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• Departmental Forecast Report
• Strategic Business Plan

• Leadership
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are the Critical Issues and How Are We Addressing Them?
• International Linkages
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are the Critical Issues and How Are We Addressing Them?
  • Deeper Economic Relationship with China
  • Developing a Single Economic Market with Australia
  • Taking New Zealand to the World and Bringing the World to New Zealand
  • Contributions of Output Classes to the International Linkages Strategic Priority
• Innovation
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are the Critical Issues and How Are We Addressing Them?
  • Contributions of Output Classes to the Innovation Strategic Priority
• Regulatory Environment
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are the Critical Issues and How Are We Addressing Them?
  • Contributions of Output Classes to the Regulatory Environment Strategic Priority
• Infrastructure
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are the Critical Issues and How Are We Addressing Them?
  • Contributions of Output Classes to the Infrastructure Strategic Priority

The five strategic priorities represent the areas of Ministry activity with most potential to increase economic growth. This section explains the rationale behind the choice of each strategic priority, and what the Ministry is trying to achieve within them.

It also describes work being done to address the critical issues for each strategic priority, and shows which output classes contribute to them.

Leadership

Leadership > Leading a whole-of-government approach to economic development

Why Is This a Priority?

The Government's economic objectives transcend departmental boundaries. For example, the Ministry does not have direct responsibility for some of the areas of policy which influence productivity, such as access arrangements for international trade, the development of skills and talent, and policy on macro-economic stability.

The way in which the public sector is structured, financed and managed can create "silos" of thinking with differing - and potentially conflicting - views on economic aims, priorities and activities. The focus is sometimes on departmental output delivery rather than the achievement of whole-of-government outcomes. The bias of the system towards vertical accountability - while having important advantages - can also work against the cross-cutting effort necessary to achieve economic development goals.

The Ministry therefore has an important leadership role across the public sector to ensure economic development remains a key area of focus. We also have strong links with a wide range of businesses and organisations, which enhances our understanding of what is needed for economic development.

What Are We Aiming to Achieve?

The primary objective of this strategic priority is to work with other agencies to increase the combined effectiveness of the public sector in improving the rate of economic growth in New Zealand. This will:

• help to identify areas of complementary work, reduce duplication of effort, and identify policy gaps;
• assist other government agencies to keep an eye on the big picture and our respective roles within it, hence facilitating a more cohesive set of government actions. The objective is to increase mutual understanding of our roles in economic development; and
• test whether the Ministry needs to adapt its own strategy.

To achieve this objective the Ministry will focus on:

• exercising its cross-public sector leadership role to focus economic development effort;
• building a coherent view and shared understanding of economic development across the public sector, so objectives, priorities, roles and actions to achieve the objectives are clear; and
• identifying generic or systemic barriers to achieving better collaboration across government on economic development, and taking steps to reduce them.

What Are the Critical Issues and How Are We Addressing Them?

The Ministry is implementing this strategic priority in two ways. We are exercising our leadership role in relation to economic development, and also making better use of existing mechanisms to achieve stronger alignment. A work programme relating to each is set out below.

Exercising Our Leadership Role

Many public sector agencies are looking for leadership on what taking a growth perspective means for them and their area of responsibility. It is critical that the policy and operational levers these agencies operate are not considered in isolation. The Ministry's effective leadership of the economic development sector will see all players clear about their roles, contributions, and common direction.

The Ministry will define more fully what our leadership role means and what it requires in practice, including whether the current public management system poses any barriers to meeting the Government's objectives for economic growth. This is likely to involve:

• implementing practical actions to enhance skills, knowledge and expertise critical to our ability to exert leadership and influence. This will be done through the Ministry's organisational development strategy (see Section 5);
• building a cross-sector evidence base in order to consider government interventions as a single portfolio; and
• identifying how to better connect policy and delivery functions in the economic development sector to ensure we deliver advice informed by operations, and that operations are well informed of policy.

Making Better Use of Existing Alignment Tools

The Ministry already has a number of tools available to influence other agencies. For example, where we have the appropriate relationship, we will use existing accountability mechanisms to generate greater alignment across government. Where we have no accountability relationship, we will seek to build informal relationships for the same purpose.

