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Modelling to a Standstill


None of us were around in 1870 when Vogel chose to build the railways in New Zealand but we might speculate that the economic rationale supporting a £7.5 million project for a country of 250,000 people went something like: “A prosperous modern economy needs a comprehensive rail network. We want New Zealand to be prosperous. We will build a railway.”

It is interesting to reflect on what would have happened had Vogel submitted his proposal to a modern economic regulator. The regulator would have sat down and earnestly compiled a view of the costs and the benefits, subtracted the former from the latter, found an enormously negative number, and dismissed the idea as lunacy. And that would have been a disaster.

The new Government has vowed to focus on infrastructure. Doesn’t take a rocket scientist – or economic modeller – to tell us there’s plenty that needs doing, and it’s not a bad time to get on with it as we march towards recession. The question is how to ensure it happens at a decent clip so that our economic performance can improve both in absolute and relative terms.

Of course, it’s a tricky issue. We don’t want to plough increasingly scarce capital resources into the wrong thing, but how do we recognise the wrong thing when we see it?

The current approach of the Electricity Commission to the supervision of transmission investment by Transpower is a classic case where we are striving to prove that an investment is optimal. How do we prove it? We build an economic model, of course. But the sad truth is, you can’t prove it because most of “it” hasn’t happened yet.

Ultimately, an economic model is just a forecast, which is just a fancy word for a guess. The only thing we know for certain is that it will be wrong. These modeller characters are bright, really bright. But the world is too complex for even the brightest. How good was the model that Lehman Brothers were working off? Or AIG? Or Iceland? What is around the corner for the hedge funds? The models are incredibly sophisticated but nowhere near as sophisticated as the increasingly globalised economic organism.

To climb back into the top half of the OECD, we are going to need ambition, vision and leadership. We can’t afford to wait patiently for a bunch of clever people to debate the imponderables at the margins of a particular transmission proposal that – on a particular view of the world – might be a bit over the top.

We’re not just talking about the ignominy of forgoing heating the living room during another “dry winter”. We are talking about the backbone of our economy. Let’s get on with it! We’re desperately trying to avoid committing the cardinal sin of “gold plating”. God forbid we end up a little bit future-proofed. We crave instead something perfect – not too big, not too small, and just in time. Well that would be just fine if it was realistic to expect a modelling exercise to distinguish between a really, really good proposal and an optimal one.

On the flipside there are the risks associated with underinvestment. Yes, we’ve built a couple of White Elephants over the years – the Synfuels plant being an obvious one – but we’ve also missed opportunities. Don’t we wish Robbie had been allowed to build his rapid transit light rail system around Auckland? Don’t we wish that our ports were in a better position to deploy capital strategically for the good of the nation rather than smearing it across a multiplicity of sites each pursuing a parochial regional agenda?

Take “Fibre to the Home”. Expensive. Especially out in the wops. But so was “Electricity to the Home”. The developed world has committed to an online future. We conquered distance once with refrigerated shipping. If the vision is that we conquer it again with Broadband, let’s go for it. Surely, if there is a potential economic uplift buried somewhere in this fibre revolution, it will be disproportionately high for us.

Understandably, a private company’s investment horizon may well not accommodate such boldness. The demand, and the wealth, just isn’t there yet. So it’s chicken and egg. Unlike a commercial entity, the Government is in a position to take a truly inter-generational view of economic transformation. The Nats are right then to subsidise the investment from the public purse. Is $1.5 billion enough? Hard to say. Maybe an economic model can help us out a bit here. Used sensibly, it can identify the boundary between where the commercial business case stops and the strategic or transformative decision starts.

No-one would argue that there is not a use for economic modelling but it should not be allowed to substitute for larger judgements. Identify the need, design the solution and execute. Then get on with the next thing. Action, not prevarication. Less talk, more do. It’s what New Zealand was known for back in Vogel’s day.


This article was first published (in shortened form) in The Independent. Neil Anderson is a Partner at Chapman Tripp. These views are his own rather than those of the firm or its clients.

Related people Neil Anderson
Related practice areas Infrastructure




 

Financial Services Regulation Alert


The British Bankers Association has just released their Statement of Principles. The Statement sets out 10 promises that the banks are making to small business customers, particularly when they are in financial distress.

Increasingly, there is an expectation (here and in other jurisdictions), that banks should demonstrate social responsibility.

The Statement of Principles is set out below:

Our promises to small business customers in financial difficulty
The banks are committed to a Statement of Principles which sets out how they deal with their small business customers. These Principles cover both the good times and the bad and, importantly, map out how banks and their customers can work together to overcome financial difficulties.
Under the Banking Code we restate our promise to treat small businesses sympathetically and positively if they face financial difficulties.
We will:

    maintain competitively-priced lending and promote it actively
    help you by getting to know your business - this means we will ask for financial information, such as your company accounts, business plan and cash-flow forecasts
    speak to you in plain language and in the way you want - for instance by telephone, email or letter - whichever you prefer
    confirm the conditions of any arrangement, loan or guarantee with you in writing
    recommend you get independent advice before borrowing from us
    provide, on request, information about where you can get independent financial advice
    explain - if you want and in writing if you ask - why we turn you down for a loan
    get in touch with you in good time if we see you heading towards financial difficulty
    work with your advisers, if appropriate, to consider the best way forward and
    support any rescue plan we believe will succeed.




