Hon Clayton Cosgrove
Minister for Small Business

Embargoed until 4.30pm, 25 July 2008 Speech

Taking New Zealand’s SME’s forward – speech to the New Zealand Small Business Summit

Venue: Sky City Auckland Convention Centre
Time: 4:30pm to 5pm, 25 July 2008

Chairman Jack Christie, and Vice Chairman Peter Sewell of the Independent Business Foundation which organised this event; Business New Zealand Chief Executive Phil O'Reilly; David Eder, the Director of ‘Just the Berries’ and member of the Small Business Advisory Group; the Auckland Regional Chamber of Commerce & Industry Chief Executive Michael Barnett; the Chief Executive of the Employers and Manufacturers Association (Northern), Alastair Thompson; the Chief Executive of the Council of Small Business of Australia, Tony Steven; my Parliamentary colleagues; members of the New Zealand business community; special guests; ladies and gentlemen.

Good afternoon, it is a pleasure to be here.

Thank you for the invitation to speak here today on the subject of “Taking New Zealand’s Small and Medium Enterprises (SMEs) Forward”.

The title of this session alone is food for thought. Ultimately, it is New Zealand businesses that take themselves, and New Zealand, forward. I think this fact is not recognised enough in this country. We kiwis are quick to celebrate our sporting success and put our sporting heroes on a pedestal. Yet it is people like you in this room, who provide the jobs we need to put food on our families’ table. If people like you weren’t willing to take the risks in the hard, real world that is business, our economy and ultimately our society would suffer. We should celebrate our business people - they are the life blood of our economy.

As the Minister for Small Business I have had the pleasure of visiting many small businesses throughout the country, and seeing first-hand the realities they face on a day to day basis.

I believe that Kiwis, as born innovators and entrepreneurs, are great at running their own businesses. But I as a former small business owner myself, I know it isn’t easy.

The government has a clear role to play, not so much in leading businesses, but in providing the tools and support for small businesses to maximise their potential, and to also provide a positive business environment.

It is therefore with particular satisfaction that I note the many things the government has done, and plans to do, to better support the growth and prosperity of the small business sector, which comprise a staggering 97 percent of all firms in this country.

This support is recognised internationally. New Zealand’s regulatory environment continues to be consistently ranked either No 1 or No 2 by the World Bank in terms of the Ease of Doing Business survey.

Talk to any business person exporting or importing and they will tell you that New Zealand’s regulatory framework is light years ahead of the vast majority of our international competitors. As just one example, the Companies Office uses text messaging to advise company directors that their company returns are due or a little late – something quite simply beyond the imagination and management capability of most overseas business registries.

The European Union aspires to reduce the time it takes to register a new company to one week. New Zealand does it now in an hour or less – and enables the firm to get a tax number at the same time – every hour of every day.

The latest Business New Zealand-KPMG Compliance Cost Survey of business people shows that our commitment to continuous regulatory improvement is seeing compliance costs decreasing for small business. The Survey shows that compliance costs have fallen by a third since 2005 for firms employing five or fewer staff.

While these are all positive achievements, it doesn’t mean that we shouldn’t seek further improvement. Today I will outline some of the government’s most recent initiatives to support the small business sector, and the strategies underway to address the challenges facing businesses in New Zealand.

One of the biggest challenges is, of course, compliance costs.

Balancing compliance costs with the right amount of regulation to ensure a fair market can be a tricky issue to address, and New Zealand is not alone in this regard. That said, I believe that the approach this government has adopted has been a success, largely because of the direct engagement with business.

There is simply no substitute, legal or otherwise, for talking with people about what works and what doesn’t work, and developing mutually respectful relationships between legislators, regulators and the regulated.

The dialogue between small businesses and the government is happening on many levels.

In 2003 the government established the Small Business Advisory Group (SBAG) to provide this direct link. SBAG acts as a sounding board for government policy development, it identifies issues impacting on the growth and development of SMEs, and it suggests priorities for action and explores solutions.

To date SBAG has produced three reports – the latest being the 2008 document “Growing Competitive SMEs” which I will be reporting back on in the near future. The government is listening to SBAG, and as evidence of this, has already delivered on 75 per cent of SBAG’s recommendations in its previous reports.

The Business Consultation website that was launched in 2005 is another direct hotlink for business, and specifically SMEs, to consult directly with the government.

Other measures introduced by the government to ensure the SME “voice” is being heard include the establishment of my portfolio, the Minister for Small Business, in 2002; the establishment of the Small Business Directorate within the Ministry of Economic Development; and the setting up of specialised small business units or groups within a range of government ministries and departments (including the Department of Labour, Inland Revenue Department, Ministry for the Environment, Statistics New Zealand and Te Puni Kokiri).

