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• Statement of Intent

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• 2007-2010
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• 2002-2005
• 2008-2011
• Departmental Forecast Report
• Strategic Business Plan

• SP1: Facilitate the Alignment of Economic Development Activities across the Public Sector
  • What Do We Mean by 'Alignment'?
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are We Going to Do to Achieve This?
  • Contributions of Output Classes to SP 1
• SP2: Improve International Connections, Particularly with Australia
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are We Going to Do to Achieve This?
  • Contributions of Output Classes to SP 2
• SP3: Stimulate Enhanced Entrepreneurial and Innovative Capability of New Zealand Firms
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are We Going to Do to Achieve This?
  • Contributions of Output Classes to SP 3
• SP4: Improve the Regulatory Environment for Business
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are We Going to Do to Achieve This?
  • Contributions of Output Classes to SP 4
• SP5: Improve the Quality and Reliability of Key Infrastructure Services
  • Why Is This a Priority?
  • What Are We Aiming to Achieve?
  • What Are We Going to Do to Achieve This?
  • Contributions of Output Classes to SP 5

This section describes how the Ministry will translate its five Strategic Priorities (SPs) into action. Over the past year cross-Ministry teams have examined the issues, the problems and the opportunities for government intervention embedded within each SP. This has been challenging, partly because we have often been at the margins of knowledge about what drives growth, and also because we have been clarifying the robustness of the evidence base from which we draw conclusions and make judgements.

The result of this process is an 'Action Plan' for each SP. These plans will evolve as our understanding and knowledge develops. This section of the SOI provides executive summaries of each of these plans.

SP1: Facilitate the Alignment of Economic Development Activities across the Public Sector

What Do We Mean by 'Alignment'?

In the context of this Strategic Priority, alignment means: the co-ordination of policy advice and/or services delivered by different agencies to ensure the most cost-effective achievement of common or closely related outcomes.

Why Is This a Priority?

Facilitating alignment is important because achieving a significant increase in growth depends on a wide variety of factors, many of which are influenced by government agencies other than MED - as well as regional and local authorities. The more closely the activities and policies of these agencies are aligned with the government's economic objective, the better positioned we will be to achieve that objective. The incremental contributions of different departments can - if they are well aligned and co-ordinated - act to boost the impact of any single intervention. Working across portfolios or disciplines can also create opportunities to think about old problems in new and innovative ways. The impact of the whole can be greater than that of its individual parts.

This is not a new idea. There has been much discussion of the need for 'joined-up government' and a 'whole of government' approach. But while New Zealand's public management system has many strengths, there is no systematic approach for determining shared strategic goals and priorities for agencies working in the same area.

The Ministry has a particular interest in improving alignment because we have been charged by the Government with coordinating implementation of the Growth and Innovation Framework. This is a major cross-departmental co-ordination exercise that faces a number of challenges such as those outlined above. Alignment is therefore a significant strategic priority for this Ministry.

What Are We Aiming to Achieve?

Across the public sector we want to see a high degree of ownership of sustainable growth as a priority, and a common understanding of what it involves. As a result we expect consistent and aligned use of the key growth-related levers to promote higher productivity and income growth. To realise this we need to focus on achieving the following:

• clear leadership of the growth agenda - particularly at Ministerial and Chief Executive levels.
• co-ordination at a senior level among the key agencies that contribute to economic development to develop common understanding and agree on objectives, priorities, and roles; and
• use of the public management system to support alignment of activity to promote growth.

What Are We Going to Do to Achieve This?

A great deal of alignment activity is already undertaken by the Ministry and other departments. We participate in many inter-departmental projects and fora; we contribute funding and expertise to initiatives led by other agencies; and many of the policy initiatives we lead involve collaboration and knowledge sharing with others. However, the alignment strategic priority is not intended to embrace this type of policy-specific work. It relates instead to the system through which alignment is achieved. This includes the processes for leading and managing collaboration and co-ordination, as well as the processes for creating incentives to align strategy and work programmes.

A lot of work has been done already to build an alignment system, notably in relation to the GIF and its related budget process. However, there is a range of additional opportunities and points of leverage that the Ministry has yet to address. These may be grouped under three headings:

• providing leadership and co-ordination;
• communicating and influencing economic development; and
• working to overcome obstacles to alignment.

