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Extract PM’S Post Cabinet Presser - Dairy Merger

Transcript Extract PM’S Post Cabinet Presser 9/4/01:

Q: Prime Minister, you have an opinion on the merger?

HELEN CLARK: Of course, I have an opinion. I strongly support the decision made today. The decision we've made is to bypass the Commerce Commission, to give the industry the go-ahead to put the proposal to farmers. It's industry driven. The Government's position has been to ensure the proposal goes forward in the best possible shape it can. In the end, it's up to farmers whether they go with it or not.

Q: are you saying if it's industry-driven, then it can bypass the Commerce Commission? Doesn't that mean a precedent for other industries?

HELEN CLARK: No, it doesn't. Tell me another industry with a cooperative structure like the dairy industry which is heavily regulated by statute.

Q: why not the Commerce Commission

HELEN CLARK: It is my view that the Commerce Commission's main interest is in the domestic market and its competition. It's main purpose is not the scrutiny of whether this is the best form for a major export industry to take. In addition, the requirement to divest one of the two major companies that retail in NZ means you keep domestic competition at that level. I don't consider the arguments about the supply or purchasing of milk from the farmer to be particularly valid at all. If you've lived in Dairy Group territory now in the Waikato, Kiwi doesn't send a tanker down your road. There isn't competition there at all. But I'd prefer to hand over to Mr Sutton now, who's the specialist.

JIM SUTTON: As the Prime Minister said, Cabinet has decided to exempt the dairy industry merger proposal from the competition policy provisions of the Commerce Act. It's possibly the largest merger proposal in NZ's business history. It will provide a way of resolving the dysfunction created by the industry's current regulations. The dairy industry as the Prime Minister has said is unique in its highly regulated structure, it's marketing and commercial arrangements. Any change will require legislation to give effect to it. Exempting the merger from the business acquisitions provisions of the Commerce Act will facilitate the early and certain reform of the industyr's regulatory environment. The merger will have to be approved by 75 per cent of farmers in each of the companies, which will then allow legislation to be introduced into Parliament and it would go throu8gh a full select committee process. It is important the proposal is thoroughly discussed and debated, both inside and outside the dairy industry. A comprehensive regulatory package has been developed in consultation with dairy industry officials in order to mitigate any potentially negative consequences of the merger. Once the merger is complete, GDC will be exposed to the full disciplines of the Commerce Act, which currently don't apply to the Dairy Board. The company will be around 95 per cent of the NZ dairy industry, about 7 per cent of GDP, about 20 per cent of total exports, around 96 per cent of dairy exports and around 50 per cent of domestic markets.

Q: 2 years ago, the Commerce Commission said the deal was no good for the economy. What's changed?

JIM SUTTON: This isn't the same deal. The reason we've gone this route is that it provides greater certainty, greater speed. The situation the dairy industry is in now is not sustainable. You've got two major companies, each setting about making acquisitions offshore, while at the same time, sitting on and dominating the board of the Dairy Board, which itself is making acquisitions offshore, potentially all in competition, one with another. That is not a sustainable situation. Something needs to be done. There is of course considerable doubt as to whether the Commerce Commission with its existing rules could ever approve a structure like this. Even some of the advice which says yes it could say it would take maybe a couple of years to get it through. We don't have a couple of years to fiddle around.

Q: What's changed? A couple of years ago it only took a couple of months to get a deliberation.

JIM SUTTON: This is considerably different from then. It has as you will see when you go through the material we'll be handing out at the door, it has a new way of getting commercial disciplines to apply to the unbundling of returns to milk, the price of milk, the value of the shares, the income streams from the shares. We believe it will apply commercial disciplines to the industry that have been absent in most cases for some time. It will also, when a short transition period has gone through, allow a real possibility of genuinely competitive new entrants.

Q: What about competition in the domestic market?

JIM SUTTON: As the Prime Minister said, one of the two major manufacturing operations which supplies product to the domestic market is being divested. So that will ensure, even right from the beginning, there will be the same amount of competition as there is now. In addition to that, the smaller companies who already have some export permits form the Board, will immediately have the capacity and the right to export a full range of products if they so wish, so they will be in a position to provide greater benchmarking and greater competition.

Q: How will you guarantee Dairy Foods will have a good supply of raw milk at a good price?

JIM SUTTON: Because the regulatory package will require that and if that is not the outcome the Government would be in a position to do something about it.

Q: What about our other export industries, if they want this too?

JIM SUTTON: The fear of precedent is a bit of something to hide behind. We're not hiding behind it. I don't think there is any other industry that could readily call on this as a precedent. I can tell you, they would have to beat on our doors for a long time.

Q: Did you ask the dairy industry to provide for sharemilkers?

JIM SUTTON: We will amend the law to require all cooperative dairy companies to allow sharemilkers to purchase shares by agreement from their farm owners.