We will identify areas where collaboration across government is either not occurring or could occur more effectively, and will work on solutions to achieve this. We will:

• Work with key stakeholders to develop, staff and execute an effective work programme for the Ministry's Auckland policy office. This office will open in July 2005 and will enable us to develop stronger knowledge of and relationships with Auckland business, and local and regional government. It will also create greater integration and shared working across policy agencies engaging in economic development issues, particularly the Department of Labour and the Ministry for the Environment, who have agreed to co-locate with us and to work together on projects of mutual interest;
• Develop a shortlist of priority issues and implement an influencing strategy to gain traction on these issues with other agencies;
• Produce a practical guide to effective use of the available tools to increase cohesion across government. This will include developing a best practice approach to Crown entity relationships across the Ministry;
• Improve the GIF processes as a horizontal alignment tool, with particular focus on GIF Budget processes and effective use of the Growth and Innovation Advisory Board to help set a strategic agenda for economic development and improve engagement with the private sector; and
• Develop and maintain relationships with key private sector people from whom we can learn and who are key influencers within their networks. This will build on our existing external relationship strategy (see Section 5).

International Linkages

International Linkages > Improving the international linkages that allow firms to benefit from trade, knowledge transfer and investment

Why Is This a Priority?

International trade, knowledge transfer and investment between New Zealand and other countries stimulate innovation and hence drive higher productivity and economic growth. They do so by:

• helping innovators to identify and take advantage of new opportunities, and exploit their competitive advantage;
• stimulating ideas for boosting productivity by enabling firms to seek out and access new markets, new technologies and knowledge, skilled labour, and best practice work and management techniques; and
• enhancing incentives for firms to innovate by creating competitive pressure from offshore and providing much greater consumer choice.

As a small, geographically isolated economy, New Zealand faces considerable barriers when endeavouring to form and maintain international linkages that support business activity. While transport and communication costs have declined substantially, distance still has important impacts on person-to-person contact and business relationships, and on the transfer of tacit knowledge, such as subtle differences in consumer preferences. Institutional, legal and regulatory differences also create costs for firms. Finding a niche in large international markets can be daunting, difficult and risky.

These barriers are a major impediment to improving New Zealand's growth rate. Government can help by reducing the impact of borders on firms, by promoting connections that allow knowledge transfer to occur, and by promoting high-value international trade.

What Are We Aiming to Achieve?

Our goal is that New Zealand's international connections facilitate sustainable economic growth through increased international trade, foreign investment and knowledge transfer.

Work done under this strategic priority will contribute to this outcome by:

• reducing the impact of distance and international borders so that domestic and foreign firms do not regard them as significant barriers to trade; and
• assisting New Zealand firms and other institutions in their efforts to connect with the rest of the world.

Many of the connections opportunities are external to the Ministry, so we need to work across government to agree overall strategic priorities. We are working closely with the Ministry of Foreign Affairs and Trade (MFAT) to co-ordinate priority allocation and resource planning. This collaborative partnership is reflected by both departments sharing the above outcome.

The Ministry leads specific issues in keeping with our role and expertise. Particular areas of focus include:

• leadership of the GIF and our relationship with New Zealand Trade and Enterprise (NZTE), and the focus on building internationally competitive businesses; and
• protection of intellectual property rights, trade remedies policy and rules, international regulatory and competition policy and tariff policy.

In common with MFAT, NZTE and other agencies contributing to New Zealand's international connections, the Ministry will focus on countries or regions that are most important to our future. This includes those "bedrock" countries with which New Zealand maintains important economic relationships (Australia, the US, the EU, Japan, the Pacific Island countries and China) plus other important trade relationship opportunities that emerge (for example, in the ASEAN region).

We will put emphasis on the relationship with China, in order to take advantage of the significant opportunities represented by this vast, emerging market. We will also continue to place particular emphasis on the relationship with Australia and the Government's trans-Tasman goal to create a Single Economic Market.

What Are the Critical Issues and How Are We Addressing Them?

Internationally, the Ministry is involved in a wide range of issues across many fora, but our main efforts are focused on three areas we believe have most potential to produce gains for growth:

• Building a deeper economic relationship with China. We will endeavour to achieve substantial liberalising commitments under a China Free Trade Agreement (FTA), and form strategies to develop broader economic connections, including strategies to leverage an FTA.
• Developing a Single Economic Market with Australia. We will broaden and quicken work on deepening New Zealand's relationship with Australia to advance a Single Economic Market.
• Taking New Zealand to the world and bringing the world to New Zealand. We will improve our understanding of the impediments to internationalisation of business, and what government can do to address them. We are also working to promote tourism and attract high-quality foreign direct investment.