All of these apply internally within the Ministry, as well as across the public service, Crown entities and the wider public sector. This approach is illustrated in the following table.

Leading and Co-Ordinating

Public Service and Crown Entities

Clear leadership is essential to the effective development and implementation of any strategy. The more effectively Ministers work together to develop shared approaches and agendas, the better positioned they are to promote aligned and co-ordinated work programmes from their respective Chief Executives and agencies. Over the past year the Ministry has been engaging economic development Ministers in discussions about our strategic priorities in order to share knowledge and understanding, and to ensure that the work we propose is based upon shared judgement about what is important for growth and economic development. We will continue to promote this strategic dialogue, and to support Ministers in providing collaborative but clear leadership of the growth agenda.

Additional initiatives to facilitate cross-departmental alignment will include:

• Implementation of the Growth and Innovation Framework: The Ministry will continue to co-ordinate and facilitate the processes by which GIF is implemented. We are constantly working to develop and refine GIF in light of work done and new information gained since its launch in 2002.
• Shared outcomes: the Ministry has developed shared outcomes with the Ministry of Foreign Affairs and Trade, and linked outcomes with the Ministry of Research, Science and Technology. These outcomes form the basis for ongoing discussions with these agencies on strategic direction, perspectives and priorities. They also form the basis for improved alignment of our respective work programmes. More details of the shared outcome with MFAT are provided in the summary of SP2, and with MoRST in the summary of SP3.

Regional and Local Government

Regional and local governments have a role in supporting and facilitating economic development in local communities. The Local Government Act 2002 provides a platform for improving alignment between central and local government development outcomes, particularly via the mechanisms of community outcomes and the associated Long Term Council Community Plans. The Ministry's Regional Development Team will be working with the Department of Internal Affairs and local authorities to help ensure that the implementation of the Local Government Act enables improved links and alignment between central and local government.

In addition, the Ministry recently established a position of Director, Auckland Business and Government Relations. This is based in Auckland - New Zealand's largest city and greatest concentration of business activity. The Director has responsibility for improving our connection with the business community, as well as the alignment between the Ministry's work and that of the city's local and regional authorities.

Internal Alignment

The Ministry is a diverse organisation that impacts the business environment in many ways. We place a great deal of emphasis on aligning our organisation with our outcome framework and our work in this regard is covered in more detail in Section 5: Developing our Organisation.

Communicating and Influencing

To pursue the Government's economic objective all agencies involved in economic development need to have a clear idea of how they best contribute to an improved rate of growth. The Growth and Innovation Framework provided an initial basis for alignment by identifying the primary areas in which government should invest, and the GIF working groups are clarifying and adding detail to this. The Ministry intends to increase its efforts to develop a shared understanding with other agencies of the 'growth story', drawing on the analysis of GIF working groups and wider research and policy development. We will also increase our efforts to communicate internally, building consensus and understanding within the Ministry on the best economic approaches to promoting growth.

Overcoming Obstacles

The Ministry intends to work with Ministers, central agencies and other departments to identify ways of using the existing public management apparatus to increase alignment in pursuit of government goals - such as the economic objective - that require a whole of government approach to achieve. We also intend to assess further opportunities for improving the Ministry's internal integration and alignment.

Contributions of Output Classes to SP 1

In addition to specific output class deliverables, the Ministry's Medium Term Strategy Group will be developing strategic initiatives focused on alignment across the public sector (as described above).

For further details of the outputs under the contributing votes refer to the output class specific performance measures in Part B.

SP2: Improve International Connections, Particularly with Australia

Why Is This a Priority?

International connections support and encourage innovation, higher productivity and economic growth. They do so in a variety of ways, such as:

• helping innovators to identify and access new markets and take advantage of new opportunities and ideas for boosting productivity;
• creating competitive pressure from offshore and providing much greater consumer choice, enhancing incentives for firms to innovate;
• giving firms access to global production networks, which are conduits for the transfer of knowledge, technologies, skilled labour, and best practice work and management practices; and
• building management capability and experience in global markets.

However, New Zealand faces a number of barriers in terms of its international connections:

• high transport and communication costs;
• institutional, legal, and regulatory differences that create costs for firms;
• the impact of distance on person-to-person and business relationships; and
• the small size of the New Zealand market and New Zealand firms, which makes gearing up to produce for overseas markets difficult and risky.