None of these initiatives existed prior to this government taking office in 1999.

Reducing the compliance burden for business is a key government priority. The Prime Minister Helen Clark, in her statement to Parliament after the 2005 Election, said the government would take a fresh look at regulatory frameworks. Feedback from business suggested that higher quality regulation would lead to more growth and investment, and we sought to engage with business on how to achieve that. It led to a programme called the Quality Regulation Review.

We are already seeing the positive results of the improved communication between SMEs and policy makers. The Quality Regulation Review has produced a lot of results for business especially at the SME level - none of it is earth-shattering front page news - but it is making a real difference to how SMEs are able to navigate their way through various regulatory frameworks.

One of the findings of the Review was that bigger businesses usually prefer to operate within open, principles-based regulatory frameworks that enable them to adapt the details to suit their own circumstances. Smaller businesses on the other hand usually prefer something a little more prescriptive – “just tell me what I have to do” was the common demand of the SME sector.

Providing businesses with easily accessible advice on how to be compliant remains a challenge, but that essentially comes back to the design of the framework and the approach to ensuring compliance.

The other matter confirmed by the review was the fact that we in government tend to see as separate the individual government departments – like ACC, IRD, MSD, OSH, Immigration, Justice, Statistics, NZTE, the list goes on. Business operators just see those agencies as “The Government” and ask why they have to keep telling the government the same thing over and over again.

Resolving the issue of duplication in the way that businesses interface with all the arms of government became a central focus of the Review. A major initiative to resolve this problem is now underway.

Simpler Business Reporting

The government has agreed, in principle, to investigate Standard Business Reporting for New Zealand. I see Tony Steven, from the Council of Small Business of Australia, who is here today, said in an open letter earlier this year that Standard Business Reporting in Australia "will revolutionise the way business deals with Government" and that "the private sector will need to follow this initiative and maximise their opportunities". I totally agree with Tony about this and encourage the New Zealand business sector to support this initiative in New Zealand.

Standard Business Reporting will allow businesses to file information only once with government, in one place, and from there it will be distributed to the agencies that are entitled to that information. Based on calculations done for a similar system in Australia, the cost savings for New Zealand businesses are conservatively believed to be between $55-75 million every year, once the system is fully implemented. In other words this new system will save small businesses in particular, both time and money.

We are going to start with the government agencies that deal with financial reporting – the Ministry of Economic Development’s Companies Office, Inland Revenue, Statistics New Zealand and ACC. This is where we think the greatest savings for businesses will be found.

As a part of the project we have also asked officials to further investigate the introduction of a single business number for New Zealand. This number would be unique to the business and could stand in place of the dozens of identifiers (e.g. tax numbers, incorporation numbers, ACC numbers etc) businesses currently have to use to interact with government. Reducing the need to submit the same or similar information to multiple government agencies would be of huge benefit to New Zealand businesses, particularly SMEs.

Free Statistics New Zealand Information

This flow of information should not be a one-way street. You should get something back. The government has been freeing up data that is useful to businesses. Beginning in May 2007 a large range of Statistics New Zealand data and products have progressively be made available for free.

To date, more than $28 million worth of statistical information products have been made available, free of charge. This initiative is about giving back the information in a usable form so that value can be added to New Zealand businesses through economic growth.

Business Portal

Information about useful tools and resources provided by government are also now available online to help small businesses. The internet portal www.business.govt.nz provides a useful resource in looking across all government departments for assistance that is available. One example of the information available on this site is the PAYE subsidy scheme. This scheme is available for businesses that employ five or less staff and pay less than $100 000 a year in PAYE. It entitles you to a subsidy for employing someone else to do your payroll for you which of course gives you back some time you can spend growing your business.

Challenges

While we can take some satisfaction from the improvements we are seeing within the business sector due to the improved communication with the government, there are still some major challenges ahead.

Despite having one of the best business regulatory environments in the world, New Zealand’s businesses do face difficulties. New Zealand has a small domestic market and is a long way from major markets.

Overcoming Economic Geography

Government is addressing the economic geography issues of size and distance to market by opening doors and building links with other markets. The Single Economic Market (SEM) with Australia is aiming to harmonise regulations to make it easier for businesses to operate on both sides of the Tasman. This does mean there are more Australian businesses in New Zealand, but there are far more opportunities for our businesses to expand into Australia. New Zealand businesses are taking up those opportunities.

I recently visited Frank van der Velden of Brave New World in Auckland. His company has established itself in Australia and is now looking at North America. It has been a big step and a learning experience for Frank and Brave New World, but they are linking into networks, some of which were established during a trade mission led by the Prime Minister, to build the contacts and speed up the learning process.