Deeper Economic Relationship with China

Our relationship with China presents a significant opportunity for New Zealand, through opening up access to large and rapidly expanding markets, especially in primary products, education and tourism.

The Ministry and MFAT have identified an organising framework for shaping New Zealand's broader long-term engagement with China. The four elements of this framework are:

• negotiating a high-quality FTA to open the door to new trade and investment opportunities;
• building broader and deeper institutional co-operation with China, to forge the connections that will make it easier for New Zealand firms to do business in China;
• identifying and implementing a co-ordinated trade and investment promotion plan to help create opportunities for New Zealand firms and help firms identify existing opportunities; and
• supporting efforts to build New Zealand business capability to engage with China.

Developing a Single Economic Market with Australia

Australia is our most important economic partner and the largest market for New Zealand goods and services. New Zealand already enjoys uniquely close social, institutional and business linkages with Australia. It is logical to build on this, and to emphasise this relationship as we seek to forge the international economic connections that will benefit New Zealand businesses.

The Single Economic Market is a vehicle to ensure that developing the trans-Tasman relationship remains a high priority. It provides a broader framework for integration that allows for the possibility of more joint policy development, more institutional co-ordination, and the possibility of broader policy trade-offs across issues. Much progress has already been made in removing trade barriers. The key remaining impediments to openness are differences in our regulatory institutions and in our regulation of business activity and goods and services markets.

The Ministry will collaborate with agencies on both sides of the Tasman to create a seamless trans-Tasman market where businesses need only comply with one set of rules. The regulatory co-ordination work programme will build on work already underway, including deepening business law and competition co-ordination, institutional co-ordination, and leveraging the outcomes of the review of the Trans-Tasman Mutual Recognition Arrangement (TTMRA) and associated regulatory co-ordination instruments.

In addition to a seamless business environment, we also need to help build networks and connections with Australia. Improving trans-Tasman economic development co-operation is essential. The Ministry will be working with other New Zealand agencies and our Australian counterparts to create more of a joint trans-Tasman approach to connecting with the rest of the world. We will also seek to improve the integration of our respective economic development policies. This will bring New Zealand the benefit of larger scale and greater influence on the world stage, as well as strengthening the trans-Tasman economy as a whole.

Taking New Zealand to the World and Bringing the World to New Zealand

Successive governments have worked to open New Zealand's economy to world trade, particularly through the World Trade Organisation, and the agenda to achieve this is relatively well established. The Ministry and other agencies involved in this process, such as MFAT and NZTE, continue to build understanding of how best to facilitate connections between local firms and markets overseas. This is relevant in the context of our work on Australia and China, as well as more generally.

To improve our ability to develop the international connections agenda, we will continue analysing the experiences of New Zealand firms as they engage in foreign markets. This focus will include:

• improving our understanding of the performance of New Zealand's exporters;
• leading an APEC/OECD study to examine impediments to small- to medium-size enterprises exporting, and policy tools to remove those impediments; and
• understanding how management capability contributes to the internationalisation of New Zealand firms.

We will also be working with other agencies to develop a coherent policy and operational framework to improve the quality of New Zealand's international linkages, informed by a better understanding of government's role in that process.

The objective is to attract knowledge and capital, and to stimulate demand for specific high value-added exports. Openness and connections with overseas markets are important to achieving this, but whereas the work described above focuses largely on making business easier for New Zealand firms overseas, this area of work is about attracting others to invest in New Zealand, transact with local firms, and visit the country as students and tourists. It includes:

• Working with a range of agencies (including Investment New Zealand, MFAT and NZTE) to attract foreign direct investment. In particular, continuing to work towards a framework for attracting high-quality foreign direct investment (FDI) and evaluating the effectiveness of Investment New Zealand activities; and
• Conducting a baseline review of Tourism New Zealand's budget, with a particular emphasis on international marketing, to ensure it has adequate resources and applies them effectively to maximise the growth gains from in-bound tourism.

Contributions of Output Classes to the International Linkages Strategic Priority

Innovation

Innovation > Fostering entrepreneurship and innovation in New Zealand firms

Why Is This a Priority?