Together, these barriers are a major impediment to improving New Zealand's growth rate. The Government can help by reducing the impact of borders on firms, and by promoting connections and high value international trade. In contributing to this work, the Ministry will place particular emphasis on Australia, our most important economic partner and the largest market for New Zealand goods and services. We are already well integrated with Australia in social, institutional and business terms. It is therefore 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.

What Are We Aiming to Achieve?

Much of the work on New Zealand's international connections is led by the Ministry of Foreign Affairs and Trade (MFAT), but MED helps to set the agenda and also contributes to or leads on specific issues according to our role and expertise. Particular areas we focus on include: protection of intellectual property rights; trade remedies policy and rules; international regulatory and competition policy; tariff policy and more general economic development policy. This collaborative approach between MED and MFAT is manifest in the Business Environment outcome shown above, which is shared by both departments.

Work done under this SP will contribute to this outcome above 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 in their efforts to connect with the rest of the world.

In common with MFAT, NZTE and other agencies contributing to New Zealand's international connections, MED will focus on those countries that are most important to our future. This includes those 'bedrock' countries with which New Zealand maintains ongoing relationships (Australia, the US, EU, Pacific region, plus China and Japan) plus other important trade relationship opportunities that emerge. We will, however, continue to place particular emphasis upon the relationship with Australia. The Government's Australasian goal is the creation of a Single Economic Market in which firms need comply with only one set of rules.

What Are We Going to Do to Achieve This?

Within the scope of our role and expertise, the Ministry will focus on three broad areas of work: increasing openness between New Zealand and other countries; helping New Zealand firms connect to overseas markets, and encouraging the world to come to New Zealand (as tourists, investors etc)³. Because of our particularly close economic and social relationship with Australia, we have a special focus on Australia in the first two of these areas.

Our overall approach is illustrated by the following diagram and described further in the text below.

Increasing Openness

Minimising Regulatory Barriers with the Rest of the World

The Ministry will work with MFAT to remove trade barriers and reduce the transaction costs for New Zealand firms wanting to trade and invest overseas. We will also lead the work to make New Zealand attractive to the rest of the world as a location in which to do business. There are several broad dimensions to this, including:

• unilaterally and bilaterally reducing barriers to trade and aligning New Zealand rules and institutions with those of key players internationally; and
• working in international fora to influence the policies and regulations of other countries and international institutions in favour of New Zealand interests.

Work being done under Strategic Priority 4 to improve the regulatory environment for business will also contribute to the international connections agenda by helping to inspire confidence in New Zealand's business environment among the international community.

Creating a Single Economic Market with Australia

The New Zealand and Australian Governments have recently agreed to work towards a Single Economic Market. This will involve the Ministry collaborating with agencies on both sides of the Tasman to create a seamless Australasian market where businesses need only comply with one set of rules. Significant headway has already been made in terms of trade barriers, and the key remaining impediments to openness are differences in our regulatory institutions and in our regulation of business activity and goods and services markets. Policy initiatives such as the Trans-Tasman Mutual Recognition Arrangement (which recognises New Zealand regulations as sufficient for the purpose of doing business in Australia) have made significant progress in this regard. Achieving additional gains in terms of regulatory and institutional integration will be more complex, and exceptions may be required because of differences in New Zealand's market or the scale of its firms. The Ministry will be exploring this complexity and promoting opportunities for improved alignment - for example, the concept of a single registration process for companies wishing to operate in the trans-Tasman market.

Connecting New Zealand to the World

Helping to Build Global Networks and Connections

Successive Governments have been working to open New Zealand's economy to world trade for a considerable time, and the agenda to achieve this is relatively well established. In contrast, the Ministry and other agencies involved in this process (e.g. MFAT, NZTE) are still building understanding of how best to facilitate connections between local firms and markets overseas. The Ministry is doing so as part of our contribution to the GIF Global Connections working group, which is focusing on:

• market integration - facilitating the integration of New Zealand firms into international markets (including support for work in this field led by NZTE);
• knowledge transfer/absorption - enhancing the capability of New Zealand firms to tap into international knowledge networks, and absorb and adapt knowledge from overseas; and
• sharpening New Zealand's approach in trade agreements - the Ministry will work with other agencies to increase the focus on business, innovation, and growth in the negotiation of bilateral and multilateral agreements, and to leverage more for New Zealand firms from existing agreements.

