Section Three: The Strategy in Action

This Document is Archived

Why Is This a Priority?

Investment provides the foundation for future firm growth. Investment allows firms to:

• expand production capacity to meet demand and take advantage of economies of scale;
• develop or implement new technologies or processes to develop a competitive advantage;
• develop marketing and distribution networks in order to meet customers' needs; and
• evolve their business models in the face of new competitive drivers.

New Zealand is a small country, distant from large consumer markets. For many companies, internationalisation will be an important part of their growth strategies, enabling them to access larger markets and to exploit economies of scale. As firms develop their international presence, choices around the location of particular activities become more pronounced. In considering these issues, the objective is for New Zealand and New Zealanders to capture as much of the benefit of our successful firms as we can.

Creating an environment in which globally competitive firms choose to base operations in New Zealand, including functions such as headquarters or specialist research and development operations, is important for New Zealand's future growth prospects. These functions are likely to be high value, high skill and generate wealth for New Zealanders.

Firms' decisions around investment are influenced by the cost and availability of funds to finance that investment. Our current account deficit indicates that much of New Zealand's investment is financed from foreign capital, which often brings with it additional know-how. While we need this foreign capital, we need to ensure that we make the most of the contribution it can bring to our economy. Domestically sourced capital is also important if New Zealanders are to own a share of their own companies and invest in opportunities in other countries (i.e. outward investment). Increasing the volume of local savings, and increasing the extent to which savings are available for productive investment rather than invested in housing, would reduce our dependence on foreign capital and raise our long-term growth prospects.

Matching flows of funds to firms with investment proposals requires a sophisticated infrastructure. This includes exchanges where equity can be readily traded, analysts who are researching companies to inform potential investors about various companies, and people able to help match investment proposals to funds. While evidence indicates that deep and efficient capital markets contribute to economic growth, some aspects of New Zealand's capital markets look underdeveloped. This is particularly so for our equity markets, which might be important for small, newly established firms looking for investors who are able to bring management expertise and access to technology or marketing networks, which may be important to fulfil the growth potential of these firms.

By their nature, investment decisions can commit a firm to a future direction for a long period of time. Ensuring confidence in the long-term business environment is therefore important in encouraging investment. The Ministry has a key role in creating a regulatory environment that is low cost, effective and promotes certainty. The Ministry also assists firms to grow their businesses, including through offshore investment.

What Are We Aiming to Achieve?

This strategic priority aims to ensure that New Zealand further increases its attractiveness as a place for businesses to invest in and from. In particular, we want to ensure New Zealand and New Zealanders capture more of the benefit of our successful firms. The Ministry will collaborate with other agencies via the economic transformation agenda to identify critical issues and work with relevant agencies to address those issues.

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

New Zealand stands out as unusual in a number of respects relating to investment. We have a lower capital stock per employee than countries such as Australia and the United States. This is a key influence on the productivity of workers, and hence on our levels of output and income. There are a number of potential explanations for this, including the higher level of interest rates. This is in turn, at least in part, likely to reflect New Zealand's high level of foreign indebtedness - the result of historically not saving sufficiently domestically to fund our investment.

We are working with other agencies on the implementation of KiwiSaver, which is intended to encourage household savings.

We are leading work on a regime for regulation of financial intermediaries, which is intended to both give greater confidence to investors and encourage good savings and investment behaviours.

A further aspect of our investment environment is that parts of our capital markets appear underdeveloped relative to those in other countries. Banks dominate our financial system, the stock market is relatively small, there have been few domestic issues of corporate bonds and the venture capital market is not mature. These features are a concern if they limit the ability of firms seeking finance to grow further by raising those funds in New Zealand, or make it more difficult or expensive for them to do so.

We are continuing with ongoing policy work and monitoring the impact of the recent extension of the New Zealand Venture Investment Fund's mandate.

We are proposing to develop a better understanding of the issues facing New Zealand's equity markets and work with the business community to identify options for deepening these markets.