 

Tax Reforms Under the National-led Government


Tax reform was a major plank of the National Party's election campaign. Below, we set out National's tax policies and also discuss other possible tax changes which National may implement during its term of office.

National's KiwiSaver reforms are discussed in the KiwiSaver Alert issued earlier in this series.

Pre election tax policies
Personal tax rates and independent earner rebate
Personal tax cuts were the key component of National's tax policy. National's proposed tax rates and thresholds for the next three years are as follows.




Income tax rates1 April 2009
$0 - $14,00012.5%
$14,001 - $48,00021%
$48,001 - $70,00033%
$70,001 and over38%





Income tax rates1 April 20101 April 2011
$0 - $14,00012.5%12.5%
$14,001 - $48,00021%20%
$48,001 - $70,00033%33%
$70,001 and over37%37%

National had planned to provide greater tax cuts, but was required to reduce them to the above levels following publication of the Pre-election Economic and Fiscal Update. Accordingly, the Government can be expected to make further tax cuts after 2011 if economic conditions permit. National's stated medium term goal is a three tier tax system with a maximum personal rate of no more than 33% on income above $50,000.

National also proposes introducing a new independent earner rebate for persons who earn $24,000 or more and are not receiving any other benefit. The rebate is $10 a week for the 2009/10 income year, increasing to $15 week in the following tax year. Entitlement will abate as income increases above $44,000, with no benefit payable above $48,000 in the 2009/10 income year and above $50,000 in the following year.

National's announced tax cuts, in conjunction with its new rebate, are clearly designed to appeal mostly to middle income earners.

R&D tax credit
National has said it will repeal the current 15% research and development tax credit, with effect from the start of the next income year. The savings from this repeal, in conjunction with the KiwiSaver reductions, will be used to fund its tax cuts.

The removal of incentives for research and development is surprising from a party that likes to be seen as pro-business. While the existing R&D tax credit regime required some amendments, it was generally considered economically beneficial. We suspect its removal was necessitated by National's need to demonstrate that its undoubtedly more popular tax cut package could be funded without resort to specific cuts in Government spending or increased borrowing.

Whether National will re-introduce some form of R&D tax benefit if economic conditions improve is an open question.

Future tax changes
Proposals in current tax bill
The first question is what effect the change of government will have on the proposals in the current tax bill (the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill). This Bill contains substantial amendments to the tax law. In particular, the Bill would:


    Significantly, and in our view unjustifiably, widen the circumstances in which two persons will be treated as associated;
    Reform the tax treatment of New Zealand resident investors in controlled foreign companies (CFCs). CFCs are foreign companies controlled by a small group of New Zealand residents. The new rules would:

  • effectively limit the current grey list exemption to Australian companies;

  • only tax NZ corporate shareholders to the extent the CFC carries on a "passive" (ie. investment) business;

  • exempt companies from tax on any dividends they receive from most CFCs;

  • repeal the current conduit tax relief rules; and

  • introduce a thin capitalisation rule to deny New Zealand residents that invest in a CFC interest deductions on debt in excess of specified levels.


    Reform the tax treatment of life insurers, by taxing the risk business on its actual profits in a similar manner to other businesses, and extending the benefits of the PIE tax regime to investors in life products.

The associated person amendments in particular have proven very controversial. A National Government may be more likely to respond to the business community's concerns and restrict the scope of the new rules than Labour would have been.

Similarly, there are a number of serious problems with the new CFC regime, due to the rather cautious approach of the legislation, which National may be more predisposed to remedy given that Labour introduced the Bill.

The other tax changes in the Bill are less controversial, and so remain likely to be enacted.

The direction of future tax changes
A number of other possible tax changes have been discussed by other parties and commentators. These include:


    Reforming the imputation credit system. Possible reforms in this area include:

  • allowing charities and people in loss to claim a cash refund for any imputation credits (this is currently being considered by the IRD);

  • trans Tasman recognition of imputation credits, so that Australian residents would get an Australian tax credit for New Zealand imputation credits and vice versa (this is currently being discussed by the New Zealand and Australian Government); and

  • removing the imputation system altogether. Although this has been suggested, we doubt it will occur in the short-medium term.


    Lowering the corporate tax rate. The National Government will form a coalition Government with Act and United Future. Act's stated policy is to lower the corporate tax rate to 15% (in line with its proposed top personal tax rate) by the 2018/19 tax year. Act may be able to exert some political traction to ensure the rate is reduced from 30% at least. However, given the projected fiscal deficits, this would not seem likely in the short term.
    Extending the PIE regime, so it is attractive to offshore as well as domestic investors. This could be done by imposing no New Zealand tax on offshore income of a PIE to the extent that it has offshore investors.
    Removing the tax benefits of housing investment. Contrary to some reports, property investment is not taxed any more favourably than other investment types (and is in fact treated less favourably, as profits from property sales are taxable in a wider variety of circumstances than for other investment types). However the nature of property investment makes the availability of the usual tax benefits problematic. This is because:

  • a much larger proportion of land's value can be borrowed, thus significantly increasing both the amount of deductions claimable and the tax free return on equity; and

  • the tax benefits give people buying houses for investment purposes a significant advantage over those buying houses to live in, which is not an issue faced with other types of investment.