New Zealand's economic success depends on the performance of its businesses. Innovation is vital to international business success, as it is difficult for our firms to compete successfully on the basis of scale of operation or to sustain a position as the least-cost producer. If our businesses are to succeed and be highly productive relative to their international competitors, they must innovate by finding new opportunities and ways of producing goods and services. Innovation involves a combination of:

• creating and marketing new or improved products and services that consumers both here and abroad value highly; and
• creating and adapting to new forms of organisation and new technologies.

Entrepreneurs are at the heart of this process, spotting new opportunities and motivating those around them to devote resources to innovation. There is a mixed picture of how innovative and entrepreneurial local firms are. New Zealand has relatively high and dynamic levels of entrepreneurship as measured by business start-ups, exits and a business's chance of surviving once up and running. But New Zealand ranks low on the formal technological measures of innovation, such as private sector R&D and patenting. While this can be explained by New Zealand's distance from major world centres of R&D, lack of very large firms and its relatively large primary sector, it remains a cause for concern.

There is some evidence that New Zealand is investing less than other developed countries in information and communications technology (ICT) and there has been a relatively low uptake of broadband. Other small developed countries that have ascended to the top half of the OECD productivity rankings have invested heavily in technological innovation.

This overall picture masks a lot of variation between and within industries in New Zealand. The best New Zealand businesses compete very successfully. The challenge for New Zealand is to become increasingly innovative and entrepreneurial overall. This is essential if we are to catch up with other developed countries and achieve the Government's economic objective.

Our innovation-related outcomes are linked to the Ministry of Research, Science and Technology's outcomes for the research, science and technology sector, recognising that both agencies have intertwined roles in fostering innovation.

What Are We Aiming to Achieve?

Factors that the Ministry of Economic Development can influence that are particularly relevant to the level and quality of innovation and entrepreneurship include:

• Effective and competitive markets. New Zealand's product, input, labour and capital markets need to support innovation and business activity. This involves a variety of factors, such as maintaining the competitive pressures that generate incentives for innovation, and ensuring the quality and quantity of infrastructure in New Zealand facilitates the flow of ideas, goods and services, and people.
• A dynamic research and development system. Through work on the Government's Growth and Innovation Framework we need to work with the Ministry of Research, Science and Technology (MoRST) to ensure that the public and private R&D systems are operating effectively. These systems need to take into account the unique New Zealand context of few very large firms, distance from large R&D centres and a relatively large primary sector.
• Improved skills for innovation and entrepreneurship. Government policies for education and skills development need to ensure that New Zealand firms have access to the skills necessary to identify business opportunities and to translate them into commercial success. Effective use of ICT is a particular example.
• Effective business links. Strong links between businesses (either in New Zealand or overseas) are often part of innovating. Such links maximise opportunities for businesses to take advantage of information, skills, knowledge and technology residing elsewhere.
• Improving the performance of the innovation system. The Ministry is uniquely placed to keep an overview of government policy on innovation performance as a whole.

The Ministry works collaboratively with a range of other agencies on these issues, including the Department of Labour; the Foundation for Research, Science and Technology; the Ministry of Education; and MoRST.

The macro-economic framework also affects business success. Fiscal and monetary policies influence the "big picture" context in which businesses operate through their effects on inflation, interest rates, exchange rates and taxation. However, these issues are addressed more directly by other agencies.

What Are the Critical Issues and How Are We Addressing Them?

The Ministry will undertake a focused programme of policy development, evaluation and research aimed at lifting innovation performance in New Zealand. Within the themes identified above we have prioritised the following areas of work:

• improving the innovation system's performance;
• using ICTs to support innovation and productivity;
• sources of innovation and firm productivity;
• capital deepening and access to finance;
• aligning consumer and competition policy; and
• increasing linkages between the private sector and the public science system.

Improving the Innovation System's Performance

The Ministry is uniquely placed to provide an overview of government policy on innovation. We lead the Growth and Innovation Framework and we advise on other areas that affect innovation. We will work across government to build an evidence base to support development of future innovation policy. This will include assessing our policy settings against international benchmarks and identifying priority areas for action.

Promoting ICT as an Enabler of Innovation and Productivity

The purpose of the Digital Strategy is to provide a unifying vision for using digital technologies to shape a more prosperous and socially cohesive future. ICTs have the potential to enhance the levels of both innovation and productivity across the economy, but to realise this potential requires us to establish the key enabling conditions - content, confidence and capability, and connection - and to recognise the needs of key user groups - individuals, businesses and government. Co-ordinating successful implementation of the set of initiatives contained in the Digital Strategy will be a high priority for the Ministry over the next four years. The infrastructural aspects of these issues are discussed under the Infrastructure Strategic Priority.

