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Upton On Corporatisation and Sustainability

HON SIMON UPTON
ADDRESS TO RESOURCE MANAGEMENT LAW ASSOCIATION CONFERENCE
PLENARY SESSION
TOWN HALL, CHRISTCHURCH
1 OCTOBER 1999
"Corporatisation and Sustainable Management"


Thank you for the opportunity to speak on the topic of Corporatisation and Sustainable Management.

On the face of it there's no necessary connection or dis-connection between these two subjects. It's a bit like being asked to talk on "butterflies and armchairs". However, I note that the speakers have been given a wide brief to approach the topic from their own perspective, so that is exactly what I have done.

I intend to focus this morning on the regulatory environment, and what it means for the way both business and the public sector operate. In particular, I want to suggest that ownership structures have little to do with environmental performance. What makes the difference is the clarity of the regulatory environment.

In a developed country every activity takes place within the context of a legal framework. One could, of course, subscribe to an "Ayn Rand meets Ronald Coase" type world. But I think we ought not to cross the borders of that theoretical world and must retreat to a more practical and pragmatic reality. That is a more complex environment where industry operates within a framework of rules.

Let's look at the subject of rule-making as a continuum – from rules controlling almost every aspect of business and private life through to freedom to do pretty much what one likes. We know – from experience and observation – that both ends of the continuum really do not work economically or environmentally.

Eastern Europe has shown that regulation prescribing what will be produced doesn't generate what people want. Nor does it result in an environment that the people want to live in. Equally, lawless locations such as Eritrea and perhaps closer to home, East Timor in recent weeks, do not produce desired economic or environmental outcomes either.

So our quest is to define the optimal middle ground – where laws set the framework for business to operate most efficiently, and where we can be fairly confident that we can achieve outcomes that are sustainable in both an economic and environmental sense.

Through the reforms of both of our institutions and our legal framework since 1984, New Zealand has sought to disentangle the historical mix of production incentives and responsibilities for environmental regulation. This has happened in all spheres of New Zealand life.

Central government

Since 1984, there has been a revolution in the way that the institutions of government are structured and operate. The large public sector agencies used to be heavily involved in providing goods and services, many of which were commercial in nature. The result was that providing these services was the primary goal of such agencies. They also had other regulatory and social goals, but it was often unclear what was being delivered, to what standard, at what cost and to whom.

We faced a real risk that policy advice was skewed, and even ignored, in the quest to perpetuate the agencies' self-interest in continuing to deliver products and services.

The Environment Forum in 1985 was a watershed event. At that gathering the Ministry for the Environment and the Department of Conservation were conceived. The death knell was sounded for the Ministry of Works and Development, the New Zealand Forest Service, Lands and Survey, and other large agencies.

The debate then was very much about transparency of purpose. It was couched in terms of "green dot" theory – should there be one large green dot for environmental advocacy and protection, or lots of small green dots scattered amongst agencies with other objectives? Needless to say the large green dot approach prevailed.

The themes of transparency, accountability and, where relevant, clear commercial goals have continued to be the focus since that time. This has led to a separation of functions into policy agencies, service delivery agencies and commercial entities.

The second stage has been for the Government to evaluate ownership of enterprises involved in mainly commercial activities. As a result, we have seen the sale or corporatisation of many such enterprises.

I would argue that, from an environmental perspective, who owns such enterprises is less of an issue than the drivers of their performance. What are the incentives on the managers and owners of the enterprise? How clearly are they specified?

I think that this has been one of the great successes of the environment movement. After Manapouri, which established the environment as a significant national issue, the debates of the eighties about indigenous forest laid the ground for introducing transparency of purpose in central government decision making.

This had been lacking in our big government agencies. Now we know that the construction of a road does not involve a tradeoff behind closed doors between environmental outcomes, social outcomes and economic objectives.

Local Government

The 1989 reform of local government was, for some, a cataclysmic affair. New Zealand compressed more than 800 units of local government into 86. At the same time, the environmental management functions of local government were completely rewritten through the Resource Management Law Reform process.

Reform of the funding process for local government was started but has not been completed. In the intervening years, though, the financial planning and reporting structures of local government have been brought right up to date. Again the process was one of ensuring improved accountability.

The local government reform required that regulatory functions be separated from other responsibilities. Committees, which have a responsibility for regulation, cannot also fulfill other functions. For the first time, therefore, decision making about resource consents and approvals was separated from the business of providing services which required resource consents.

There could not be a total separation of the regulatory role in 1989, although in future this may happen. Both regional councils and territorial authorities still have a mix of functions. However, the recent report by the Parliamentary Commissioner for the Environment and the Audit Office on a study of local government environmental management models suggests that a separation of regulatory and service delivery functions does not appear to be an issue in terms of local government performance.

Working within the new controls on financial planning, councils are having to operate service delivery functions on a sustainable basis. This has come as a shock (often a financial shock) to communities. No doubt understanding the full life-cycle costs of providing infrastructure will mean changes to how services are provided and at what level.

