Michael Cullen Speech: Pipfruit Industry Conference

Mission Estate, Napier

According to the Chinese astrological calendar, we have just entered the Year of the Monkey. As one would expect, the monkey symbolizes a zest for life, abundant energy, a quick intelligence and a capricious temper. Those born in the Year of the Monkey are said to be productive, methodical, caring and vivacious. But they can also be restless, calculating, strong-minded, and at the lowest end of the scale, troublemakers and tricksters.

While I can assure you that Chinese astrology is not one of the tools used by the Treasury to forecast the economic trends for the year ahead, several aspects of the monkey character seem apposite to New Zealand exporters, both in terms of the conditions they are likely to face and the attitude needed to thrive.

As for the New Zealand pipfruit industry itself, I am sure you can all think of ways in which the current situation calls for energy, intelligence and strong-mindedness.

Looking first at the external situation, the outlook is for growth in export volumes, but downwards pressure on prices. As last year MAF’s “Situation and Outlook for New Zealand’s Agriculture and Forestry” noted, apple export volumes for 2003/04 are forecast to increase 7 percent to 19.2 million cartons, due to a combination of favourable weather conditions and relaxed grade standards. Barring adverse weather conditions, this figure is forecast to increase further to 19.3 million cartons and 19.6 million cartons in the ensuring two years.

This positive growth makes it all the more important that we make progress in market access for New Zealand apples. We have been trying to export our apples to Australia for eighty years, but this trade has been blocked on the grounds that New Zealand apples may be a vector of fire blight. The Government was therefore delighted with the strong decision out of the World Trade Organisation last year that apples in commercial trade are not a vector of fire blight.

The rulings were made in the context of a complaint by the United States against measures imposed by Japan, but given our substantial interest in the issue of principle, New Zealand participated as a Third Party, asserting that Japan’s controls on apples were unjustified by science and in violation of the Agreement on the Application of Sanitary and Phytosanitary Measures. In light of these recent WTO rulings New Zealand looks forward to working with both Japan and Australia to ensure that early progress is made on improved access for our apples.

Progress on this front would be welcome, but we cannot forget the large picture. Forecast growth in exports worldwide is expected to depress prices for all apple varieties, while competitors on premium varieties continue to catch up with New Zealand producers on quality and marketing.

Further complicating the story is the high exchange rate, to which I will return in a moment.

These external factors are matched by the ongoing process within the pipfruit industry of adjustment to a deregulated environment. As expected, the initial period after the abolition of the ‘single-desk’ approach to exporting pipfruit saw a proliferation of new export companies springing up alongside ENZA, who continue to have a large share of the market.

This process was undoubtedly aided by high export returns during the first season after the deregulation which took effect in October 2001, and the perception is that this incoming tide has, as it were, nurtured more export companies than can be expected to survive over the long term. It may well be that the next couple of years sees some winnowing out of those companies who do not have a secure future.

It seems likely then that the long term shape of the pipfruit industry will not emerge for several more years. Of particular concern – and this is something which I hope will be debated both formally and informally at this Conference – is the question of the industry wide roles that used to be played by ENZA prior to October 2001, the full range and magnitude of which is only now becoming apparent.

This is where Pipfruit Growers of New Zealand has a vital role to play. To remain competitive, growers need a reliable supply of technical, economic and marketing information, and need a forum for organising industry-good functions and for representing their collective interests. Activities such as crop estimation and price forecasting were once carried out by ENZA as a matter of course; but they now require new mechanisms for cooperation within the industry, based on voluntary compliance instead of the mandate of law.

So the industry faces challenges that are both external and internal, and I trust that the developing role of Pipfruit Growers of New Zealand will move some way towards meeting them.

I would like to focus my remarks today on three issues relevant to the pipfruit industry in which the government has a role:

Firstly, the foreign exchange trends, where government’s role is severely constrained, although not the extent some would have us believe;

Secondly, government investment in science, where we are seeking to develop partnerships with industries; and

Thirdly, the management of compliance costs and taxation, where the government is seeking to balance the interests of business and those of the community at large.

First, the exchange rate. Clearly the high dollar has an impact in the short term on the revenue that New Zealand exporters earn.

Media commentaries have tended to focus on the substantial appreciation of the Kiwi against the US dollar, some 25 percent during 2003. What receives less attention is the fact that the New Zealand dollar has actually depreciated against the Australian dollar and appreciated more modestly against currencies such as the British pound and the euro.

Nevertheless, the trade-weighted exchange rate has appreciated by 13.5 percent since the start of 2003 and is currently around 44.4 percent higher than its 2000 low. Overall the TWI is currently around 12.9 percent higher than its post-float average.

The two key factors driving this appreciation are the generalised weakness in the US dollar and the out-performance of the New Zealand economy in world terms. Although exchange rates are notoriously difficult to forecast, there are few signs of these fundamental drivers reversing in the near term.