Foreign direct investment into New Zealand has the potential to allow New Zealand firms to access capital, technology and markets. The Government therefore actively seeks to encourage this form of inward investment. The objective is to ensure that New Zealand extracts the maximum benefit from such investment.

We are responding to the review of Investment New Zealand to ensure that its activities better support the attraction of quality investment that improves the productivity and internationalisation of New Zealand firms.

Ensuring high-quality investment occurs requires more than just the availability of funds. Firms need to have suitable business models to be able to attract capital and grow to become globally competitive. At the same time, we want to ensure that the environment here is conducive to supporting New Zealand firms internationalising from a New Zealand base.

We are responding to recommendations arising from the Business Assistance Review to ensure that programmes support firms' ability to attract the type of capital that allows them to internationalise and innovate.

Contributions of Output Classes to the Investment Strategic Priority

Why Is This a Priority?

Infrastructure is a key enabler of economic growth and is about the services that the infrastructure provides, not just the presence of the physical infrastructure itself. Efficient and reliable infrastructure services reduce the costs of production, increase the attractiveness of New Zealand as a location for investment and a place to live, and facilitate the flow of ideas, goods and services, and people. Adequate levels of infrastructure investment can also assist in meeting social and environmental objectives essential in supporting wider sustainable development objectives.

Actual and perceived infrastructure bottlenecks can act as a constraint on investment confidence and day-to-day commercial activity. Even a small risk of supply disruption adds substantially to the uncertainty that firms face and can be an impediment to growth. To be successful, New Zealand needs to provide certainty to business and consumers that they will have access to effective, efficient and reliable infrastructure, such as transport, energy, ICT, and water and waste services.

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 continues to work with other government agencies and the private sector to address these issues.

Infrastructure investment decisions are often influenced by unpriced externalities including environmental and social. Infrastructure provision can also exhibit natural monopoly characteristics, particularly in a small economy. Costs and benefits can be spread widely, meaning that normal investment appraisal techniques are sometimes unsuited to investment decisions. These characteristics explain why governments have typically played major roles in decisions to regulate, establish and to operate infrastructure.

Given the complexity of these issues and the fundamental importance of infrastructure in the growth of a modern sustainable economy, this is an ongoing area of strategic importance for the Ministry.

What Are We Aiming to Achieve?

To support economic growth and sustainable development, businesses and consumers need to access reliable infrastructure services they need, at reasonable cost. This environment would be characterised by:

• high levels of regulatory stability in order to provide investor confidence;
• early identification of bottlenecks and shortages, leaving time to implement cost-effective solutions;
• high levels of confidence by investors and the community that an appropriate 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 Key Issues and How Are We Addressing Them?

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

• Overarching infrastructure
• Energy (Ministry has lead role)
• Information and communications technologies (Ministry has lead role)
• Transport
• Water

Overarching Infrastructure

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. The Ministry's main areas of focus in the next year include:

• leading and supporting government agencies in identifying critical infrastructure issues and supporting delivery of the critical projects outlined in the Government's economic transformation agenda;
• inputting into cross-government policy processes that may have an impact on infrastructure development, notably in relation to the Resource Management Act, general competition policy issues (including leading the review of Parts 4, 4A and 5 of the Commerce Act), and funding allocation and budgetary decisions; and
• working with the Ministry of Civil Defence and Emergency Management and other government agencies to clarify the Ministry's role in national emergency preparedness and management.

Energy

New Zealand faces two major long-term energy challenges. The first is responding to climate change and tackling carbon emissions from our energy production and use. The second is delivering secure, clean energy at affordable prices to support economic development. These challenges take place in an international landscape where there is a heightened awareness of climate change, and concerns about international oil price volatility.

Government can help coordinate energy decisions of strategic significance to New Zealand by providing consistent policy signals and ensuring the planning process allows for the development of sustainable energy infrastructure and fast take-up of better energy options as they emerge. This includes being clearer about desired outcomes, the role of government, and setting expectations about when certain infrastructure will need to be in place.