One possible reform would be a return to the law which existed before 1985, where losses generated from property investment (eg. where the interest cost exceeded the rental return) could only be offset against other income from property.


    Introducing a capital gains tax. The received wisdom is that the introduction of a capital gains tax would be political suicide for any Government attempting it. However the introduction of a capital gains tax in conjunction with lower personal and corporate tax rates and an exemption for primary dwellings may not cause the feared uprising in the general electorate. It would also assist in removing some of the tax benefits from investment in the housing market (by making the profit clearly taxable). There has been no indication that any political party is considering such a move.
    Some other tax changes which have been suggested by third parties, and which may be considered by the National-led Government, include:

  • the elimination of provisional tax uplifts during the current economic crisis and increases in the income threshold at which provisional tax becomes payable;

  • accelerated depreciation deductions to encourage investment during the current economic climate;

  • expansion of tax deductibility for valid business expenses (eg. the black hole expenditure which occurs on corporate equity raising); and

  • reducing the punitive rates at which interest is payable on overdue tax and overpayments from the IRD.


Chapman Tripp will continue to monitor developments closely and will keep you informed as matters progress.
Related people Casey Plunket, Sam Rowe




 

National's Infrastructure Policy


National’s infrastructure policy is aimed at increasing New Zealand’s medium term productivity growth. The policy comprises:

    a new National Infrastructure Plan;
    a commitment to spend $8b more than is currently budgeted over the next six years;
    a greater role for the private sector; and
    a dedicated Minister.

The clear focus on productivity growth will be useful and National has presented an ambitious framework. Much of the detail, however, remains to be worked out

A national infrastructure plan
National will develop a 20 year plan, which will cover the planning, regulation, governance and financing of infrastructure across a range of sectors. National has mentioned telecommunications, electricity generation, Transpower’s grid, roads, public transport, schools and prisons. Ports are a curious omission and have possibly been parked pending the outcome of the Auckland governance review.
National will also develop a National Transport Plan to co-ordinate all transport modes.

Specific proposals
A short list of specific proposals has already been identified:

    $1.5 billion on a Fibre To The Home open access network (over which all telecommunications competitors can deliver services);
    the Waikato expressway (costing $750 million over 10 years);
    $500 million on schools over 3 years;
    a new prison ($315 million).

Working out the rest…
Beyond this, most of the Plan is still to be fleshed out, including identifying where we have significant infrastructure deficits and prioritising the $8 billion public spend.

Three areas are likely to receive early attention.

First, the telecommunications fibre network. As we noted above, National has committed to funding the roll out of fibre. The outstanding issue is the vehicle for the investment – who will roll it out, who will own it, and who will set terms of access for competing telcos?

Second, electricity security of supply. Unlocking the answer to security of supply in the electricity sector remains elusive. National proposes some initiatives:

    removing the ban on new thermal electricity generation (which had been significantly watered down by the Select Committee and the Electricity Commission in any event); and
    reviewing the regulation of Transpower.

These do not materially change the policy settings on electricity security of supply. What will?

Third, Auckland roading and public transport nationwide. If you are looking for bottlenecks holding back productivity, this is it.

Tolling
While $8 billion sounds like a lot (and it is), infrastructure is expensive to build. Demand for infrastructure is likely to outstrip available funds very quickly. Look for reforms to the road tolling legislation.

Although during the election campaign John Key twice distanced himself from comments made by Maurice Williamson about tolling, he was reacting to the prices Williamson was proposing rather than to the principle. Key commented in October, for example, “there is no point in us making comments about what the price of a toll road would be, because we haven't even identified what roads would be tolled, so it's far too premature to be talking about numbers."

Williamson was talking about tolls of $3 to $5. Key said $2 was more likely and that he rather than Williamson would be deciding the criteria for tolling.

So look for:

    consultation being broadened to remove the bias against tolling by including the views of potential users who benefit from a better road, sooner (as well as those who live, work or study near the road); and streamlined to remove duplication;
    tolling of existing roads as part of a wider plan. If there is ever to be a second harbour crossing for Auckland, why not toll both the existing bridge and the new bridge or tunnel, even if the money must all be spent on the new road;
    integration of tolls with wider objectives. Tolls at peak hours only could subsidise development of related public transport, for example.

The private sector
There is little detail, beyond Resource Management Act reform, on how National will encourage more private infrastructure investment. We do not yet have National’s views on the role of the Commerce Commission in regulating private infrastructure such as telecommunications, electricity lines, and gas pipelines, or on whether the Commission is delivering sufficient certainty and return on investment.

Instead the policy focus seems to be on involving the private sector in public infrastructure. Features of the package include a willingness to:

    consider PPPs. The objective is to take advantage of private sector management and risk taking expertise;
    use funding mechanisms such as infrastructure bonds tied to particular projects and tolling of roads; and
    subsidise infrastructure provided by private sector participants, such as the $1.5 billion to be spent on Fibre To The Home.

A new Minister in search of solutions
The new Minister will be tasked with pulling all this together. Solutions will need to be found to some interesting challenges, including the governance of subsidised infrastructure, the regulation of private infrastructure and getting New Zealanders comfortable with price signals. There is plenty of scope for engagement.

The infrastructure bonds developed by the Labour-led Government were really just government stock in drag. We would expect more innovative instruments to be introduced under National. This is an area in which Chapman Tripp has significant expertise to offer.