Sources of Innovation and Firm Productivity

There are many views on what practices and innovations within firms raise productivity. It is critical for economic policy that we better understand what matters most for lifting firm productivity. The Ministry will use data from the Business Practices Survey (2001) and the Business Operations Survey (2005) to better understand this issue.

Capital Deepening and Access to Finance

New Zealand firms have lower capital investment than the OECD median. Business investment impacts on labour productivity by increasing the amount of capital and technology available per worker. The Ministry will investigate the determinants of the private sector capital stock across OECD countries, including the importance of profitability and firm size. We will also analyse new survey data to determine whether finance constraints that firms face arise from problems with a firm's individual circumstances or are symptomatic of a wider problem with capital markets.

Aligning Consumer and Competition Policy

New Zealand is regarded internationally as having high-quality competition and consumer law, which enables dynamic efficiency and consumer protection objectives to be met. However, given New Zealand is a small and distant country, there are still challenges, in particular to compensate for the lower short-term competitive pressures arising from a number of industries only having a few competitors in the domestic market. The Ministry will examine whether there are opportunities to further improve growth prospects in New Zealand, using a combination of competition and consumer policies.

Increasing Linkages between the Private Sector and the Public Science System

Institutional arrangements for the public science system affect the rates of knowledge creation, application and diffusion. We need to ensure that mechanisms to encourage alignment between investments in public science and industry are working effectively. We intend to work closely with MoRST to increase linkages between the public and private sectors which reflect these unique characteristics of the New Zealand business environment. This work with MoRST will include looking at the quality and efficiency of both tertiary education providers and Crown Research Institutes in developing economically significant knowledge.

Contributions of Output Classes to the Innovation Strategic Priority

Regulatory Environment

Regulatory Environment > Strengthening the growth focus in the regulatory environment for business

Why Is This a Priority?

Regulation plays a critical role in shaping the business environment in which economic activity takes place. The goal of this strategic priority is to ensure that regulation is well designed and implemented to foster achievement of economic objectives, while also ensuring that social and environmental objectives are met.

The OECD considers that New Zealand ranks very well in terms of "growth-friendly" regulation. However, continual improvement is needed for three reasons:

• other countries continue to improve their regulatory environment for business, and New Zealand needs to keep abreast of regulatory best practice to maintain its comparative advantage;
• the regulatory environment is continually changing, with growing volume and complexity, internationalisation, increased expectations of meeting multiple objectives, and stronger expectations of community and business involvement in regulatory design; and
• continuing demand from business for reduced compliance costs.

What Are We Aiming to Achieve?

The Ministry's primary aim is to ensure that the regulatory environment supports sustainable growth as much as possible. This means ensuring that regulation affecting business is designed and implemented to minimise the burden of regulations on firms while achieving the objectives of those regulations. The objectives are to improve the quality of regulation, reduce the regulatory burden imposed on firms (especially small firms), and give them as much certainty and flexibility as possible in meeting their regulatory obligations.

Where regulation has non-economic (social, cultural or environmental) objectives, the Ministry aims to ensure that economic growth objectives are given due weight when framing the legislation. This includes:

• ensuring that the regulation achieves its other objectives in a way that ideally is complementary to, and at least does not unnecessarily detract from, achieving sustainable economic growth; and
• ensuring that the trade-off between the various objectives and economic growth gives due weight to the sustainable economic growth objective.

When the regulation primarily has an economic objective (e.g. competition, intellectual property, insolvency and consumer policy), our goal is to ensure that regulation is designed to foster sustainable growth in income per capita.

For all regulation, therefore, the economic objective is to foster sustainable growth in income per capita, whilst also recognising that the Government will normally have broader regulatory objectives.

What Are the Critical Issues and How Are We Addressing Them?

The Ministry is working to improve the quality of regulation in three priority areas:

• designing and implementing Ministry-led regulation that is key for innovation and economic growth;
• ensuring regulatory design across the public sector takes into account impacts on the business environment; and
• focusing on a small number of key regulatory regimes led by other agencies that have potentially high impacts on economic growth.

