12 March 2007

Speech Notes Monday 12 March 2007
Nelson Institute of Directors

Trailways Motor Inn,Trafalgar Street,Nelson,5.30pm

Thank you for the opportunity to say a few words about the range of work that makes up my Commerce and Small Business portfolios. You have specifically asked me to address the following: · The cost of doing business (update on the Quality Regulation Review) · Government support for small business · Takeovers Panel role · Commerce and Securities Commission · KiwiSaver and the impact on business

This is all relevant to the work that I have been doing over the last few months and will be doing over the year ahead so it is a timely request for what is essentially an overview of much of my work programme.

There is a strong link between my Commerce and Small Business portfolios, but they are different and this enables me to bring quite different perspectives to the Cabinet table. So although the Quality Regulation Review falls under my Commerce portfolio, the results I believe will impact significantly on the SME sector.

The Commerce portfolio is focused on the legislative aspects of regulatory frameworks that are designed to promote good business practice and provide comfort to those who invest in the ideas of others.

The Small Business portfolio is about how those frameworks impact on SMEs, which in the NZ context means those firms that employ less than 20 staff. They make up 96 per cent of businesses, but as I have said on many occasions, it is not that number that makes them important to the government's economic transformation agenda, it is their potential for growth that does that.

Support for SMEs and the Quality Regulation Review Last week I attended the APEC SME Ministerial meeting, which confirmed that all APEC economies are committed to providing relevant support to their SMEs to enable their growth potential to be realised. New Zealand stacks up well by way of international comparison. Our number two status in the World Bank survey on Doing Business is something we can be proud of, however, it has its real value in benchmarking what we do against 175 other economies. My own view is that we must constantly strive to do better at the point where the rubber meets the road. Communicating with SMEs is of critical importance to compliance on the one hand and quality policy making on the other.

One thing I have learned as I have travelled around New Zealand meeting with representative associations, institutes, chambers and individual firms, is that there is universal agreement that regulation is important. But what is vital in terms of the cost-benefit analysis we undertake is that we get the balance right by ensuring that regulatory frameworks are 'fit for purpose' from the outset and that they remain so over time.

We sometimes forget that circumstances change and therefore it is important that we have mechanisms in place to review regulatory frameworks over time. It is becoming increasingly common to write reviews into legislation, or at least to publicly commit to a review during the passage of legislation, so that we can be assured that we have got it right.

I made the point in a recent address about what can happen when regulation is not subject to such scrutiny – even to the extent of achieving the exact opposite effect than that intended. In 1917 Parliament enacted the six o'clock closing rule for pubs. The aim was to have men home early, thus promoting sobriety and family life. Due to the short time between knock-off and closing time, what in fact happened was the consumption of large amounts of alcohol in a short space of time and what was known as the 'six o'clock swill'. The result was drunkenness and anti-social behaviour. Despite this, the law was not repealed until 1967. 50 years of a regulatory framework that was not fit for purpose from the outset.

The Quality Regulation Review, that I am leading, was sparked off by the Prime Minister's statement last year that regulatory barriers to growth would be addressed as part of the Labour-led government's commitment to economic transformation. As I said before, we do well in terms of international benchmarks, but by adopting a different way of talking to business about what their issues are, I think we will be in a position to make a significant difference for business, but particularly SMEs.

As I have also said on more than one occasion, many of the issues that impact on small business do not have the same impact on larger businesses. It's the lack of scale and scope within SMEs that makes it harder for them to know and understand all of the regulatory frameworks that apply to them.

This is largely because the owners tend to do everything. They are the human resources department, the marketing department, the accounts department, the procurement office, and usually the management and part of the workforce as well.

This is also a sector, where what you think will happen, becomes your measure of what will happen. Sometimes I think the government should use 'mateship' as the mechanism for communicating all requirements to SMEs. The number of times I have been told that someone's cousin's mate had been burned off by some law, coupled with an incredible and untraceable story that can only have been embellished many times over, makes me worry that people think it is ok to run a business without knowing how to run a business.