Chapman Tripp will continue to monitor the infrastructure area and will keep you informed of developments as they occur.
Related people Matthew Carroll, David Cochrane, Brigid McArthur, Andy Nicholls, Robert Parker, John Sproat




 

National’s KiwiSaver and “Cullen Fund” policies


Significant changes will be made to KiwiSaver by the incoming Government (linked to National's tax cuts package), though the basic structure of the regime will remain intact. Additionally, a major change is proposed for the New Zealand Superannuation Fund, also known as the "Cullen Fund".

KiwiSaver policy
The old
National will retain many of KiwiSaver's existing features, including:


    its voluntary character, with automatic enrolment for new employees and a right to opt out;
    the $1,000 government "kick-start" and $40 per annum fee subsidy; and
    the member tax credit (matching members' contributions up to a maximum of $1,043 per year).

The new
However, the new Government will make a number of key changes:


    the standard minimum employee contribution rate will be 2% of gross salary or wages, instead of the current 4%;
    the minimum employer contribution rate – currently 1% of gross salary or wages – will increase to 2% on 1 April 2009 (as the legislation currently prescribes) but will remain at that rate. National will repeal the KiwiSaver Act's provisions for increases to 3% on 1 April 2010 and to 4% on 1 April 2011;
    National will discontinue the employer tax credit (currently matching an employer's KiwiSaver contributions up to $1,043 per employee, per annum) from 1 April 2009;
    only the first 2% of an employer's contributions will be exempt from contribution tax (currently, employer contributions are tax free up to 4% if matched by an employee contribution); and
    the September 2008 Employment Relations Act amendments will be repealed. This is a welcome move, as there were a number of serious issues with those changes which Chapman Tripp had raised publicly and with officials (and which had yet to be satisfactorily addressed). However, it seems clear that effective "total remuneration" approaches to KiwiSaver employer contributions will still not be allowed (see below).

There was some initial uncertainty as to whether the self-employed and the non-employed would remain eligible for member tax credits. We now understand that they will.

It seems, however, that employees will only receive a member tax credit equal to their minimum contribution rate (2% of salary), even if they make additional voluntary contributions.

For low income earners, this will be less than the full $1,043 which is available to other members. As well as disadvantaging low income earners, this aspect of the policy will be difficult to administer and could lead to distortionary behaviour.

Slimmed down
We agree with commentators who say that reducing the minimum employee contribution rate to 2% will likely remove an existing constraint on growing KiwiSaver membership numbers. Inland Revenue's first KiwiSaver Evaluation Report in September 2008 reported that the minimum 4% contribution rate "is the main feature that is discouraging enrolments".

That report also noted that another factor discouraging participation was a concern that future governments might change or even discontinue KiwiSaver. Though National's proposals for an "enduring, affordable KiwiSaver" produce a slimmed-down menu of incentives, its commitment to retaining KiwiSaver will no doubt also mitigate those concerns.

A minimum employee contribution rate of 2% will likely also reduce (longer term) the frequency with which employees take hardship or affordability-based contribution holidays.

National says it will consider a "3% plus 3%" option when the country (and the government) can afford it.

Is "total remuneration" back in favour?
No. National will repeal the September 2008 amendments, and this will enable employers to pay non-KiwiSaver members extra cash to offset all or part of the amounts that KiwiSaver members receive as employer contributions.

However, National also says it will ensure that employees do not have their gross taxable pay reduced by reason of joining KiwiSaver. This would appear to mean that if a non-member who has received the extra cash then elects to join KiwiSaver, the employer must continue paying the extra cash (as well as paying the required employer contribution).

If National's current policy is enacted, we doubt that formal total remuneration approaches will be common.

It seems the amending legislation will likely confirm that employers can offset KiwiSaver employer contributions against their contributions to non-KiwiSaver superannuation schemes. That will be a welcome and sensible confirmation.

Some general comments
We wonder whether it will remain practicable or desirable, with a new minimum employee contribution rate of 2%, to continue requiring an 8% (as well as a 4%) rate also to be offered to all employed KiwiSaver members. Software and systems constraints will be relevant here.

A KiwiSaver regime which is less generous, and features lower overall contribution rates, should leave a commensurately greater place in the sun for more tailored and flexible non-KiwiSaver offerings.

--------------------------------------------------------------------------------

New Zealand Superannuation Fund policy
Established under the New Zealand Superannuation and Retirement Income Act 2001, the New Zealand Superannuation Fund (the "Cullen Fund") was created to partially provide for the future cost of funding New Zealand superannuation payments. Like many countries around the world, New Zealand has an ageing population, with the number of retired people expected to double by 2050.

National's policy is to use the resources of the New Zealand Superannuation Fund to invest in, and grow, the New Zealand economy. The target is to invest at least 40% of the Fund in New Zealand.

The current mandate of the Guardians of the Fund is to invest on a prudent, commercial basis consistent with best practice portfolio management. Ministerial directions may be given to the Guardians regarding "the Government's expectations as to the Fund's performance", but the "how to" of investing the Fund is left to the Guardians' discretion.

A legislative amendment will be needed for the New Zealand Superannuation and Retirement Income Act 2001 to allow a Ministerial direction to the Guardians concerning the proportion of the Fund to be allocated to New Zealand.