Much as I might wish otherwise, there is nothing I can do to alter international perceptions around the US economy and fiscal position. And, on the other hand, the recent strength of the New Zealand economy is something to be celebrated, especially as it has been achieved without significant inflation, has been accompanied by rates of employment that have not been seen since the early 1980s, and by increases in household incomes and wealth.

So the means by which a government of a trading nation can influence the value of its currency are limited and carry with them significant risks. I should make the point, however, that the stance advocated by Dr Brash – a stance which renounces in advance any possibility of intervention under any circumstances – is also a risky one, although one in which a government can always wash its hands of the outcome, claiming that it was the inexorable will of the markets.

Pragmatism suggests a careful balancing of options and risks, rather than a slavish commitment to some orthodoxy. Governments need to be seen to be alert and responsible, rather than sleepily dogmatic.

What I would urge New Zealand’s exporters to do, however, is to maintain a focus on the broader set of forces which impact upon our international competitiveness, of which the exchange rate is only one, albeit one that can behave in a very volatile manner over the short term.

My next two issues – science and the management of compliance costs – are things which have a long term impact upon productivity and competitiveness, beyond the temporary (albeit potentially harmful) effects of fluctuations in the exchange rate.

In the area of scientific research, the Government is working increasing closely with industry in support of the goal of lifting New Zealand’s overall productivity. Our Growth and Innovation Framework has highlighted the importance of innovation to lifting our growth, including the contribution to innovation from our scientists.

This commitment has gone beyond mere words. Over the past four years ongoing annual funding has risen by around $120 million.

We have aimed not only to increase support for science but also to ensure that is relevant to industry needs and that where new ideas are generated the means is available to support their development.

The “Research for Industry” Output Class, managed by the Foundation for Research, Science and Technology, continues to contribute significantly to our core export industries.

For example, New Zealand’s $420 million of apple exports and $618 million of kiwifruit exports are supported by approximately $12 million of RFI funding, undertaken mainly in CRIs, and about $3 million of industry research funding per year.

This on-going stream of research funding has provided such successes as the Jazz apple and Zespri Gold kiwifruit.

However, research in vacuum, or remote from the realities of the market, is not good enough. Research contributes best to industry where there are good linkages between researchers and users. There needs to be rapid transfer of learning in both directions, and a capacity for firms and users to take up and apply the science.

That is why we have put a lot of effort into improving the connection between the research sector and industry over the past four years.

Research Consortia is one example. These are jointly funded research projects in a range of scientific areas. Research providers, end-users and the government jointly decide the direction of research. The resulting stronger linkages between research providers and end-users are designed to:

address concerns that new knowledge is not passing fast enough from researchers’ heads to entrepreneurs’ heads; and

ensure that research agendas have a sufficiently commercial focus by developing them through collaboration between providers and users.

Technology New Zealand is a key tool for the government to support innovative projects that are industry developed and led. The key aspects of this programme include:

Technology for Business Growth - supporting firms’ R&D projects by providing 50 per cent of funding for projects that meet the criteria for the fund. During 2002/03 a total value of $50.8 million of grants were approved, compared with grants valued at $39.7 million in 2001/02.

Grants for Private Sector Research and Development, which also assist businesses in funding research projects but are aimed at an earlier stage than the Technology for Business Growth programme. The value of these grants was $14.8 million in 2002/03.

Technology Industry Fellowships: These support the placement of researchers or technologists in firms to build understanding of technological innovation in firms and researchers appreciation of commercial R&D environment.

Finally, Techink is aimed at stimulating awareness of new technology by providing technological guidance and planning.

It has also been important to foster links between science and industry at a regional level, rather than through national bodies. After all, research into how innovation occurs shows that localised business clusters are the best crucible for both making and adopting technological innovations.

The government’s Regional Partnerships programme supports a number of major regional initiatives that have a strong focus on fostering links between science and industry. For example:

Food Hawke's Bay is developing food industry clusters and a Centre of Innovation based at Eastern Institute of Technology (EIT). The focus is on the transfer of production capacity from existing companies to local small to medium businesses, adding value and growing export volumes in the food industry throughout the region, stimulating new product development and improving food industry training and education.

The Wine Research Centre of Excellence in Blenheim is an initiative of the Marlborough Economic Development Trust and the Marlborough District Council. The Centre will open up more opportunities to pursue graduate studies and post-graduate research. The knowledge gained will go back into the region's wine industry.

This is a start, but we know we can do more. We need to encourage more industry-led or industry-influenced research. Our RS&T policies need to reflect ‘market pull’, as well as ‘science push’. Again that is a challenge to be met by both government and industry working together.

I want to say a few words about the related issues of compliance costs, regulation and taxation. Understandably, any discussion of these is guaranteed to cast a pall of gloom over any gathering of New Zealand businesspeople. That is inevitable; and it is inevitable also that governments do not always see eye to eye with business on these matters. Government is, of course, responsible for maintaining order and promoting the public good; and in the course of doing this the rights and freedoms of individuals and businesses need to be balanced against one another, and revenues need to be raised to fund essential public services from which we all benefit, whether we realise it or not.