Improving the Design and Implementation of Key Ministry-Led Regulation

Surveys conducted by the World Bank and others suggest that regulations administered by the Ministry tend to be high quality and to involve low compliance costs. For example, the innovative use of technology for which the Ministry has been recognised internationally has reduced the costs of setting up a company in New Zealand to among the lowest in the world. While the opportunities for change in Ministry-administered regulation therefore may be incremental, these may nevertheless build to create a more effective and low-cost regulatory environment for business. The Ministry will continue to review and refine the design of regulation for which it is responsible.

Regulation covering effective functioning of financial markets is a key area of Ministry regulation with an important impact on growth. In this regard, the Ministry will review the law relating to disclosure requirements, occupational regulation, prudential regulation, and supervisory arrangements for all non-bank financial institutions (e.g. insurance companies and non-bank deposit-taking institutions) and financial products (e.g. debt securities, equity securities and managed funds).

Venture capital provides a valuable source of funding for new companies and early stage expansion capital. The Ministry is working with the Inland Revenue Department and the Treasury on reforms to remove regulatory and tax barriers to venture capital and investment in New Zealand. The preferred legal structure for investing in venture capital internationally is the limited partnership, so the Ministry will be reviewing the limited partnerships regime.

Promoting High-Quality Regulatory Design across the Public Sector

We can best promote high-quality regulation across the public sector by keeping abreast of international best practice, monitoring departmental performance in the design of regulation, and measuring the impact of regulation on business and growth.

In addition to ensuring that the broader economic costs of regulation are minimised as far as possible, the actual implementation of regulation presents two challenges. First we need to ensure that the processes that firms are required to adopt do not create undue compliance costs. The Ministry has already made significant headway regarding implementation of its own regulation, for example, our use of web-based technology has reduced the costs of searching or registering a security interest against personal property.

The second challenge for a small country like New Zealand is to ensure that the institutions that monitor and administer business regulations have the people, skills and resources to do so effectively, and that regulation is appropriately designed to reflect the capabilities available to implement them.

The Ministry is continuing to review international best practice in regulatory design and to promote its findings across the public sector. In particular, we will review international best practice to develop a system for evaluating the impacts of regulatory implementation on the business environment. Our initial focus will be on evaluating and trialling the Dutch standard costing model, which measures business compliance costs in a way that allows international comparison. We are considering whether to apply this model to the Hazardous Substances and New Organisms Act.

Focusing on Key Regulatory Regimes Led by Other Departments

Much of the regulation that impacts on business is developed and/or implemented and monitored by other agencies. This includes the six legislative frameworks about which concerns tend to be raised when businesses are surveyed (Resource Management, Employment Relations, Hazardous Substances and New Organisms, Health and Safety in Employment, ACC, and taxation). International research also identifies several of these areas of regulation as having potentially important impacts on economic growth.

The Ministry has recently contributed to major reviews of the Resource Management Act and the Employment Relations Act, to on-going implementation of the Hazardous Substances strategy, and to climate change regulation.

Currently we are:

• instituting a multi-year research programme on the impacts on the business environment of the RMA and HSNO;
• contributing an economic development perspective to the evaluation of the impacts of employment regulation; and
• contributing an economic development perspective to the implementation of climate change regulation. In particular, we are supporting the development of an effective system for the international trading of carbon emissions.

Contributions of Output Classes to the Regulatory Environment Strategic Priority

Infrastructure

Infrastructure > Improving the quality and reliability of key infrastructure services

Why Is This a Priority?

Sound infrastructure services, such as transport, energy, communications and water distribution, are essential to New Zealand's growth prospects and our general quality of life. Efficient and reliable infrastructure services reduce the costs of production, increase the attractiveness of New Zealand as a location for investment, and facilitate the flow of ideas, goods and services, and people. Infrastructure bottlenecks or shortages of critical services jeopardise the productivity, profitability and even viability of firms. Even a small risk of supply disruption adds substantially to the uncertainty that firms face, and can be an impediment to growth and sustainable development.

It is therefore important that firms and consumers have access to the infrastructure services they need, when they need them. In recent years, however, some significant issues have emerged. These include challenges to the short- and long-term security of New Zealand's energy supply, increasing traffic congestion in and around Auckland, and the need to ensure that New Zealanders have access to and are able to use new telecommunications technologies. The Ministry has been working with other government agencies and the private sector to address these issues.