The New Zealand Energy Strategy

The draft New Zealand Energy Strategy (NZES) sets direction for the sector and explores the key energy challenges that New Zealand faces. Delivery of the final NZES in 2007/2008 will provide the strategic context and a detailed action plan for initiatives across the whole of government in the following areas:

• Resilient, low carbon transport
• Security of electricity supply
• Low-emission power and heat
• Using energy more efficiently
• Sustainable technologies and innovation
• Access to energy services

The New Zealand Energy Efficiency and Conservation Strategy (NZEECS) sits under the overall framework provided by the New Zealand Energy Strategy. In 2007/2008, the NZEECS will be finalised and will provide sector-based action plans to support energy efficiency and renewable energy objectives. The Ministry, together with the Energy Efficiency and Conservation Authority, has responsibility for monitoring and reporting on the wider energy picture. Once the NZEECS is finalised, the Ministry will continue to share this responsibility and also be accountable for the delivery of specific initiatives under the final NZEECS.

Long-Term Energy Scenarios

Ensuring we can meet energy demand over the long term, at reasonable prices, is critical to the global competitiveness of New Zealand firms and our way of life in general. To avoid surprises, we will be:

• developing and maintaining information on energy supply and demand, and energy sector greenhouse gas emissions. This will help us to maintain a good shared understanding of current and likely future energy requirements and trends, as well as their implications for policy and investment.

Energy Security of Supply and Competitive Prices

Confidence in security of energy supply and competitive and efficient prices are essential to supporting economic growth. At the same time, the sustainability objectives require the increased use of renewable energy, which will place particular demands on the market and the system.

New Zealand's electricity prices have risen significantly in recent years, reflecting increases in the cost of new increments of generation, but still compare reasonably well with most other OECD countries.

The Ministry recently completed a review of the electricity market arrangements. The review concluded that a range of enhancements could be pursued to improve market performance. In 2007/2008 the Ministry will focus on:

• enhancements to the electricity market arrangements including in relation to security of supply and role clarity in market governance and regulation;
• addressing issues raised in the draft NZES to maximise the potential delivery of renewable generation; and
• progressing the review of Parts 4, 4A and 5 of the Commerce Act, which is an opportunity to ensure the right balance between maintaining incentives for investment and protecting consumers from excessive prices.

It is important to ensure that our gas transmission and distribution networks can handle the transition from a long-term, stable gas supply (Maui) to a more diverse, variable supply (i.e. smaller sized, more dispersed gas fields). In 2007/2008 the Ministry will closely monitor the:

• implementation of improved gas transmission and wholesale arrangements, which is the responsibility of the Gas Industry Company.

Reducing Oil Dependency and Transport Sector Emissions

New Zealand is well short of self-sufficiency in oil and is therefore exposed to international oil price fluctuations. We are also relatively transport-intensive through our dispersed population, geography and physical isolation from trading partners. The transport sector is still largely fuelled by oil and is a major emitter of carbon. To address these issues we will be:

• giving effect to the Government's recent announcement of a Biofuel Sales Obligation that requires 3.4 per cent of petroleum fuels sold in New Zealand to be biofuel by 2012; and
• ensuring that New Zealand maintains adequate petroleum reserves (as well as meeting international obligations) and that any regulation to increase stocks is justified by community benefits.

Information and Communications Technologies

ICT is a key driver of productivity, allowing firms to improve products, services and processes and to reduce costs. ICT also plays a key long-term role in assisting New Zealand's transition to being a more sustainable economy - reducing transport costs through electronic communications and improving the efficiency and sustainability of production. For both reasons, it is of critical strategic importance to the economy.

The ICT sector accounts for some 5.1 per cent of GDP and is a relatively fast growing sector. Optimising ICT growth and export performance is also an important goal in Export Year 2007.

Ensuring that broadband's ever-increasing potential is effectively utilised is a key step in advancing New Zealand's economic growth and sustainable development objectives. However, although New Zealand is relatively well-connected for internet, uptake of broadband services is still slow (see Graph 2).

Nevertheless, use of ICT in daily commercial and social interactions (for example, internet auctioning and blogging) has been expanding, in part reflecting falling costs. ICT also has a role in supporting alternative ways of working, which has flow-through to wider sustainable development objectives.