Interestingly, the Act specifically requires that on the introduction of the amending Bill, the Minister must report to the House on the consultation process that followed the formulation of the required amendment. That report must state whether consultation has taken place with the Guardians and with several political parties who have previously notified their agreement to the relevant Part of the Act – Labour, United Future and Progressive.
Related people Helen Bowie, Tim Williams, Mike Woodbury, Bradley Kidd, Victoria Stace, Geoff Bevan, Penny Sheerin




 

Employment and workplace relations under National


The incoming National administration isn’t promising wholesale changes to the Employment Relations Act 2000. This in itself indicates a shift from the policy “pendulum swings” which have characterised this area over the last two decades.

National’s proposed reforms are targeting five key areas:

Small business protection: 90-day trial period
Businesses that employ fewer than 20 staff look set to gain stronger protection from personal grievances, with the introduction of an optional 90-day trial period.

National’s policy says that good faith requirements, Human Rights legislation, leave laws, health and safety provisions, rules of “natural justice” and mediations will still apply during the trial period.

Personal grievances often succeed (or are settled at mediation) because the employer has failed to follow requirements of “natural justice.” It will therefore be interesting to see how the eventual legislation preserves these rights, while at the same time creating an effective and reliable “personal grievance free” period.

Union/collective bargaining
National’s policy looks set to pull back some of the advantages that unions have gained under Labour, although its initial changes are relatively restrained.

The new government will allow union access to workplaces, but this will be subject to the employer’s consent (not to be unreasonably withheld). Again, the detail (not yet released) will be important, but National’s policy suggests employers may be given a broader ability to deny union access.

National has also said it will restore workers rights to bargain collectively without having to belong to a union.

In the longer (and perhaps not so longer) term, we suspect National will push their reforms further, possibly targeting some of the “union friendly” changes made in late 2004, such as the restrictions against passing on collective terms to non-union members.

Holidays Act
National has said that it will keep four weeks leave, but allow employees to trade the fourth week for cash if they wish (this can only be at the employees request).

National is also promising to review the Holidays Act. That piece of legislation has been plagued by issues, and a review (with subsequent changes) is positive.

Dispute resolution
National’s promise to ensure the mediation service is “properly resourced” with “properly qualified” mediators is more than a hint of dissatisfaction with the current system.

Greater resourcing of the service will be useful. However, in our experience the mediation service generally functions well, and we hope that any changes do not result in an exodus of skilled and experienced mediators.

Similarly, National’s policy suggests it will make the Employment Relations Authority more like a court, and allow certain cases to go straight to the Employment Court. It also appears there will be a broader right of appeal to the Court of Appeal.

There are certainly some case types where the Authority does not always function well, and some of these changes are likely to be very helpful. However, despite initial scepticism (mainly from lawyers!) the Authority works very well in the vast majority of cases. Simple matters can be dealt with faster and far less expensively than would be the case if a full court hearing was needed.

KiwiSaver
National has announced a “slimmed down” version of KiwiSaver, and has said it will repeal the amendments made in September 2008, which prevent KiwiSaver members from being disadvantaged as against non-members.

However, National says that it will change the law to ensure that employer contributions are made on top of existing pay, when employees join the scheme. Click here for further details.

Transitional relief package
National plans a time-limited relief package for people who have been made redundant from a job they have held for at least six months and who as a consequence will either have to go on a benefit or rely on the income of a relatively low paid spouse or partner.

They will be eligible for:

    a Working for Families top-up equivalent to the in-work tax credit; and
    an increase of $100 in the maximum weekly accommodation supplement.

The assistance will be available for up to 16 weeks.

National has presented the policy as a response to the recession and says it will be available initially for two years at which time it will be monitored to determine whether it should be continued in whole or in part.

What we won’t be seeing
Under Labour, a number of changes had been introduced or announced which aimed to offer greater protection to casual and fixed term employees, dependent contractors and staff involved in a “triangular” employment relationship. Labour also intended to introduce compulsory redundancy compensation.

These proposed laws will not see the light of day under National.
Related people Doug Alderslade, Jo Appleyard, Pheroze Jagose, Geoff Carter, Geoff Bevan, Stuart Dalzell




 

Where to for the Emissions Trading Scheme – A First Principles Discussion or Tinkering at the Edges?


A new political environment for environmental issues
The election of a National-led government has thrown the newly enacted Emissions Trading Scheme (ETS) back onto the political playing field. Under the confidence and supply agreement signed on 16 November between National and Act, National has agreed to a review by a special select committee of Parliament into the current ETS and any amendments or alternatives to it “including carbon taxes”.

National has also agreed to “pass forthwith” an amendment to the ETS legislation delaying its implementation until this review is completed.

While National continues to support an ETS, the select committee review will occur against a global political backdrop substantially different from when the ETS was first announced just over a year ago.

US President-Elect Barack Obama has signalled an increased willingness of the US to become a global leader on climate change, to re-engage with the UN Framework Convention on Climate Change and to implement an economy-wide cap and trade scheme. However, at the same time the global economic crisis has relegated the issue of climate change from a top of mind issue to, at best, a lower priority in the short-medium term.

Further, increased distrust of market instruments due to the financial market meltdown, increased volatility of carbon prices on European markets and the potential for increased direct subsidisation of clean technology (including as a short-medium term economic stimulus measure), could add weight to calls for a re-think of whether an ETS is the correct policy response to incentivise long-term behavioural change.