There are two points I want to stress, however. The first is that New Zealand businesses are in fact well-served in comparison to their competitors in many other countries. International studies show that the burden of government weighs lighter upon New Zealand businesses.

The burden of regulation and compliance costs on business in New Zealand is light relative to other developed countries. In its 2003 Economic Survey, the OECD commented that “in New Zealand, government regulation is generally of good quality, and compliance costs are not high by international standards. Nevertheless, compliance costs have been for some time a source of concern for small businesses, for which they represent a proportionately much larger burden than for larger firms.”

The 2003 Index of Economic Freedom, published by the Heritage Foundation and the Wall St Journal, noted that “it is easy to establish a business in New Zealand”, and described the regulatory regime as “relatively light” and “transparent”.

The second point is that this government, far from being insensitive to the needs of business, has worked hard to reduce that burden further in the context of building stronger communities and a more resilient, more globally competitive economy.

Improvement of the regulatory framework for business remains a key focus for this government. An analysis of the compliance costs of meeting regulatory requirements is one of the important costs factored into government decisions about whether to regulate or whether to alter regulation.

Government departments are required to prepare Regulatory Impact Statements (RIS) and Business Compliance Cost Statements (BCCS) where advice supporting regulatory change will have compliance cost implications for business. Even when regulation is seen as the best available option, the government still seeks to ensure compliance costs are minimised.

In addition, we have undertaken several initiatives focused specifically on reducing compliance costs for business. These include:

The Ministerial Panel on Business Compliance Costs Review – A report-back to the government in June 2003 confirmed implementation of many of the wide-ranging 162 recommendations submitted by the Panel.

The Tax Simplification Programme - the government’s ongoing programme to make tax compliance easier for SMEs. A discussion document released in September suggested initiatives including subsidising the costs of using a payroll agent. Officials are further developing these proposals in light of submissions received and it is intended that final proposals will be included in tax legislation later this year.

Business Law Reform Bill - an omnibus Bill that makes amendments to a wide range of commercial law statutes with a focus on compliance cost reduction.

The Electronic Transactions Act - By providing improved and clarified legal status for electronic information, this will reduce compliance and transaction costs for business.

Other initiatives are aimed at increasing the efficiency of regulatory systems. These include:

The development by the Department of Labour of best practice employment information, directed at the needs of SMEs;

The introduction of a training and accreditation scheme for councillors and commissioners involved in Resource Management Act decision-making;

Increasing funding for the Environment Court, so as to substantially reduce the time take to hear appeals;

A web-based one-stop-shop for business, to be launched later this month, containing all relevant government information and services.

The Immigration Service is also working to streamline the procedures for granting work permits for those on visitors visas. This issue has emerged in recent years around harvest time, where pipfruit growers have sought permission to employ workers who, for whatever reason, did not enter the country under the working holiday scheme, or other provisions allowing them to undertake temporary work. Clearly we cannot simply dispense with the requirements of our immigration law, particularly in the current international climate. However, we can undertake to provide a faster turnaround of applications, so as to assist growers find the workers they need at a particularly pressured time.

On the tax front, through its Industry Partnership activities in the horticultural sector, Inland Revenue is holding discussions with groups representing subcontract workers to look at ways of dealing with the non-compliance with tax laws that has been highlighted in recent court cases. The government appreciates your industry’s willingness to cooperate with this initiative.

Finally, still in the area of taxation, some of you will be aware that the government has recently approved a proposal to allow a limited proportion of replacement plantings to be deducted in a tax year. The current law limits the extent to which expenditure on replacement trees can be deducted as current year expenditure. Discussions with the Fruitgrowers Federation led to agreement on an upper limit based on replacement planting expenditure in respect of 5 percent of the area of an orchard, in effect treating that expenditure as repairs and maintenance. This will provide more flexibility in the tax treatment of replanting activities, and should ensure the most commercially desirable varieties are planted.

I trust that what these examples show is that my government is not content to rest on the laurels that international commentators have bestowed upon us in terms of low comparable compliance costs and regulatory burdens. Doing business in this country is simpler than most other developed countries in the world; but given our disadvantages of geographical isolation and a small domestic market that makes good sense.

There are those who call for grand gestures – reductions in the marginal tax rate, privatisation of ACC, slashing of health expenditure and social welfare, and so on. The evidence suggests that these options are much less effective than the promises that are made for them. And what is worse they run the risk of undermining the well-being of communities and tearing the social fabric from which businesses draw their workforce and, in many cases, seek their customers.

We believe that healthy communities making for healthier businesses, and vice versa. We cannot afford, in the words of an ancient Chinese proverb, to ‘take bricks from the West wall to fix a hole in the East wall’.

As with most of our export industries, growth in the pipfruit industry is driven by small advances – in productivity, in technology, and in market access. The government is committed to assisting those advances through a stable economic platform, a broadly based approach to science, and commitment to keeping the costs of doing business in this country to the minimum required to maintain a healthy society.

Thank you.

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