Chapter 2: Areas of Concern for SMEs
Not everything governments do has a beneficial impact on SMEs.
In this chapter, we alert you to some of the current areas of government activity that need your conscientious scrutiny on behalf of SMEs.
Environment for Business
There are a number of things that need addressing if the government wants to promote a genuinely business-friendly environment in New Zealand. These include encouraging and being open to innovation in all its guises, delivering 21st century levels of energy, transport and communications infrastructure, ensuring we have fair tax rates and efficient tax rules and processes, and protecting against the erosion of individual property rights, including intellectual property rights.
By fair tax rates, we mean those that encourage continuous re-investment by firms in business growth. By fair tax processes, we mean not unfairly penalising people who unintentionally miss deadlines for tax payments. In terms of infrastructure, we are particularly keen that the promises of broadband coverage contained in the government's Digital Strategy are delivered at an affordable price, in a manner that provides capacity that is of an international standard (today and for the medium term), and in a timeframe that meets the government's economic transformation goals.
Australia
The government must continue its work on developing a truly Australasian business environment. Australia is the number one export market for SMEs. Creating a true single economic market, including compatible financial systems, a borderless internal market across the Tasman, and common product and service standards, would further open up a market of 20 million people to many small businesses.
"Helpful" Government
Government agencies increasingly appreciate the need for "whole-of-government" initiatives designed to improve private sector management and business capability, as a key means to improving overall productivity.
Projects such as the Business Capability Partnership, Pure Business, No Wrong Doors, Workplace Productivity, Work-Life Balance and Women in Enterprise are being passionately pursued by well-intentioned officials from a variety of agencies.
However, we have observed a growing duplication of resources and effort across these projects. We see them all, independently, struggling with the same challenges in determining how to encourage change in the workplace. We are worried by the high levels of unquestioning acceptance of models and practices from overseas. And we consider that there are too few measurable goals attached to the projects and too little active and unvarnished reporting on progress.
Therefore, we are concerned that all this effort might lead to nothing more than a pile of glossy brochures (and upbeat DVDs) unless you and your ministerial colleagues ensure that the projects are co-ordinated and driven to deliver tangible results quickly.
Skills and Training
Firms of all sizes report labour and skills shortages as being a key impediment to business and economic growth.
Part of the solution to this is more in-house training and greater capital investment - both areas in which SMEs can struggle to find the time and money that is needed. Making it easier to bring in skilled immigrants, encouraging on-the-job training, maintaining youth rates, extending current apprenticeship arrangements, and allowing for more flexible workplace practices are all areas that would have a direct impact on SME growth and productivity.
Therefore, we urge you to ensure that the reality of SMEs is always borne in mind in the consideration of such options and that the SME perspective is fully reflected in any proposed solutions (e.g. through ensuring the active participation of SMEs in such processes).
Finance
Smaller businesses, particularly high-growth IP-based firms, find it difficult to raise debt finance and struggle to attract capital from investors. Although the Ministry of Economic Development and Statistics New Zealand Business Finance Survey shows that the majority of New Zealand SMEs had little difficulty accessing finance in 2004, this is not the complete picture. Further work needs to be done to uncover precisely which firms failed to get the finance they needed, why several firms felt it was too difficult even to try to get new funds, and why equity financing is neither well-understood nor regularly sought by SMEs.
Regulatory Environment
Complying with regulations remains a significant problem for SMEs. As the KPMG/Business New Zealand survey continues to show, the costs of complying with regulations fall disproportionately on SMEs. But despite this evidence, there appears to be no let up in the introduction of new business regulations.
It may not be a single regulation or law that poses significant problems, but rather the cumulative effect of many that combine to place a large burden on small businesses. The last two years have seen 312 new Acts and 875 new central government regulations (admittedly, not all of them are business-related). Keeping up, let alone complying, with this barrage of regulation is taking away the focus of businesses from more productive activities.
We have some specific recommendations on this subject in Chapter 4 of this report. However, these may not be enough.
What is clear is that the government has not adhered to its own impact analysis rules, and has allowed perfunctory and superficial regulatory impact analyses (RIA) and cost/benefit analyses to precede the imposition of new regulations. This has led to the passage of legislation that has business cost and compliance impacts that no-one assessed or appears to have anticipated. The Holidays Act 2003 is a stand-out example of this. We urge you to be vigilant on behalf of SMEs in ensuring that only regulatory impact analyses of the highest standard are accepted by Cabinet.
Other things the government might like to consider to assist businesses to manage the growing compliance burden include establishing a website (with email alerts) that lists all impending regulations which may have compliance implications for business. You might also consider some recent Australian initiatives in this area - a private sector compliance costs taskforce and an annual review of the nett movement in the stock of Commonwealth regulation.
Local Government
Local government devises and administers a number of regulations and laws that affect SMEs.
We are concerned about the complexities and general lack of transparency in local government decision-making. This makes it hard to ensure that business perspectives are fully considered before decisions are made, particularly those that impose costs on businesses.
Regrettably, too, there is considerable inconsistency within and between local authorities in the way regulations are made and administered. These variations often militate against the attraction of investment for business growth.
To take just four examples:
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Researchers at Motu Economic and Public Policy Research last year demonstrated that the per-capita rates base varies tremendously across local authorities, including neighbouring authorities. Therefore, two firms that are close geographically and that may be competitors in the same markets, potentially face very different levels of rates and services. Additionally, too many councils seem to operate on the belief that landowners and businesses can "afford" to bear a disproportionate share of the rates in order to pay for projects of broad public benefit (such as museums).
One way to limit these effects could be to require local government to adopt the regulatory impact and cost-benefit analysis standards that apply in central government. As a part of that exercise, local government could be required to be explicit about any cross-subsidisation of public good benefits. We note, too, that the Australian Commonwealth government has recently launched a $A50 million incentive fund to encourage local authorities to review and reduce regulation on SMEs. This might be replicable in New Zealand.
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The principle that those who benefit most should bear their full share of the costs is also overlooked where farmers are required to fence off and to control pests in areas of "significant natural value" that are located on their farms.
Just as owners of some historic buildings can claim assistance to preserve and upkeep their buildings, so farmers could be compensated for the loss of productive land and the costs on maintaining "valuable" sites in the public interest.
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The provision of local infrastructure, including telecommunications, is critical to local economic development. Being connected by broadband matters; fast, reliable and effective communication is becoming increasingly important for business growth, particularly outside of the main cities and towns.
We consider that local government could be required to install appropriate vendor-neutral conduits (such as fibre optic cables) whenever a road or public right of way is being developed or dug up for other services. Additionally, local government could ensure that vendor-neutral conduits and/or fibre are installed in each new commercial and residential subdivision.
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Despite recent amendments to the Resource Management Act, the implementation of the RMA remains inconsistent and costly at local government level. In particular, the indirect and unpredictable costs flowing from the administration of the Act by local government serve to limit economic development. An example is the ability of parties who are not connected with the locality to challenge an application in the Environment Court. Many small businesses simply cannot afford the time and money associated with obtaining a resource consent from such a lottery process.
It seems to us that only a fundamental review of the RMA will ensure clear and consistent implementation of the Act throughout the country.
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