National’s take on the ETS
National campaigned on changing (rather than dumping) the ETS, and has stated that it will introduce amending legislation before the end of the year.

National has (so far) avoided outlining the specific changes it will make to the ETS but the key issues are likely to be as follows.

Timetable for exposure to the price of emissions
It’s clear from National’s comments that, whatever the final form of the new Government’s climate change policy, there will likely be changes to delay exposing trade-exposed sectors of the New Zealand economy to a cost on emissions. In the context of a global financial crisis, this has political appeal, at least in the short-term.

Nick Smith (now confirmed as the new Climate Change Minister) indicated during the election campaign that the current timetable for staged entry by sectors into the ETS would not change (the electricity and industrial processes sectors are scheduled to join the ETS by 1 January 2010 and the agriculture sector by 1 January 2013).

National’s language on the implementation timetable has however changed subtly in recent days. What was previously a promise to have an ETS in place by 1 January 2010 (consistent with the existing timetable), has now become a preference (Nick Smith, Morning Report interview, 18 November).

Irrespective of whether the implementation timetable does change, any reforms to the ETS to avoid a competitive disadvantage to trade exposed sectors are likely to take the form of either or both of:

    delaying the commencement of the obligation to surrender credits for emissions; that is, initial obligations are likely to be no more than reporting obligations;
    more generous free allocation of credits to off-set the costs of participation in the ETS.

Intensity-based allocation
National proposes amending the ETS to reward investment that, while increasing emissions, reduces emissions per unit of output. National argues this better balances economic growth with the objective of reducing emissions from industrial activities. How this will be achieved is, again, unclear, although it will likely involve an increased free allocation of additional credits.

Cap on the price of emissions
National has also argued for a cap on the price of carbon credits within the ETS. A cap on the price of emissions would align the ETS with Australia’s proposed Carbon Pollution Reduction Scheme.

Some may question whether a price cap is necessary. Prices in the ETS will be set by global prices for carbon credits, which are currently trending downwards (although over the long-term are expected to increase and be relatively stable) and the ETS legislation already provides for additional credits to be auctioned into the scheme by the Government, a form of price “safety valve”.

None of the above changes would represent a fundamental shift in the framework of the ETS. Rather National will argue that these are pragmatic changes to avoid risks to New Zealand’s export competitiveness while playing our part in the global response to climate change.

National’s criticism of the ETS has focussed on six principles, first outlined in National’s extensive minority view in the Select Committee report on the Climate Change (Emissions Trading and Renewable Preference) Bill.

    The ETS must strike a balance between New Zealand’s environmental and economic interests. It should not attempt to make New Zealand a world leader on climate change.
    The ETS should be fiscally neutral rather than providing billions of dollars in windfall gains to the government accounts at the expense of business and consumers.
    The ETS should be as closely aligned as possible to the Australian Carbon Pollution Reduction Scheme, with, where possible common compliance regimes and tradability. National wants to closely co-operate with Australia as the respective schemes are developed.
    The ETS should encourage the use of technologies that improve efficiency and reduce emissions intensity, rather than encourage exodus of industries and their skilled staff off-shore.
    The ETS needs to recognise the importance of small and medium enterprise to New Zealand and not discriminate against them in allocating permits.
    The ETS should have the flexibility to respond to progress in international negotiations rather than setting a rigid schedule. This way, industry obligations can be kept in line with foreign competitors.

The moratorium on new thermal generation
Finally, the previous government’s 10-year moratorium on new base-load thermal electricity generation will almost certainly be scrapped, in line with National Party policy. The fact that this will likely have very little impact on generation investment decisions by electricity companies suggests the policy was ill-conceived in the first place – the biggest winner here will be the oil and gas exploration industry.

Given that long-term prices of fossil fuels are likely to continue to increase steadily (despite the temporary collapse in oil prices over recent months in response to the global financial crisis), uncertainty remains over future supplies of gas, and ETS itself incentivising a move away from thermal generation, renewable energy generation was already increasingly seen as key to meeting New Zealand’s future electricity generation requirements.

And proposed reform of the Resource Management Act by the new Government will likely accelerate this shift towards renewable generation. Legislation to amend the RMA is expected to also be introduced before Christmas. Please click here for more information.

Chapman Tripp will continue to monitor developments in the climate change policy area and publish further alerts as specifics of the new Government’s changes to the ETS are announced.
Related people Brigid McArthur, Frank McLaughlin, Andy Nicholls, Vernon Rive, Chris Bougen




 

The National Government’s First Round Reforms of the RMA


National is committed within the first 100 days to what Nick Smith has described as the "biggest reform" of the Resource Management Act since the RMA was introduced in 1991.

National has identified 20 specific amendments. A key theme of these is to provide a greater degree of central direction. Smith told the Environmental Defence Society in an extended interview during the election campaign that National considers that the current RMA framework is too devolved.

Chapman Tripp supports National's general reform thrust. In some areas we believe National's objectives could be achieved more effectively by taking a slightly different approach. We will make some suggestions for this in a Counsel "Directions for Reform of the RMA" which we will send you when completed.