Q: ACT's claim, agreement good, should fly through?

JIM SUTTON: It will simply take more time. It's disputed amongst legal experts whether a deal like this could ever get through the Commerce Commission. As the Prime Minister has said, the primary role of the Commerce Commission is to protect NZ consumers from monopolistic behaviour in the NZ market. The regulation of major export industries is not the core function of the Commerce Commission and we believe it is entirely appropriate that a whole of government approach be taken to this. We have put the best parts of the public sector to work on this in recent weeks.

Q: Blackmail by the industry?

JIM SUTTON: the relationship between the dairy industry and the government is certainly not one of blackmail.

Q: I thought the Commerce Commission was able to handle bigger things?

JIM SUTTON: Yes it can, but I think those are really outside its core competencies and core roles. The Government believes the unique situation of the NZ Dairy industry requires a whole of government approach and we're not shrinking from that responsibility.

Q: You know more than the Commerce Commission?

JIM SUTTON: We know more about whole of Govenrment than the Commerce Commision, yes.

Q: What's unique aobut the dairy industry?

JIM SUTTON: It's the way in which it has been rendered dysfunctional by a regulatory regime which is the result of its historical development. I think it is pretty much unique in New Zealand.

Q: timetable?

JIM SUTTON: I have one here. It's a best endeavours timetable. It envisages Government releasing its decision and associated regulatory package mid-April, which is now. The GDC proponents sending formal merger proposals to farmers later this month. Early next month, govt confirming its decision to facilitate merger and finalising detials of the package and agreeing to introduce legislation. In May, farmers voting on the merger proposal. Late May, legislation introduced and passed by September. That would be allowing for 13 weeks of select committee legislation.

Q: As part of that deal, deregulation of the industry? When?

JIM SUTTON: The statutory single desk will be removed after one year. The use of NZ's quota access to protected markets will be put on a contestable basis after six years, which will be predominantly utilised by those companies using it at the moment.

Q: Why this structure?

JIM SUTTON: This industry belongs to its supplier-shareholders. They have looked at all the options and this is the option they believe is best for them. When you look at the performance of the NZSE 40 over the past 15 years and the performance of the dairy industry, you got to say they have the track record, they deserve to be able to say they have the ideas for their own industry.

Q: You're not looking at anything else?

JIM SUTTON: of course we've looked at what might happen if we did not help facilitate this change.There has been quite a lot of work done offshore by consultants, partly to peer review our own conclusions, but also to bring other points of view to bear. If I could sum up quite a lot of material in a few words, it's that one is better than two when it comes to marketing, two would be better than one when it comes to processing, but it's very important that processing and marketing be integrated, so we can't have it both ways. Certainly the industry is convinced, certainly it seems to be the majority of the industry is convinced this is the way they want to go. We've looked at it, they have satisfied our public policy requirements and therefore the decision is now up to the owners of the industry.

Q: Why not forestry, meat, other industries, if they want this?

JIM SUTTON: They haven't come to see me for it, so quite clearly they don't.

Q: any quid pro quo on animal welfare or environmental compliance?

JIM SUTTON: we haven't looked at that.

Q: there was one outstanding issue last week? What was it?

JIM SUTTON: I think that would have been the tax treatment of the merger.

Q: price controls could be introduced after three years?

JIM SUTTON: The company will be subject to the full rigours of the Commerce Act, except for the merger itself. Insofar as there could be some attempt to engage in monopolist behaviour in the event that one of competing companies runs into trouble, obviously price controls could become an option. But we don't envisage that. We envisage quite a dynamic situation, where niche operators get in, innovate, and provide competition.

Q: What about Nestle or Kraft coming in?

JIM SUTTON: it's a possibility, but there are intrinsic difficulties with a new entrant like that winning sufficient supply, some primary producers. The regulatory regime will put very strong incentives on the big company price milk and its shares, its assets, accurately so there is not likely to be much room for a new entrant to offer a significant advantage to farmer suppliers.

Q: Govt given any indication of likely buyers for other half of NZDF?

JIM SUTTON: About half the shares of NZDF now owned by individual farmers and other half owned by NZDG. They are being divested. I don't know what's intended for that. I wouldn't have thought it inconceivable that existing shareholders would want to increase their shareholdings.

**(tape ran out here? a bit patchy near the end)**

Q: Will GDC remain in NZ farmer ownership?

JIM SUTTON: this is a true cooperative.

Q: But other corporates could buy in?

JIM SUTTON: It's not possible, given the constitution.

Q: Has there been consultation with overseas quota partners?

JIM SUTTON: There hasn't been, no. But we're confident the arrangements for this will make it quite clear they are still controlled by the government of New Zealand.

Q: What about industry good activities?

JIM SUTTON: These will continue, in a completely separate co-operative owned by its users, the farmers and sharemilkers of New Zealand. There will be an incorporated society, with a working name of industry good inc.

ENDS

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