Helping to Build Australasian Networks and Connections

The agenda for building connections with Australia is similar to that for the rest of the world, but moves toward the creation of a single trans-Tasman market have sharpened the context within which connections may be made. We therefore have a number of targeted Australasian initiatives, and the degree of effort the Ministry is putting into this work reflects the importance of Australian connections to New Zealand.

One of the most important of these initiatives is improving trans-Tasman economic development co-operation. The Ministry will be working with other New Zealand agencies and our Australian counterparts to create more of a joint Australasian approach to connecting with the rest of the world. We will also explore ways of improving 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 Australasian economy as a whole.

To help us engage more effectively with Australian government and businesses, the Ministry has established a new post of Counsellor (Economic) based in New Zealand's High Commission in Canberra. The role will help to:

• build and strengthen the relationships that will improve connections with Australia and help achieve the outcomes we seek;
• develop a sound understanding of government and business drivers that affect those connections and outcomes; and
• promote the benefits of Australasian integration and connections to Australian decision-makers.

Bringing the world to New Zealand

Attracting Skills, Knowledge, Investment and Tourism

The objective here is to attract knowledge, capital, and demand for specific high value-added exports. Openness and connections with overseas markets are both 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 tourists. It includes:

• attracting foreign direct investment - contributing to the GIF Global Connections working group to identify policies to attract more inward investment and get more out of the investments we attract;
• cross-border consumer law enforcement - determining the best way of implementing new OECD recommendations in the context of the review of consumer protection law and its enforcement;
• tourism - leading the funding, implementation and monitoring of the New Zealand Tourism Strategy, including support for Tourism NZ's promotion work through the '100% Pure' campaign;
• petroleum exploration - developing proposals to enhance New Zealand's attractiveness as a destination for petroleum exploration; and
• international education - contributing to an interdepartmental group developing policy to maximise the economic benefits derived from this sector.

Contributions of Output Classes to SP 2

For further details of the outputs under the contributing votes refer to the output class specific performance measures in Part B.

SP3: Stimulate Enhanced Entrepreneurial and Innovative Capability of New Zealand Firms

Why Is This a Priority?

New Zealand's economic success depends on the performance of its businesses. If our businesses are to succeed, they need the ability to create and market products (including services) that consumers both here and abroad value highly. Innovation and entrepreneurship are probably the most important factors in determining how well businesses achieve this. Innovation is the process of identifying opportunities to create, produce and market high value products. Entrepreneurship is having the motivation and alertness to identify opportunities to innovate.

It is not easy to determine how good New Zealand businesses are at innovation and entrepreneurship compared to businesses elsewhere, but the available evidence suggests that our performance is variable.

New Zealand has high rates of business start-ups and these businesses seem to be good at adopting and adapting products and processes that are 'new to the firm'. But we have very few large businesses and, because of our size, we have few industries that produce the sort of "new-to-the-world" technology that results in truly innovative products - the products that command premium prices on world markets.

These judgements, of course, hide a lot of variation between and within industries. The best New Zealand businesses and industries are clearly world-class. New Zealand has simply not produced sufficient businesses and industries to create the levels of economic welfare that its citizens aspire to. The Ministry therefore has identified innovation and entrepreneurial capability as priority areas of focus in order to help achieve the government's economic objective.

What Are We Aiming to Achieve?

The key force driving innovation is the individual entrepreneur acting within a business. The skills, knowledge and mindset New Zealanders bring to their daily business activity will primarily determine how well New Zealand businesses perform. However, government policy has an important role to play in providing the context within which individuals and businesses identify and capitalise on opportunities.

The evidence suggests that there are four factors that the Ministry can influence that are particularly important to the level and quality of innovation and entrepreneurship in an economy, and to achieving the Business Environment outcomes listed above.