The government has also entered into trade agreements with other countries such as Singapore and Chile, and the big one, China. While this does not physically reduce the distance to markets, it makes it easier for NZ businesses to enter those markets. We do not expect every business to take advantage of these opportunities but for those that are considering it, the government is providing a lot of information and support to help businesses consider China market opportunities.

Indeed, it is a little known fact that the China Free Trade Agreement (FTA) contains a whole section (Article 176) in which the New Zealand and the Chinese governments have committed themselves to undertake a range of activities designed to promote a favourable trading environment specifically for the development of SMEs and to build the capacity of SMEs to trade effectively under the FTA. The Ministry of Foreign Affairs and Trade is co-ordinating the government initiatives in this area.

If you have not done so already, check out the website www.ChinaFTA.govt.nz to see all the work that is going on to get the most out of the China FTA.

There are more than 360,000 businesses in New Zealand, but only a small number of them are currently involved in exporting or international investment. As few as 625 companies are responsible for 91 per cent of our merchandise exports. Clearly there is great potential for more New Zealand businesses to enter the international market place. Growing globally competitive firms is a key objective of the government’s Economic Transformation agenda.

Productivity

The New Zealand economy needs productivity growth to respond to globalisation and demographic change. We need to work smarter. The challenge is to have more New Zealanders in higher value work that produces higher value goods and services.

So how do we achieve this?

I note that the National Party has announced that given the chance, it would institute a 90-day probation period for new workers in businesses with fewer than 20 staff during which employment could be terminated.

Section 67 already allows for this to occur. However, under Section 67 employers are required to undertake due process to justify the dismissal of an employee, on which the employee is entitled to seek mediation and ruling from the Employment Relations Authority. This appeal right would be lost under National’s proposal. This Fire-at-will policy would mean that there are no protections provided to new employees under the amendment.

What would this mean for small businesses? Would it help lift productivity and strengthen the sector? The answer is no. Fire-at-will discourages small business growth, because what incentive does an employer have to expand by employing new staff, when fire-at-will only applies to businesses of 19 staff or less?

Fire-at- will also discourages investment in skills, because what incentive do employers have to invest in training to support new employees when they can be released in the 90 days? Even more importantly, what incentives do employees have to take up opportunities in an SME, bringing their skills and knowledge, if they could lose their job easily for no reason? The ability of SME’s to attract the best staff would be seriously compromised.

Fire-at-will is also a compromise to satisfy big business, as this is the first employment relations proposal that would distinguish business based on size. Big business knows it won’t work because large unionised workplaces won’t put their colleagues at risk. Fire-at-will would be a major step backwards for the SME sector.

The government knows that the solution for improving productivity is through innovation in products and processes. This will take investment in

• Skills

• Innovation

• Infrastructure

• Businesses

Investment in Skill

Productivity increases are being supported by this government with $168 million in operating funding over the next four years to provide workers with the right skills for the complexities of the modern workplace, as part of the New Zealand Skills Strategy. The “Building Firm Capability” work strand of the skills strategy is being lead by Business New Zealand Chief Executive, Phil O’Reilly, with direct involvement from several public and private organisations.

Better skilled workers are more motivated and more effective workers. They have ongoing opportunities within the workplace to keep up to date with their technical workplace literacy, language and numeracy skills.

Investing in these skills leads to higher work quality, better health and safety, and improved staff retention. Equally important, it enhances family and community life.

We are also investing in management skills. Management Focus, a joint partnership between government and business is encouraging more managers to develop their business skills - this is essential if we are going to have globally competitive firms. Check out their website www.managementfocus.org.nz if you are interested in finding out more about this.

Investment in Innovation

Innovation and skills funding in Budget 2008 signalled a step change towards a high wage – high skill future for New Zealand. Over $1.7 billion has been allocated for work on boosting New Zealand’s productivity through innovation involving research and development, a quality tertiary sector and practical support for globally competitive firms.

The New Zealand Fast Forward commitment is the largest ever boost to research, development, and innovation funding and will help transform New Zealand’s pastoral and food sectors to meet future challenges. The Government’s upfront investment of $700 million is expected to grow to around $1 billion as it earns interest over the next ten to fifteen years. In addition, industries will be expected to match the government’s commitment on an annual basis, resulting in an expected total fund of around $2 billion to be fully expended over the next ten to fifteen years.

The 15 per cent tax credit for research and development (R&D) began on July 1 this year. It is designed to materially assist the 2500 firms who undertake R&D. It is also designed to help address the single most important shortcoming in New Zealand R&D, which is the relatively low level of private sector investment.