In the longer term, infrastructure presents a number of challenges for government policy. For example, the long lead times involved in developing new infrastructure mean that any constraints can impact on businesses and other consumers for extended periods. There is also a need to co-ordinate supply arrangements across different infrastructure suppliers (roading, electricity, sewerage, etc), including central and local government and the private sector. In addition, because of the small market for infrastructure services there are often few competing providers - even in those sectors where technology and cost structures make competition possible. This can sharpen the focus on reliability of supply, and where there is less opportunity for competition there is also a risk of less innovation and excessive pricing.

Given the complexity of these issues, and the fundamental importance of infrastructure in a modern, export-led economy, this is an on-going area of strategic importance for the Ministry.

What Are We Aiming to Achieve?

The overarching goal is to ensure that businesses and consumers have access to reliable infrastructure services they need, at reasonable cost. The hallmarks of effective infrastructure performance include:

• early identification of bottlenecks and shortages, leaving time to implement cost-effective solutions;
• high levels of confidence by investors and the community that a justifiable level of infrastructure services will be available when needed, at "reasonable" prices; and
• pricing and other arrangements (such as education and information provision) that avoid unnecessary volatility and that encourage investors and consumers to take into account the full effects of their decisions.

What Are the Critical Issues and How Are We Addressing Them?

The Ministry is addressing a range of important issues in each of the following sectors:

• Energy (Ministry has lead role)
• Information and Communications Technologies (Ministry has lead role)
• Transport
• Water
• Overarching infrastructure.

Energy

Energy Outcomes and the Drivers of Change in the Energy System

Local and global demand for energy will inevitably increase over time, and this will put pressure on our energy supplies. Pressure on supply will be reflected in higher energy prices. The challenge over the medium to long term is to meet New Zealand's energy needs in a way that protects our way of life, economy and the environment. More specifically, our aim is to maintain an energy system over time that balances three high level outcomes:

• a high level of supply security (short- and long-term), balanced against the costs involved;
• acceptable environmental impact; and
• competitive and efficient pricing (which also reflects the cost of negative aspects of our energy use).

It will be a challenge to achieve these goals over time in the face of global climate change and a tightening demand/supply balance for traditional energy forms. Innovations and uptake of cleaner and more sustainable energy sources will help reduce supply constraints and mitigate the effects of climate change. Together with technology that promotes greater energy efficiency, and efforts to reduce unnecessary energy consumption, these developments provide us with a range of new ways to manage the issues.

Avoiding Short- and Medium-Term Problems

Dry winters can disrupt electricity supply and cause big price spikes. This can have a major impact on businesses, particularly if they have not put measures in place to manage the risk of price fluctuations. The Ministry will support the Electricity Commission in managing dry-year risk, in improving market arrangements and in enhancing the efficiency of electricity usage. We will also monitor the performance of the Commission and, in the longer term, evaluate the effectiveness of the new regime in delivering short-term supply security.

Significant investment is required to strengthen the national grid to ensure that agreed standards are met. The new regime for approving transmission investment and pricing needs to be bedded down by the Electricity Commission, working closely with Transpower and other stakeholders. Land access and resource consenting issues are complex. The Ministry will monitor these arrangements to ensure that obstacles are minimised and that any linkages across the various processes are satisfactorily addressed.

Security of petroleum supply is essential to support our economy, particularly the industrial and transport sectors. Late last year it became apparent that New Zealand was not holding sufficient reserves to meet international obligations. We will be working to ensure that New Zealand maintains adequate reserves and meets its international obligations, by developing proposals on a tender process for increasing the level of reserves that can be accessed by New Zealand in the event of a major disruption to the international oil market.

Ensuring Our Longer-Term Energy Needs Are Met, at Reasonable Prices

To meet our goals over time and to avoid surprises, we need to develop and maintain a good understanding of likely future energy requirements and trends, such as energy supply and demand, and energy sector greenhouse gas emissions. The Ministry is working to enhance its energy demand/supply projections (based on various future energy scenarios) to help predict timing of pressure points and price trends.

Gas-powered electricity generation is an important part of our current supply, accounting for approximately 25 per cent of generation. The Maui field is running out, and uncertainties about future supply are affecting investment in electricity generation and other industries that use gas. We are focusing on managing the transition from a long-term, stable gas supply (Maui) to a more diverse supply (i.e. smaller-sized, more dispersed gas fields), as well as promoting investment in exploration of potential new gas fields.