• Effective, 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 for suppliers to understand customer needs and seek better ways of meeting those needs.
• A dynamic research and development system. There is good evidence that investment in research and development is associated with economic growth. We need to ensure that our public and private R&D systems are operating effectively.
• 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 translate them into commercial success.
• Effective business links. Strong links between businesses are important to the innovation process. In particular, links maximise the chances for business to take advantage of information, skills, knowledge and technology with value-creating potential.

A fifth factor important to business success is the macro-economic framework. 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, and the Ministry's focus is on the factors we can most directly influence in the business environment.

What Are We Going to Do to Achieve This?

Work that governments around the world do to promote innovation and entrepreneurship is based on a combination of evidence and judgement. Judgement is particularly necessary for the more proactive, facilitative policies because there are relatively few areas in which there is an unequivocal case for a particular intervention. However, the Ministry is continually working to improve the evidence base from which we develop our advice to Ministers. Only by doing so can we be sure that government expenditure is targeted as effectively as possible.

We have prioritised four areas of work to focus our effort. Some involve developing specific policies. Other initiatives are more exploratory, and investigate some important issues that may offer opportunities for improving New Zealand's business performance. These are illustrated in the diagram below and described further in the text that follows.

Effective, competitive markets

• Government procurement and standard setting. Government is an important purchaser in the economy, and its purchasing choices can stimulate innovation by setting standards for products and services. Unlike other OECD countries, New Zealand has not used government's procurement power or its ability to set standards to stimulate innovation and economic development. We will examine this issue to determine what scope there may be for using these instruments more directly to encourage New Zealand firms to innovate and to provide them with a basis for increasing their penetration of markets overseas.
• Capital investment by New Zealand firms. Investment in capital equipment is an important factor in helping firms become more productive. New Zealand firms have low levels of such investment relative to other OECD countries, but it is uncertain whether this is a systemic problem, a function of New Zealand's economic structure, or something that will pick up over time as the effects of past reforms work their way through the economy. The Ministry will work with the Treasury to investigate this issue and identify whether and how government should respond.

A dynamic research and development system

• Private sector R&D. New Zealand's investment in research and development (and especially private sector investment) is low compared with the rest of the OECD. We will be working with MoRST to examine the reasons for this, and to identify options for addressing the issue.
• Public sector R&D. Because of New Zealand's low levels of private sector investment, government needs to ensure that the public research system makes the best possible contribution to innovation and entrepreneurship. We need to ensure that mechanisms to encourage stronger alignment between research institutions and industry are working effectively. The Ministry will be building knowledge in this area to ensure that advice to Ministers incorporates an economic development perspective.

The lead agency promoting research, science and technology (RS&T) in New Zealand is MoRST. While MED and MoRST have different roles and areas of expertise, we share a common interest in the economic benefits that derive from public and private sector research and development. MoRST's work in this area contributes to achieving MED's Business Environment Outcome C: Businesses are more capable of innovating and making the most of market opportunities. In parallel, the Ministry's work under SP3 makes a contribution to the RS&T outcomes in MoRST's SOI, most particularly:

• Increased and more effective investment that optimises opportunities from, and for, RS&T in New Zealand.
• Effective diffusion of RS&T knowledge that increases innovative potential across industry and government.

MED and MoRST have agreed that these outcomes are linked, and we will be collaborating and sharing knowledge on the best way to achieve them.

Skills Development System

Skills development is clearly a very broad area, and the Ministry of Education, the Department of Labour and the Tertiary Education Commission have the most important roles here. In the work outlined below the Ministry focuses on two aspects of skills development that we can influence through our own work and that of New Zealand Trade and Enterprise (NZTE).

• Management capability. Management capability is critical to key business activities such as product development, investment in equipment and market development. There are currently a number of NZTE's programmes focused on building business capability. We will be evaluating the effectiveness of these programmes to assess what works. This will enable us to channel resources into developing the right skills in the right way for the right people.
• A culture of enterprise. If the culture of a country does not value businesspeople or the 'spirit of enterprise' then it is less likely that people will aspire to business success and seek to develop the necessary skills. New Zealand's culture is often blamedfor undermining our entrepreneurial performance and hence our economic development. The Ministry will be working with other agencies and the Growth and Innovation Advisory Board to improve our understanding of the links between New Zealand's cultural norms and its economic performance. We will also be seeking to identify new policy options to enhance the work we already do to promote business and entrepreneurship.