Clearly, an evolution of ownership structures is still continuing. These range from continued direct community ownership of infrastructure and infrastructure providers, to LATE's franchising, to build/operate/transfer schemes, through to total privatisation. Much of the debate about optimal ownership structures now has little to do with environmental or any other regulatory issue. Rather the debate is more closely focused on control – the governance structures and capital structures.

I come back to my original contention. The ownership structure for companies, and for that matter, public sector service delivery providers, has little to do with their environmental performance. What matters is the clarity of the regulatory environment within which they operate. (I have a different view of their commercial performance, however: there, I do think public ownership will lead to poor performance, and political interference in resource allocation decisions robs managers of the incentives to perform).

Private sector

Even the private sector has not been immune from the pressures to show a clarity of purpose. Perhaps the most obvious remaining examples are on the stock market, where large companies such as Fletcher Challenge are now divided up, with each sector largely going its own way ( in both performance and ownership). Note also that the investment companies of the 80s with multiple interests have largely gone. Why? Because, in part, it is difficult to understand and assess the value of an organisation that has multiple objectives.

Clarity of purpose has, therefore, pervaded the private sector as well. Whether this leads to improved environmental outcomes is unclear. One suspects that the scorecard might be somewhat mixed. Loss of economies of scale and fragmentation means that environmental "luxuries" such as high quality corporate advice and research can be lost.

On the other hand, a clear focus on the effects caused by a specific activity means that the buck cannot be passed or responsibility avoided.

As I stated at the launch of the New Zealand Business Council for Sustainable Development, only business will be able to find the solutions to the current challenges to society. The business sector will be expected to provide the technological solutions we will need if we are to radically change the pattern of our production and consumption in order to achieve a sustainable future.

Where are we now?

We have heard a lot of criticism about the RMA over the past two years. Much of it, I might add, is conveniently anecdotal. Despite regular requests for facts and patterns of problems, we hear more "war stories" than information that shows where central government can usefully take action.

As I travel around the country, I find that the tide seems to be washing backwards and forwards in a more complex pattern these days. There is strong support, even from many of the critics, for the consistency of process and the goals sought.

We found that in consultation over the recent proposals for amendment to the RMA. Submissions from all sectors showed a commitment to the Act, with many noting that the RMA is fundamentally sound. One might be forgiven for hoping that this represents a more sophisticated appreciation of the role that RMA and other regulation plays in setting the framework within which industry operates.

Dwelling on the positives for a moment – and drawing on some of the more reputable information available – one must draw the conclusion that the RMA has had a profound effect on raising environmental issues in the consciousness of many industries and sectors.

In the past environmental responsibilities were more honoured in the breach. I suspect that the RMA has now brought environmental issues right to the boardroom table. A survey by the Ministry of Commerce two years ago highlighted business support for the thrust of the legislation. More importantly, businesses considered that the RMA made environmental responsibility a priority for them.

The RMA does establish a clear legal framework and a strong one. I make no apologies for that. The liability and enforcement regime support and enhance the message that businesses must behave in an environmentally responsible manner, and must ensure that there are no unacceptable adverse effects from their activities.

When the responsibility goes right up to the boardroom table, via the directors' liability, it creates a powerful incentive on business to do the right thing.

But let us recognise that there is still some way to go. There are still about 50 prosecutions per year of individuals and companies for non-compliance. I suspect that this is only the tip of a much larger iceberg of poor environmental performance. One of New Zealand's major companies recently fronted up and acknowledged publicly that it was in breach of a resource consent – and made it clear that it intends to do better.

Beyond regulation

Perhaps only through re-evaluating the long-term purpose of business will a true approach to sustainable management emerge – for both infrastructure providers as well as the rest of industry.

Infrastructure providers will, I believe, have to consider far more carefully the long-term costs and benefits of different approaches to providing services. The Governments reforms of the electricity sector and the roading proposals are steps in ensuring that this happens.

If we get the price signals right for infrastructure, there is the potential to ensure cost- effective delivery of the infrastructure at the right time. When you consider the high capital demands of infrastructure, this can be seen as essential for the nation's prosperity. It can also lead to better environmental outcomes. The extravagant and wasteful use of capital can lead to energy hungry systems that would never be adopted if proper returns were demanded and deny the entry into the marketplace of new, more efficient technologies.

Over the past 15 years, the Government has reformed the law and its own agencies. I believe it is now very clear what is expected of companies in the way of environmental performance.

The challenge I would make to the corporate sector is to stop focussing on the details of process and start focusing on the real issues – environmental outcomes.

Industry needs to get beyond a minimum level of environmental performance. Government will, through regulation, specify the environmental bottomline. National standards, policy statements and operative plans at the regional and district levels will make the environmental rules clear.

However, to reap the benefits for our international marketing and maintain the reputation of New Zealand's environment, industry is going to have to internalise sustainability principles into normal business practices. For many New Zealand companies this will represent a change in mindset and a challenge.

ENDS

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