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Brief Counsel

NZ Productivity Commission Bill

22 July 2010

The New Zealand Productivity Commission will take a step closer to reality today when the establishing legislation has its first reading in the House. 

The model is the Australian Productivity Commission which has been widely judged a success.  Clearly, however, it is only a very small part of the explanation for why Australia has been out-pointing New Zealand in productivity performance over the last several years.

So is a New Zealand Commission a good idea, and will it help to close the gap with Australia?  This Brief Counsel summarises the content of the Bill and considers some of the risks which will confront the new entity.

The New Zealand Productivity Commission (NZPC)

The Commission will be a statutorily independent body set up to advise the government on how to lift productivity performance in a broad range of areas including labour, natural resources, management and worker skills, competition, investment and infrastructure.

Its functions will include:

  • conducting inquiries into productivity-related matters referred to it by Ministers

  • reviewing the efficiency and effectiveness of existing regulatory regimes and agencies, and

  • assessing the impact of specified regulatory proposals.

On its own initiative, the NZPC will also be responsible for researching and promoting public understanding of productivity-related matters.

It is scheduled to come into effect in April 2011 and will have up to four commissioners, with the selection process expected to start later this year.

Comparison with the Australian Productivity Commission (APC)

The NZPC is intended to be closely modelled on the APC and to work closely with it.  While they share broadly similar functions, the scope of the NZPC is anchored in productivity related matters, while the APC advises the Australian government on a wide range of economic, social and environmental issues.  For example, the APC’s website refers to inquiries into Australia’s gambling industries and job network services for the unemployed.

Both are independent bodies, but while the APC is an Australian government agency, the NZPC will be an independent Crown entity operating outside of government.  The Law Commission and Commerce Commission are examples of similarly independent entities. 

The NZPC will also be much smaller, even allowing for the difference in size between the two countries, with 21 fulltime staff and a budget of $5 million compared to the APC’s 190 staff and budget of $A35 million.

Importantly, it has been agreed with Australia that the two Commissions will cooperate.  Discussions have already taken place on the options for cooperation, especially in relation to topics of mutual interest, including the pursuit of the Single Economic Market agenda.

The NZPC proposal has wide support

The Commission was agreed to as part of the National/ACT Confidence and Supply Agreement signed after the last election but also has tentative endorsement from Labour and wide-ranging industry support.  Advocates include business organisations like Wellington Chamber of Commerce, the Business Roundtable and Business New Zealand.  There has also been a cautious welcome by the PSA. 

Chapman Tripp too supports the establishment of an independent expert body that can push the boundaries in the analysis and advice available.  Government departments inevitably are influenced by awareness of government policy and individual Minister’s preferences.  Existing entities that have a significant impact on productivity – like the Commerce Commission – have their own patch and budget to protect.  Despite regular reviews, regulation still seems to flourish like gorse in the New Zealand environment.  We spend too much of our time trying to guide our clients through or around the bramble. 

If the NZPC can do anything to remove some of this clutter and to clear the way for new growth, it will have made a worthwhile contribution.  The APC itself attributes Australia’s productivity surge of the 1990s largely to the micro-economic reform targeted at the communications, energy and finance sectors.

So what are the risks?

The effectiveness of the NZPC is not guaranteed simply because the APC has been effective.  We also need to be mindful that the APC is working in a very different, more broadly-based and more resilient economy and to avoid burdening the fledgling NZPC with unrealistically high expectations.

In ensuring that the NZPC is fit for purpose, there are a number of risks which need to be addressed.

Lack of real independence

The NZPC’s primary function will be to enquire into such issues, and to review such regulatory regimes and agencies, as are specifically referred to it by Ministers.  Those inquiries and reviews must be carried out within specified terms of reference.  The Commission’s ability to act on its own initiative is strictly confined to undertaking research about and promoting public understanding of productivity related matters.  It is not free to identify for itself the regulatory or other shackles that currently restrict New Zealand firms’ performance at home or aboard. 

For example, the reliance upon competition to produce more efficient outcomes overlooks the fact that New Zealand’s size means few firms are likely to contest any market while distance, together with the current anti-dumping regime, may prevent imports from filling the gap.  But there seems little prospect of the Minister of Commerce referring either the merger regime of the Commerce Act or the Dumping and Countervailing Duties Act for independent study. 

Lack of capability

The Ministerial press releases indicate that funding for the new Commission will be sourced from the “29 government departments, ministries and agencies that currently provide productivity-related policy advice and those agencies with a significant influence on productivity”.  So we are not talking about increased expenditure but about recycling existing expenditures.

It will be important, therefore, in setting up the NZPC that we get the personnel decisions right and that there is an infusion of new blood, particularly from the private sector.  Successful economies, like successful firms, are built around focussed pragmatism rather than adherence to dogma.  Such pragmatism is not the exclusive preserve of the private sector - but it does flourish more readily among those who have had to risk their own or others’ capital. 

Lack of relevance

Here the new Commission faces a real tension.  Any report that adheres too closely to government policy or the status quo will attract criticism that it lacks independence or is too timid to close the productivity gap.  But anything that is too iconoclastic will struggle for acceptance – especially given the exigencies of New Zealand’s tight three year election cycle.  Radical reform proposals are not so much rejected as allowed to linger into irrelevance. 

Becoming obsessed with Oz

Perhaps the greatest risk is that comparison with Australia will become the overriding focus.  The OECD said in 2005 that New Zealand is a small, remote and open economy.  Two of those factors can’t be changed and the third shouldn’t be. 

But they do mean we face challenges that are different from those faced by our much larger and resource-rich neighbour where growth has been driven much more by labour productivity than, as here, by increases in the labour participation rate and where capital and labour markets are much stronger.

Put simply, New Zealand firms need to be allowed and encouraged to compete more effectively in global markets, to invest in R&D and innovation, to participate in infrastructure building and to switch to the kinds of value-add goods and services that are not so affected by distance.

Learning from the APC’s processes does not mean mimicking it too closely or using comparison with Australia as the single benchmark of the NZPC’s success. 

In any competition, it is not those who are far in front but those who are closest behind who should be of most concern. 

South Korea is ranked next behind New Zealand in the OECD for GDP per capita having sustained a 435% increase between 1970 and 1999 while New Zealand rose a leisurely 34%.  Yes, South Korea was coming off a much lower base.  But the average rise across the whole OECD over the same period was 82% and New Zealand slipped 11 places – from 9th to 20th – in the OECD rankings.

In the view of this writer; too much regulation, and then too little, followed by a reluctance to continue the reform process, was a big part of the explanation for New Zealand’s slide in comparative performance over these years.  That is why the NZPC needs a mandate to be proactive and the people to ensure that it performs its role assertively, intelligently and effectively. 

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