Business Links

• The role of collaboration and links. The economic literature emphasises the role that networks and links between firms play in enabling business success. The evidence is not clear and a better understanding of the dynamics of collaborative initiatives will improve government efforts to foster such collaboration. The Ministry therefore will be initiating research into this issue over the coming year.
• Sector policy. Government has a policy of focusing resources on particular sectors of the economy. It is important that the decisions about which sectors to engage with, and how, are made robustly so as to maximise returns to the economy as a whole. MED will develop and implement a framework to assist Ministers and officials make such decisions. We will also work with other agencies involved in sector engagement (MoRST, the Department of Labour and the Ministry of Education, for example) to ensure that programmes delivered by NZTE, the Foundation for Research, Science and Technology and the Tertiary Education Commission are effectively co-ordinated and aligned.

Contributions of Output Classes to SP 3

For further details of the outputs under the contributing votes refer to the output class specific performance measures in Part B.

SP4: Improve 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. Among other things it sets standards for goods and services; provides incentives for innovation; encourages competition in markets; and provides assurance to investors. Government also regulates for a wide variety of non-economic objectives such as health, public order, and protection of the environment. The challenge is to strike the right regulatory balance between policies designed to achieve these different outcomes. From the economic perspective, this means developing policies aimedat achieving social and environmental outcomes in such a way as to maximise our ability to achieve economic objectives.

Overall, New Zealand ranks very well in terms of 'growth-friendly' regulation. A recent World Bank study cited New Zealand as "the least regulated economy in the world", although there are variations across different types of regulation. But there are three reasons why we cannot be complacent about this:

• The Government's goal requires an increase in per capita income that is faster than the OECD average. New Zealand's environment for business therefore must outperform that of other countries in order to offset firm-level disadvantages such as our small domestic market and our distance from foreign markets;
• Other countries are themselves continuing to improve their own regulatory environments for business, and unless New Zealand focuses on continuous improvement we will lose our existing comparative advantage; and
• Surveys indicate that firms believe compliance costs have increased in recent years.

Because of the importance of the regulatory environment to the potential productivity of business, and because of government's influence over that environment, the Ministry has identified the quality of regulation as a strategic priority for action over the medium term.

What Are We Aiming to Achieve?

The Ministry of Economic Development's primary focus under this Strategic Priority 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 in a manner that minimises the burden of regulations on firms while meeting the objectives of those regulations. The issue is not about reducing the amount of regulation per se. 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.

What Are We Going to Do to Achieve This?

The Ministry has three roles in relation to the regulatory environment for business.

• we lead the development of knowledge in the public sector on the impact of regulations upon firms and their productivity;
• we then use that knowledge in the design and implementation of the Acts and regulations that we administer - which number over 100; and
• we also use it to work across government to improve the overall quality of regulation and - separately - to ensure that other departments give due consideration to the impact on economic development of the regulations they develop and administer.

Our approach is illustrated in the following diagram and expanded upon in the text below.

Improving Our Understanding of the Impact of Regulation on Growth

The Ministry will help to improve the public sector's empirical knowledge of the impacts of regulation on New Zealand business. In addition to undertaking empirical research, the Ministry's SME Directorate will work with firms to gain a better appreciation of the cost of regulation to, and its impact on, business. We will also share that knowledge across government and more widely so as to provide a better information base for agencies involved in regulatory work - and for firms themselves.

This whole of government approach is essential because much of the regulation that impacts on business is developed and/or implemented and monitored by agencies other than the Ministry. 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). These preliminary indications of concern need to be treated with caution, and the Ministry needs to continue working to clarify and assess how these various pieces of legislation impact upon firms and their productivity. We will then be in a better position to advise Government and other departments on the best design of regulation to help balance sometimes conflicting objectives.

To give us a sharper understanding of business development issues, the Ministry has recently established a position of Director, Auckland Business and Government Relations. This position is based in Auckland and will liaise with businesses and local government there to:

• improve the Ministry's understanding of their issues and requirements;
• keep business and local government informedon Ministry initiatives; and
• provide feedback to inform the Ministry's policy and service developments.