Which is where you come in. I know that your Institute is actively promoting discourse around the need to improve the governance of SMEs in New Zealand. John Gilks' comments on the front page of the Institute's 'boardroom' journal advocate the need for at least one non-executive director on SME boards, in order to help those firms realise their full potential. John describes an example where prior to the arrival of the non-executive director, the board focused on day-to-day company issues, rather than on strategic direction, growth opportunities and business monitoring, all of which are fundamental issues for a board.

He identifies the reality that faces the owner's commitment to the day to day running of the business, with 'little time to pause and consider the bigger picture'. He comments, as I have, on the many authors who have noted the lack of formal planning as the single greatest reason for business failure.

He says: "vision, strategic goals and objectives, succession planning, internal controls, competitor activity, budgeting and budgeting controls are 'stock in trade' to management and directors of most large enterprises. But these important topics are often not in the vocabulary of SME owners. The scale of business may be different but the principles of good governance remain the same."

If as an Institute, you are able to communicate this powerful message to SMEs, then you will be doing them a great service, by giving them access to the basic tools they need to grow.

I am hopeful that the results of the Quality Regulation Review will back you up in this regard, because it will separate the myths from the reality of the regulatory frameworks both in terms of application and enforcement. And it will potentially change the way government does business with SMEs, recognising that the weight of compliance is felt more heavily at the small end of town, and that there does not have to be a 'one-size-fits-all' approach to every regulatory framework or compliance requirement, both in terms of application and enforcement.

I am due to make the second QRR milestone report to Cabinet in a few weeks time and I am confident that I will be reporting significant progress.

I know you were keen to know whether I would be running another Small Business Day series as occurred in 2004. I am acutely aware that this was one of the recommendations of the Small Business Advisory Group, however the last year has been focussed on the QRR, which has enabled me to hear directly from SMEs and their representatives about what is happening for them on the ground and where they think the government could lift its game. I have also tied my visits to areas to existing opportunities; for example I attended several NZ Institute of Chartered Accountants' roadshows, which were essentially designed to ask accountants to think outside the square by promoting the concept of adding value to their customers' businesses rather than limiting their sights to that of a provider of compliance related services.

As a result of the recommendations of the Small Business Advisory Group, many government agencies have now developed specific services aimed at SMEs so as to tailor information to them and policy advice to government based on a practical understanding of the needs of and impact on SMEs. IRD and the Department of Labour are the standout departments in this regard, which is great because it is their areas of responsibility that raise many issues for SMEs.

If it was felt that a local business event would be enhanced by the attendance of certain government agencies to provide advice and support, then don't hesitate to use me as a conduit for arranging that. Once the QRR is completed then I will consider again whether we need to organise another Small Business Day series in accordance with the Small Business Advisory Group recommendation and perhaps as a follow up to Export Year 2007.

Securities Commission, Takeovers Panel & Commerce Commission You have asked me to comment on some of the regulatory regimes and bodies falling within my Commerce Portfolio, namely the Takeovers Panel, the Securities Commission and the Commerce Commission.

All three are Independent Crown Entities, which means my relationship with them is very much at arms length. I cannot and neither should I be able to direct them where they should focus their activities.

The legislative frameworks covering the Securities Commission and the Takeovers Panel both represent significant aspects of this government's commitment to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets.

The legislative programme began with life being breathed into the Takeovers Panel and Code, something which the previous government had failed to do. Few people today doubt the wisdom of having in place a code that protects the interests of minority shareholders in a takeover situation. John King retired this month as chair of the Panel and I believe we owe him a debt of gratitude for overseeing the implementation of a framework that has received international recognition and helped eliminate the 'wild west' reputation New Zealand had gained during the preceding two decades.

The next step in the programme was Securities Markets regulation providing for a co-regulatory environment, allowing the registered exchange to provide frontline regulatory oversight and for the Securities Commission to oversee the operations of the regulator. I am pleased to say that the system is working well.

The third step was the Securities Legislation Bill passed last year and the accompanying regulations, which we are working on now. These changes bring us into line with international best practice regarding continuous disclosure obligations and insider trading.

The final step is represented by the Review of Financial Intermediaries, Products and Providers.

Again a co-regulatory environment is proposed, with the Securities Commission providing oversight of the (yet-to-be) Approved Professional Bodies, to ensure that investors can have confidence in the significant area of financial advice and the multiplicity of investment vehicles that are available today.