We will also be working with market participants to reduce uncertainties about future costs and the availability of other thermal fuels. This includes the relative competitiveness of thermal fuels (including pricing externalities in response to the Kyoto agreement), and the place of coal and imported LNG for electricity generation and other uses.

For New Zealand to improve the energy sector's sustainability, we need to be a "fast follower" in the take-up of new technologies and approaches, from both supply and demand perspectives, as well as developing new approaches where necessary. Working with the Energy Efficiency and Conservation Authority (EECA) and the Electricity Commission, the Ministry will develop a view on the capacity of the New Zealand energy system to integrate new wind generation, and will ensure that priorities for energy research and development are aligned with sustainable energy objectives.

Managing the Effects of Climate Change

The Kyoto Protocol is designed to manage the effects of climate change by ensuring that greenhouse gas emissions remain within certain levels. In helping to implement climate change policy, the Ministry will advise on managing issues such as the way carbon charges translate through into pricing and investment planning. We will also investigate how businesses can take opportunities arising out of new markets.

Information and Communications Technologies

ICT Outcomes and the Drivers of Change in the ICT System

The ICT sector is notable for on-going and rapid developments in technology. The Ministry needs to understand emerging trends, so that we can understand their implications for growth. Developments in ICT technology are leading to very large quantity and quality improvements, and cost reductions. Further, voice, video and text can now be sent through a single transmission network to a single consumer device (e.g. 3G mobile phones). This trend is often referred to as digital "convergence". Ensuring that broadband's ever-increasing potential is effectively utilised is a key step in advancing our economic development objectives.

Against this backdrop, the Ministry's main goals in the ICT area are:

• seamless and easy access to information resources to support commercial, research and other productive activity (content);
• enhancing the skills needed to utilise the resources available (confidence and capability); and
• availability of ICT networks, particularly high speed/high quality-of-service broadband, to enable access to resources (connection).

New Zealand consumers may need support to ensure satisfactory levels of uptake of new ICT technology. Many New Zealand firms have a poor understanding of how ICT is changing market requirements and opportunities, and lack the skills to integrate ICT into business processes to obtain the strongest gains in efficiency. Similarly, the household take-up of broadband has been slow, which means that New Zealanders may not be learning skills that can be applied to develop innovative products, services, and ways of doing business.

Key Ministry initiatives include:

• implementing measures under the overarching Digital Strategy (described more fully in the Innovation Strategic Priority), and evaluating their effectiveness over time;
• evaluating the effectiveness of Project Probe over time, and collecting the data necessary to support this evaluation; and
• promoting implementation of an advanced network, enabling very high-speed connections with the international research community.

We will monitor industry developments with an eye on any implications for market power. There may also be implications for other regulatory areas. For example, regimes for copyright, privacy and standards can be eroded by use of alternative technologies. Regulatory settings can also help to influence the development of technology and new services. For example, radio spectrum allocation and management enables new, competing technologies to be developed.

The Ministry's work in this area includes:

• implementing the outcome of the Telecommunications Act review;
• monitoring the continuing impact of digital convergence, telecommunications sector investment, new broadband applications, and uptake of broadband services; and
• developing opportunities for the introduction of new spectrum management techniques and technologies in New Zealand.

Transport and Water

The Ministry's role in these areas is to provide supporting advice to the lead agencies and government on particular transport and water issues significant to economic development. For example, our focus in transport over the next year will include participating in work led by other agencies on road pricing and transport funding. Our involvement in key water issues includes promoting effective water allocation decisions in Waitaki and Canterbury, and participating in the Sustainable Development Programme of Action for Water.

Overarching Infrastructure Issues

Differences in ownership, governance, regulatory and funding arrangements across the energy, ICT, transport and water sectors mean that most infrastructure policy needs to be tailored to the circumstances of individual sectors. Nevertheless, some general issues apply across several or all sectors, such as suitable mechanisms for financing infrastructure build. The Ministry's main areas of focus in the next year and beyond include:

• developing National Policy Statements and National Environmental Standards for certain network infrastructure, particularly electricity transmission, electricity generation and telecommunications;
• developing a set of infrastructure indicators; and
• developing a Ministry view on engagement with local government on infrastructure issues.

Contributions of Output Classes to the Infrastructure Strategic Priority