Improving the Design and Implementation of MED-Led Regulation

Surveys conducted by the World Bank and others suggest that the 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 the Ministry 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, paying particular attention to three interrelated perspectives:

• the impact on broader economic development;
• the development of new global regulatory norms and the implications of these for the competitiveness of the New Zealand market and New Zealand businesses' ability to perform in global markets; and
• the benefits of having a competitive regulatory environment in attracting businesses to New Zealand.

The following areas of regulatory reform have been identified as priorities under this Strategic Priority:

• capital markets - to ensure that New Zealand is able to attract continuing capital investment;
• corporate governance - to ensure continuing confidence in the governance of our economic enterprises;
• insolvency - to promote an improved environment for entrepreneurship and innovation;
• intellectual property - to support innovation and ensure that the benefits of innovation are made efficiently available for broader use; and
• competition policy - to ensure that markets are dynamic and support the creation of innovative firms.

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. We have already made significant headway in this regard: for example, our use of web-based technology has reduced the costs associated with setting up a company. We will continue to review compliance costs across the regulations we administer to keep them to a minimum.

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, the skills and the resources to do so effectively. We will continue to report on the capability and performance of the many Crown entities that we monitor to ensure effective regulation of the business environment.

Promoting Quality Regulation throughout the Public Sector

Finally, we intend to use our increasing understanding of the impact of regulation upon firms to help improve regulatory design and implementation across the public sector. This largely involves raising awareness of the firm perspective within other relevant agencies, and supporting improvements in government's capability to design and implement effective regulation. This work includes:

• ongoing work to encourage the use of Regulatory Impact Statements and Business Compliance Cost Statements across government. Over the past year our Regulatory Impact Analysis Unit has provided training for over 200 officials in a variety of departments in the application of these Statements, and this work will continue;
• building on the work of the Ministerial Panel on Compliance Costs to improve understanding across the public sector of ways to reduce compliance costs for business;
• building the capability of our Small to Medium Enterprise Policy group and the Small Business Advisory Group, thus improving our ability to provide advice to Ministers and other agencies; and
• undertaking in-depth policy analysis of one or two Acts that our research suggests are particularly troublesome for business. We will pursue this in conjunction with the respective responsible Ministers and other key agencies.

We will also provide advice to Ministers and other agencies to ensure that due consideration is given to economic development outcomes in the development of regulation. We have a responsibility to ensure that when departments are developing or administering regulation to achieve non-economic objectives, they maximise the potential to achieve economic outcomes as well.

Contributions of Output Classes to SP 4

For further details of the outputs under the contributing votes refer to the output class specific performance measures in Part B.

SP5: Improve the Quality and Reliability of Key Infrastructure Services

Why Is This a Priority?

Network infrastructure such as transport, electricity, communications and water distribution is essential to New Zealand's productive capacity and to our quality of life in general. 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. Conversely, when there are shortages or bottlenecks in infrastructure provision the productivity of firms can be jeopardised, and their profitability and even viability can be put at risk. 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 in general.

It therefore is important to government that firms and consumers have access to the infrastructure services they need, when they need them. In recent years, however, some significant problems have emerged. In particular:

• challenges to the security of New Zealand's energy supply caused by dry year threats to hydro-electric provision plus the imminent depletion of the Maui gas field; and
• increasing traffic congestion in and around Auckland, New Zealand's largest city and location of the greatest concentration of businesses. This is impacting both the quality of life for city residents and the productivity of Auckland firms.

The Ministry has been working with other government agencies and the private sector to address these problems. The complexity of the issues involved combined with the fundamental importance of infrastructure in a modern economy mean that this is likely to remain an ongoing area of strategic importance for the Ministry.

What Are We Aiming to Achieve?

The overarching objective of this priority is to ensure that firms and consumers have available to them the infrastructure services they need, at reasonable cost. This involves enhancing infrastructure's benefits to society while simultaneously reducing the likelihood and severity of service failures.

The hallmarks of effective infrastructure performance include:

• early identification of bottlenecks and shortages, leaving time for implementation of cost-effective solutions;
• high levels of confidence by investors and the community that a justifiable level of infrastructure services will be available when needed;
• confidence that infrastructure services will be available at 'reasonable' prices, and - where prices may be difficult to predict - that effective risk management arrangements are available; and
• pricing and other arrangements (such as education and information provision) that encourage investors and consumers to take into account the full effects of their decisions, so that demand management and increased supply options are considered on their merits.