The Environmental Protection Authority
Central to the reforms will be the establishment of a new Environmental Protection Authority (EPA). The EPA will have a presence in Auckland, Wellington and Christchurch. Smith wants it to have a strong underpinning of scientific expertise in-house. He is planning to recruit expert RMA staff from territorial authorities and regional councils.

The EPA is not intended to be an advocate for the environment but a neutral agency. It will absorb the functions of the Environmental Risk Management Authority and assume responsibilities for National Policy Statements (NPS) and National Environmental Standards (NES). Expect too that the EPA will become central to National's intended second stage reforms, for example in water allocation.

An EPA with responsibility for setting national environmental standards, as well as NPS, offers significant potential for improving the RMA's administration. In particular, effective NES could achieve sensible standardising in relation to issues like noise, discharges, contaminants and other environmental impacts and facilitate the maintenance or roll-out of linear infrastructure (broadband, electricity lines networks, gas pipelines etc).

Key to this will be to ensure that the EPA has a properly grounded understanding of local issues. The indication that the EPA will have a presence in Auckland and Christchurch, as well as Wellington, signifies recognition of that.

Call-in procedures
National has also signalled associated reforms to the call-in procedures, particularly to better enable "direct referral" to the Environment Court for the priority consenting of national significance projects. The EPA would assume the role MfE presently has in relation to call-in. Currently, the RMA allows for two forms of call-in track; ad hoc Board of Inquiry, which has been the preferred track, and the direct referral track which has been used for only one project. There is room for a revamp of direct referral call-in.

Reducing bureaucracy
An overall theme of the first 100 days' reform will be to reduce the bureaucratic costs, delays and uncertainties of the present RMA. In this category, changes signalled include reducing the number of consent categories, getting rid of the Minister of Conservation's veto in coastal consenting, and limiting vexatious and frivolous and trade-related objections.

Against a background of five sets of reforms to the RMA since its enactment, it should not be assumed that a "quick fix" will be effective in addressing the bureaucracy of the consenting processes. As Smith signalled, fixing the RMA "is a difficult and complex job" requiring "care and finesse".

In this regard, although we agree that the costs and delays of RMA planning and consenting processes (including through vexatious and trade competition objections) need to be addressed, we see some of National's intended "fixes" for this as problematic:


    Limiting the definition of "environment" to natural and physical resources could have the unintended consequence of making it harder to justify major infrastructure projects. Often, these projects rely on the presently broad meaning of "environment" as this allows the national socio/economic benefits that such projects offer for people and communities to be argued in favour of consenting;
    Reducing the number of consent categories under the RMA, in particular dropping the "non-complying activity" category, could undermine investment certainty in district plan/regional plan rules; and
    Setting a nine month turnaround for "call in" decisions may well be a realistic goal, given the intentions to establish an EPA to coordinate call-in and to improve the "direct referral' call-in track. However, if this timeline were prescribed as a statutory deadline for "call-in" consenting, it could be adverse for the quality of the decision-making in complex cases, and create greater risk of High Court litigation about process issues.

As we see it, the central problem area in terms of the "bureaucracy" of the RMA is the "slop" that exists with variable quality of first instance decision-making and associated de novo appeal processes. There is simply far too much process, and the associated delay and uncertainty are fertile ground for vexatious and trade competition behaviour. Associated with this, the de novo appeal model (while needed to overcome poor first quality decision-making processes) can blur accountabilities for plan and consent decision-making. That does not assist to promote good environmental outcomes or effective public participation.

The 2005 Amendments tried to tackle this area, but the reforms were too timid. There is potential for greater improvements here, both in terms of better quality assurance of first instance plan and major consent hearings and the better focus of appeals. Measures such as provision for security for costs in appeals, and the clarification of the scope of further information requests could assist.

National has also signalled the possibility of inter-district plans, and combined regional plans. We think this is a worthwhile area for reform. In addition to greater use of national standards, encouraging councils to work together in making their plans would help avoid unnecessary duplication and differences in planning approaches. Examples such as the combined Wairarapa proposed district plans also show advantages such as having a single industrial hub for several districts and greater scope for integration between land use development and infrastructure provision. We suggest there could be other sensible reforms in this area, such as requiring councils to put their policy statement and plans on the internet in such a form that the Ministry for the Environment can provide a readily searchable, central and up-to-date database.

Where to from here?
National's reform prescription for the RMA will have big implications for business, especially in the utilities sector. Although National's plans are highly specific, there will still be the capacity for influence through the submission process so businesses should be turning their attention now to the outcomes they want to achieve out of the legislative review. Chapman Tripp will continue to monitor developments closely and will keep you informed of the debate as it unfolds.

For further information, please contact John Hassan, John Knight or Cameron Law.
Related people John Hassan, John Knight, Cameron Law




 

Crown Deposit Guarantee Scheme - Update for Collective Investment Schemes


The Crown’s policy for applicants for the collective investment scheme (CIS) component of the Crown Deposit Guarantee Scheme and the final draft Deed of Nomination have been released.

The information required to make an application is set out at: http://www.treasury.govt.nz/economy/guarantee/pdfs/cis-nom-appform-v1.pdf

The Deed of Nomination is available at: http://www.treasury.govt.nz/economy/guarantee/pdfs/cis-deed-nom-v1.pdf

Where the Crown guarantees debt securities, the guarantee will be accessible by certain unit trusts, superannuation schemes and arrangements that are participatory securities, provided they invest exclusively in NZ government securities and/or debt securities issued by entities covered by the guarantee scheme.