Investment in Infrastructure

Infrastructure is a key part of the productivity story and provides an opportunity to deliver higher productivity across the economy. The Budget 2008 Broadband package is designed to boost access to fast, affordable broadband so that New Zealand firms can better compete internationally. This is part of a wider package of more than $500 million for broadband and digital related spending.

The new Broadband Investment Fund will be used to accelerate broadband investment in three critical areas:

• facilitating high speed broadband to businesses and entities such as municipalities, universities, schools and hospitals in urban centres;

• extending the reach of broadband into underserved regions; and

• improving the resilience of New Zealand’s international connections.

Budget 2008’s investment in transport infrastructure also aims to improve the flow of goods and services, while also improving our environmental sustainability.

Business Investment

The Government has implemented a range of initiatives to improve investment in businesses. The Venture Investment Fund, established by Government in August 2001, is investing NZ$160 million alongside private sector co-investors in a series of privately managed venture capital investment funds. The VIF programme is designed to increase the supply of capital to New Zealand based innovative young companies and over time, to accelerate the development of the venture capital market in New Zealand.

Another project is the Seed Co-Investment Fund. It is an equity investment fund aimed at small to medium sized businesses, at the seed and start-up stage of development. The Fund commenced in July 2005 and provides $40 million of matched seed funding to support the further development of early-stage investment markets.

The key objectives of the Fund include:

• enhancing the development of angel investor networks,

• stimulating investment into innovative start-up companies, and

Over the past ten years many countries have moved to support the establishment of Business Angel Networks. Such networks benefit investors by enabling them to share information, and allowing easier investment syndication, therefore sharing the costs and risks of investment. They benefit firms by reducing the costs of searching for potential investors and improving the likelihood of finding investors with the right skills and experience for the needs of the business.

From a regulatory perspective Budget 2008 provided funding to better protect investors. New laws will be implemented to improve the supervision of financial advisers and institutions

Tax Changes in the Budget

We are also helping kiwi businesses compete on the world stage in the area of tax. Recently the government has made changes to the business tax and personal savings incentives to help develop a more innovative and dynamic economy, better able to complete in the global market place.

Since 1 April 2008 there has been a reduction in the company tax rate from 33 to 30 per cent, a new regime for the taxation of portfolio investments entities and the 15 per cent Research and Development (R&D) tax credit that I mentioned.

Cabinet recently approved the first stage of international tax reform, exempting from NZ tax the active foreign-sourced income of NZ-owned foreign subsidiaries, with legislation to be introduced in the next Tax Bill.

Further to that, legislation currently before Parliament will see compliance costs reduced by raising a number of tax thresholds. That may mean fewer tax returns for businesses to complete, a reduction in the amount of information or number of calculations required to complete returns, and a reduction in the number of payments that must be made.

The first phase of efforts to reduce tax compliance costs for businesses include these main threshold changes:

• The PAYE once-a-month filing and payment threshold will be raised from $100,000 to $250,000. That will allow more SME employers to file and pay PAYE deductions once a month instead of twice a month.

• The fringe benefit tax annual return filing threshold will also be raised from $100,000 to $250,000. The charges will increase the number of employers that can file and pay the tax annually rather than quarterly.

• The GST registration threshold will be raised from $40,000 to $50,000, which will mean fewer taxpayers have to register for GST.

• The GST six-monthly return filing threshold will be raised from $250,000 to $500,000 which will allow more taxpayers to file returns on a six-monthly basis rather than a two-monthly basis.

The second phase will consider further initiatives that were identified during consultation with the business community.

Conclusion

This government, more than any other government in the last 30 years, is working with key stakeholders, businesses and the unions, to develop New Zealand’s capability. We need our globally competitive firms out there doing the hard yards for New Zealand, and the government is working with them developing new markets. They also need a world-class business and regulatory environment here in New Zealand supporting their efforts. That is what we are working on with the Unified Skills Strategy, Workplace Productivity Agenda, and innovation initiatives.

You may hear today from people who promote the idea that a few policy changes will fix the bulk of the productivity and business performance issues I have outlined. That view is simplistic. If we want to see what can be done to lift long term productivity growth, we have to look at what makes a difference at the firm level.
I do not wish to understate the very important role the government plays in creating an environment in which SMEs can flourish, but we need to look beyond the view that a few quick fix policy changes will be our salvation.

To improve our standard of living we need to mitigate the barriers of size and distance from market, and invest in our skills, innovation, infrastructure and businesses. The biggest gains are going to be made in these areas.

Ultimately it must be our businesses that have the confidence and capability to compete in global markets, make good business investments, and reap the rewards. Contrary to the title of this session – it is New Zealand businesses that are taking New Zealand forward and the government needs to support that.

ENDS

© Scoop Media