In short, the Ministry envisages a future in which investors and the community have confidence that infrastructure services will be resilient, and that they will make a full contribution towards meeting New Zealand's economic, social and environmental goals.

What Are We Going to Do to Achieve This?

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 upon businesses and other consumers for extended periods. There is also a need to co-ordinate supply arrangements across different infrastructure suppliers (roading, electricity, sewage etc), including central and local government and the private sector.

In addition to these general issues, New Zealand has its own particular characteristics that make reliable infrastructure provision challenging. The country's geography makes most infrastructure provision difficult and costly, and when this is combined with the small and dispersed population it can be hard to get a return on investments. The small market for infrastructure services means that there are often few competing providers - even in those sectors where technology and cost structures make competition possible. This can itself create concerns about the reliability of supply, and where there is less opportunity for competition there is also a risk of excessive pricing.

Because of the complexity and inter-related nature of these sorts of issues, the Ministry is currently co-ordinating an 'infrastructure stocktake', which is a whole of government programme designed to improve our knowledge and find better policy solutions. This stocktake is providing:

• an audit of the current quality of existing infrastructure and its ability to meet future demands;
• a review of infrastructure policies in energy, transport, water and telecommunications, and the development of a high-level infrastructure policy framework;
• a clearer understanding of the links between infrastructure and sustainable development; and
• an assessment of possible initiatives to address problems.

Initial findings suggest that New Zealand's infrastructure faces some major issues. The key challenges are being addressed through existing work programmes, but a concentrated and co-ordinated effort is required to ensure that infrastructure does not impede New Zealand's sustainable development in the future.

The stocktake has suggested ways in which government can contribute to improved overall infrastructure performance, such as improved monitoring and information sharing. The Ministry will work with other departments to address overarching infrastructure issues as well as specific issues raised by the stocktake. We will continue to provide input into other sectors where work is being led by others - two important examples are water, and transport (e.g. work to address Auckland's transportation problems).

In addition, we will continue to advise on areas in which we have specific responsibilities, such as improving the functioning of the electricity, gas and ICT sectors. This work is described in more detail below.

Security of Energy Supply

The two main issues for electricity are maintaining the supply of electricity at reasonable prices during dry years, and ensuring that New Zealand's growth needs are met over the longer term. Overall demand for electricity is relatively unaffected by price increases in the wholesale electricity market, and dry winters can result in big spikes in electricity prices as well as potential blackouts. This problem is compounded by the long lead times in developing new capacity. All of this can have a major impact on businesses, particularly if they have not put measures in place to manage the risk of price fluctuations (e.g. hedging).

The government has recently set up the Electricity Commission to take over dry-year risk management, and to improve market arrangements including the management of demand and risk. The Ministry will monitor the activities and effectiveness of the new Commission, and is also working to reduce or resolve uncertainties surrounding the place of thermal fuels and water allocation. We took the lead in ensuring that the new reserve generation plant at Whirinaki was operating by May 2004, and we are also facilitating efforts by the private sector to identify and develop new sources of supply.

Gas-powered electrical generation is an essential component of the current supply. The Maui field is running out, and uncertainties about future supply are affecting investment in electricity generation and other industries that use gas. The Government intends to improve the - currently inadequate - governance arrangements for the gas market and is reviewing elements of the investment regime for gas exploration.

Finally, significant investment is required to strengthen the national grid. The Electricity Commission will be implementing new regimes to encourage investment and help spread the costs of that investment across users. The Ministry will advise the Government on the effectiveness of these arrangements and on wider regulatory matters.

Information and Communications Technologies (ICTs)

Technological advances in telecommunications generally reduce network constraints and promote competition, but there is evidence that potential productivity gains from ICTs may not be being fully realised in New Zealand. Questions have also arisen concerning pricing of some telecommunication services, access to local lines, and the take-up of broadband. The Ministry is leading the development of an ICT Strategy to address these issues.

Contributions of Output Classes to SP 5

For further details of the outputs under the contributing votes refer to the output class specific performance measures in Part B.

³ These three areas are similar to the 'Areas of Concentration' in MFAT’s SOI, reflecting the agreement between MED and MFAT on perspectives and priorities.