To be eligible, the relevant CIS must:

    have candidates that ensure that guarantee proceeds can only be paid to entitled creditors
    be in the business of borrowing and lending, or providing financial services, or both;
    carry out a substantial portion of their business in New Zealand;
    have at least 20 investors;
    not have any investors that, together with associated persons, hold more than 20% of the units of the scheme;
    be able to provide Trustee confirmation that there is no breach, or circumstances of which the Trustee is aware which are likely or could reasonably be expected to give rise to a breach, of the CIS’s trust deed; and
    not invest during the guarantee period in securities other than those issued by the New Zealand government or debt securities of registered banks.

Certain other factors, as detailed in the policy guidelines on the Treasury website at http://www.treasury.govt.nz/economy/guarantee/retail/cispolicyguidelines, will be considered as part of the application process.

There are a number of practical matters a CIS should consider before entering into the Deed of Nomination (including the need to amend trust deeds of the relevant funds so they comply with warranties in the deed).

Please contact Tim Williams or Penny Sheerin for further information.
Related people Tim Williams, Penny Sheerin




 

Limited partnerships in New Zealand: a new handbook


LexisNexis has produced the Wells’ limited partnership handbook. The book includes an example of a limited partnership agreement and acts as a guide to the new Limited Partnership Act 2008.

The text was written by Nick Wells, a partner in Chapman Tripp, and Phillippa Wilkie, a senior solicitor. Chapman Tripp was active in assisting industry and governmental bodies in the lead up to regulatory change and Nick was the independent expert to the parliamentary select committee responsible for the new legislation.

Topics covered in the handbook include the nature of limited partnerships, the relationship between partners, the limited partnership and third persons, terminating events, liquidation and deregistration, overseas limited partnerships and special partnerships.





 

KiwiSaver - U-turn on "total remuneration" approach


The “total remuneration” approach to KiwiSaver has been effectively banned in legislation rushed through Parliament under urgency last week. This change, which represents a substantial policy U-turn, was flagged by the Government in July. In essence, the new law says a KiwiSaver member cannot be offered lesser terms (or be otherwise disadvantaged) in comparison with a "comparable" non-member employee of similar skills, experience and circumstances.

The implications of this change are serious and potentially complex for employers who use a total remuneration approach, or who look to offset any existing superannuation subsidies against KiwiSaver employer contributions.

Chapman Tripp has published an article looking at the implications of the change for employers, and some of the problems with the way in which the new law has been implemented.

Click here to read the article.




 

Sustainable business award win


Chapman Tripp received a Judges Commendation award in the Emerging Large and Corporate category at the 2008 Northern Sustainable Business Network Awards, held in Auckland on Thursday 28 August. Express Couriers won the main prize for the category and Criterion Furniture took the overall award for Sustainable Business of the Year.

Chapman Tripp launched a firm-wide sustainable business project in mid-2007, and since then has implemented a variety of initiatives to address its environmental footprint. These have included new recycling systems, contributing to a dramatic reduction in waste sent to landfill (for example, a 90% paper waste reduction in the Auckland office and 92% reduction in organic waste in the Wellington office); a review of purchasing practices resulting in the replacement of many products used within the firm with more sustainable options; and the replacement of PCs and monitors across the firm with more energy efficient models and the donation of old PCs to schools and charities. An internal electricity conservation campaign also encouraged staff to reduce the amount of energy they use.

The firm is also actively involved in the development of thinking and policy on climate change, including hosting a climate change symposium last year, and providing legal advice to clients on climate change policy, numerous energy projects and carbon trading initiatives.

The firm’s sustainable business project manager, Jessica Meech, says that she is delighted to receive the award which recognises the efforts of staff right across the firm over the last year.

“We have achieved a great deal since we launched our sustainable business project, but we still have more work to do. We are currently looking at the firm’s energy usage and air travel to see where we can make further improvements,” she says.

The judges of the award commended Chapman Tripp for its comprehensive sustainability programme, including a focus on social as well as environmental aspects, and the use of novel and innovative ways of communicating internally.

The criteria for the “Emerging” category required that an entrant be a business that is new to sustainability and has actively begun implementing sustainable actions within the last two years.




 

LexisNexis launches revised edition of definitive guide to environment and resource management law


LexisNexis has just launched the new loose-leaf and online edition of its leading text, Environmental and Resource Management Law.

The text, which is regarded as a definitive guide for legal practitioners working in environmental and resource management law, brings together existing content with new chapters in topical areas of climate change, and the landscape and visual aspects of resource management law.

Chapman Tripp’s environment and resource management team made a major contribution to the new edition, with Paula Brosnahan, Jo Bain, Ed Steane, Katherine Harland and Vernon Rive supplying a new chapter on Landscape and Visual, Matthew Spiro and Vernon Rive updating an existing chapter on Native Trees and Plants, and Asher Davidson and Vernon Rive updating the Environmental Assessment chapter.

The text received praise from Principal Environment Judge Bollard, "Environmental and Resource Management Law has been produced by experienced practitioners and leading academics for people working in environmental and resource management law. It is well researched work that makes a significant contribution to the advancement of understanding the law, theory and practice of resource management."

For more information, see the LexisNexis website.
Related practice areas Environment and resource management





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