad spectrum, now you're likely to see more niche broadcasters, there isn't room in New Zealand which is a fairly small market for more broadcasters.

LISA: What about critics who reckon that we're gonna get a lot of repeats a lot of junk television from overseas, do you see that as an issue?

RICK: Well it is an issue because the fact of the matter is that the existing channels now search the world to get the very best programming they possibly can, there isn't any better stuff out there if there was it would be here. Obviously that’s subjective, some people will have a bent towards certain types of programming and that’s where the niche part of it comes in, in terms of broad interest programming the best is already here so it's probably going to be a criticism yes.

LISA: The government's not given any indication whether it's going to stump up any more money to make the programmes that are going to go on this greater expanded network, do you think it's necessary to have more of that funding and as someone from Television 3 should it be contestable funding, should you be able to vie for it, should it just go to the state broadcaster?

RICK: I think the New Zealand on Air model has been incredibly successful, it's been efficient, it has developed a lot of programming at a relatively low cost and so I don’t see any reason why their role couldn’t be expanded to include funding some of these niche broadcasters.

LISA: Are TV3 going to be putting the Rugby World Cup games on your new channels in 2007?

RICK: No we're gonna put them all on TV3.

LISA: Okay let's bring it open to the panel, starting off with DAVID: Beatson who we must say formally of New Zealand on Air.

DAVID: Yeah, what took you so long. Come on.

RICK: On the digital?

DAVID: On digital, why has it taken so long, we're lagging behind the rest of the world very substantially.

RICK: We are and it was a matter I think of a complex agreement that had to involve some government funding that had to involve agreements with BCL and all that sort of thing, some of those details are still being worked out but it really was a complex arrangement. You have to remember that in the past and honestly I'll put some of the blame at the foot of the government here because in other countries that have gone digital there has been a huge amount of government support up front that was lacking until now.

DAVID: Enduring. Okay when are we going to see the digital service?

RICK: You will see digital early next year on satellite and then later next year on terrestrial.

DAVID: One thing we do know is that consumers are going to have to pay, in fact there are probably some economies for producers and the government is going to get all the frequencies that you vacate which it can turn to real value by giving it over to new wireless services which currently can't get space in the spectrum. Now it seems a very good deal for the government, a very good deal for you guys but the consumers out there are going to be paying. Why is the balance so much struck in your favour?

RICK: Do you mean paying for the box?

DAVID: The whole conversion to this wonderful new age, the people at home are the ones who are going to be doing it and the taxpayers are funding it.

RICK: Yes you're right, but you talked about a huge benefit to the government which is the taxpayers in the end are going to get that huge benefit of the analogue frequencies …

DAVID: Why hasn’t that been built into the cost benefit equations that have been done on digital. It's not mentioned.

RICK: You're right it's too far down the road, it's you know the government talked yesterday or earlier this week of an analogue switch off of six to ten years, I think that’s incredibly optimistic, I think it's likely to be longer.

CLAIRE: And in fact the analogue switch off has been delayed in a few countries, I mean Australia has just had to push it back for example, it's not gonna happen any time soon in most of our similar markets. I'll be interested to know your views on whether New Zealand would be able to sustain something like a 24 hour news channel, I mean that’s a niche that New Zealanders are obviously interested in, there's a great hunger for news here I think.

RICK: Yes. I think if there was an obvious answer someone would be doing it already, and so I think there's a risk involved in it, it also depends you know the questions are too could it be a free to air channel and could it survive just on advertising revenue or does it also need subscription revenue like the Sky model, and it's a tough one because you're right the market is small and the costs are high.

CLAIRE: Yeah, I mean you guys and TVNZ already to produce one hour of news spend almost what you would have to spend to produce 20 hours of news you know there's only a finite number of resources that you need.

RICK: Well that’s right but you know you still have to have fresh news, if you're going to do 24 hour news it can't just be a rehash of the six o'clock news it's gotta be new stuff you have to have more reporters out there, more gear, more editing, you know everything producers, that whole thing it's a big investment.

CLAIRE: Is there a risk do you think that TVNZ might think to itself that a good way of dealing with some of its charter programming for example shows like Agenda is to put them on a second or third digital channel and make TV1 and 2 the entertainment high rating interesting channels, you know from I guess a viewers point of view?

RICK: They could do that, I think though that it has to be kept in mind that viewers need to receive the programmes, there's a lot of money being spent on the charter so until that platform is rather widely received I think there has to be a real caution on how much money is spent on the content on it and certainly you wouldn’t want to divert it away from TV1 I wouldn’t suggest or TVNZ.

LISA: Thank you very much RICK: Friesen.


DAVID: The thing I'm really looking forward to is the big clash that’s going to come up as Trevor Mallard's new lively SOEs get off the ground because I can't wait for the grand contest just imagine it, Treasury versus Learning Media over some grand initiative that’s gonna set the economy on fire, boy this is gonna be great stuff.

LISA: You don’t see big things on the horizon then I take it.

DAVID: I'd like to see the knitting done and New Zealand get decent roads, decent power supplies, the basic stuff that let's other people go to work in business.

LISA: So this is dabbling in an area don’t go there?

DAVID: No - why - Treasury will hate it, they’ll sit there and stonewall as much as they can and at the same time these SOEs well they’ve been drummed – any notion that they’ve got any life to go and be innovative and entrepreneurial was drummed out of them years ago, I mean there's very few of them that show greater entrepreneurial spark and Treasury has already lowered the hatchet on at least one for two of the SOEs that Trevor is nominating as those which cannot exist in a steady state any more.


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