With respect to the Commerce Commission, the significant area of work I am undertaking this year is the review of Parts 4, 4A & 5 of the Commerce Act. This review covers two broad issues. One relates to the way that regulatory control can be imposed in markets where there is little or no competition. The other relates to the processes for approving mergers and acquisitions and restrictive trade practices.

These are vitally important, because we need to encourage investment in infrastructure New Zealand in order for us to be globally competitive. This government has had to allocate considerable resources to addressing a decade of under-investment and under-regulation, for example in roads and in energy.

KiwiSaver The last area that you have asked me to address is KiwiSaver, which is of course the Labour-led government's flagship policy designed to address New Zealand's failure to inculcate a culture of savings into our national identity. I often reflect on what New Zealand's position would be today had the result of the 1975 election been different. I am often asked today why KiwiSaver is not compulsory given the success of the Australian scheme, and I wish that the 1975 voters had had an ounce of foresight, instead of falling for the personal short term benefit at the expense of the country's long-term gain.

The reason why I believe KiwiSaver cannot be compulsory is because we don't have the same mechanism for delivering the contributions without affecting the member's take-home pay. In Australia the contribution, (initially 3 per cent; now 9 per cent), was made by the employer, in lieu of the annual pay adjustment. New Zealand has not had a mechanism for delivering such a trade-off since the Employment Contracts Act 1991 scrapped national awards.

Even though we no longer have a universal wage-setting mechanism, employers will be able to offer KiwiSaver contributions as a tax exempt top-up to their employees.

I fully support the government's decision to make the scheme opt-out, rather than opt-in. We are all hopeful that the inertia that acts to limit people actively taking up superannuation will operate to limit people opting out. Around 700,000 New Zealanders start a new job over the course of a year, so we are very hopeful that the numbers will grow quickly.

I have been involved in the development of KiwiSaver as Minister of Commerce, given that I have responsibility for the regulatory aspects of the scheme, and I am jointly responsible with the Minister of Finance for appointing the default providers.

As Minister for Small Business I have sought to ensure that compliance costs for employers are kept to a minimum. There is going to be a cost. But the benefits far outweigh those, particularly when you factor in the reality that the development of superannuation schemes will lead to more investment finance being available. This should enable a deepening and strengthening of our capital markets, which is good for the New Zealand business environment.

Inland Revenue is about to start a major advertising campaign, which will include a 'how to' guide for employers, and is running seminars through the chambers of commerce. The Retirement Commissioner will also be running a public information and financial literacy campaign designed to improve understanding of the need to set aside a regular amount each week to enable us to enjoy the kind of retirement we want to have.

Conclusion Finally, I was interested to read the think-piece by Dr David Skilling, of the New Zealand Institute, in the February issue of your Institute's journal.

Our challenge is to create a sustainable economy built on innovation and quality.

First, David Skilling calls for increasing New Zealand's savings rate. This is something that has been a mantra of this government – and Dr Cullen in particular. Apart from KiwiSaver, we have established the Superannuation Fund to partially pre-fund the cost of New Zealand Super to ensure we preserve its universal application and its current thresholds, and we have introduced the voluntary State Sector Retirement Savings Scheme.

Secondly, Dr Skilling acknowledges the importance of creating a global New Zealand economy. This is something the government is highlighting this year through its Export Year activities. We have given a financial boost to initiatives such as the market assistance development scheme to support New Zealand firms breaking into overseas markets and we are engaging with the private sector in a number of ways to assist businesses seeking to develop their export ability and capacity.

Finally, Dr Skilling urges greater investment in knowledge and innovation in order to transform the economy through the development of new strengths. We could not agree more. The economic transformation agenda is built on a commitment to growing globally competitive firms; developing a world-class infrastructure; developing innovative and productive workplaces underpinned by high standards in education, skills and research; environmental sustainability; and, growing Auckland as an internationally competitive city.

We need to build a consensus around the direction we take to achieve economic growth. As Dr Cullen has said, if the benefits of growth are shared inequitably, we undermine that consensus. A fair society underpins a strong economy and vice versa.

On that note, can I thank you once more for inviting me to speak this evening and I am happy to respond to any questions you might have.

ENDS

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