Voice, data and video are converging into single transmission mechanisms (for example, internet protocol) serving diverse devices. Next Generation Networks based on IP technology are just around the corner.

Critical issues to progressing the development of the ICT sector in New Zealand to support economic growth and sustainable development include:

• limited competition and the small market size of telecommunications infrastructure (power of incumbents and small market size are constraints); and
• lack of affordable high-speed ICT infrastructure, which is constraining the development and introduction of advanced technology and business applications.

Graph 2: Broadband Subscribers per 100 Inhabitants, June 2005⁵ by Technology

• Larger, printable version of Graph 2 [119 kB GIF file]
• Text description of Graph 2

The Ministry's work to address these issues is helping to drive a major realignment of ICT policy towards a more open and competitive marketplace, that will deliver enhanced broadband take-up and consumer value. The framework for this policy was set out in the 2005 Digital Strategy. Key telecommunications sector initiatives were announced in the 2006 Telecommunications Stocktake, and are being implemented in accordance with the Telecommunications Amendment Act (No2) 2006. These include:

• implementing changes to the telecommunications regulatory framework, including operational separation of Telecom New Zealand and coordinating, where appropriate, with the Commerce Commission's implementation of local loop unbundling;
• ensuring ongoing implementation and coordination of wider Digital Strategy initiatives including delivery of the Broadband Challenge, which provides for fast broadband roll-out in urban and rural areas by supporting partnerships with achievable development plans, and supporting the work of the Digital Strategy Advisory Group;
• developing rural broadband strategy and reviewing the Telecommunications Service Obligation;
• identifying and implementing additional spectrum allocations for broadband wireless access;
• working with industry and community stakeholders to address emerging challenges such as internet peering, IT procurement and international connectivity; and
• working with industry and community stakeholders to consider options for lifting the capability of the country's communications networks.

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, efficient movement of freight, and transport funding (including passenger transport funding), with a particular focus on Auckland. Our involvement in key water issues includes participating in the Sustainable Development Programme of Action for Water, led by the Ministry for the Environment.

Contributions of Output Classes to the Infrastructure Strategic Priority

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;
• 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;
• increasing incentives for firms to innovate by creating competitive pressure from offshore and providing much greater consumer choice; and
• assisting New Zealand firms to overcome scale disadvantages in the domestic market, thereby enabling them to leverage much higher returns from innovation.

As a small, distant economy, New Zealand faces obvious challenges 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, particularly for some of our smaller businesses. The risks they face are proportionately greater than firms from other countries that have been able to grow much larger in their domestic markets before exporting or investing offshore.

These barriers form a major impediment to improving New Zealand's growth rate and to establishing more globally competitive firms within New Zealand. Fast-growing developed countries have high exports and imports, high inward and outward investment flows and large inward and outward movements of skilled people. New Zealand's performance could be improved in some of these areas. Government can help address some of these impediments by promoting connections that allow knowledge and skills transfer to occur, and by promoting high-value international trade and investment.

What Are We Aiming to Achieve?

The outcome of this strategic priority is for New Zealand's international connections to support transformation of the New Zealand economy through growth in trade, and through improved flows of investment, skills and technology.

This will be achieved by:

• reducing the impact of small firm scale, 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 business institutions in their efforts to connect with the rest of the world.

Many of the connection opportunities are external to the Ministry, so we need to work across government to agree overall strategic priorities. We work closely with the Ministry of Foreign Affairs and Trade, the Treasury and New Zealand Trade and Enterprise (NZTE) to pursue our objectives in this area. This collaborative partnership is reflected by the three agencies sharing a common outcome in this area.

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

• many aspects of the regulatory framework for business, where domestic and international frameworks are increasingly coordinated. These include protection of intellectual property rights, business law and competition policy, trade rules and remedies, tariff policy, and standards and conformance policy; and
• the ability of New Zealand firms to take advantage of expanding opportunities for international engagement. The Ministry is involved in interdepartmental work to determine the potential benefits that international engagement offers to New Zealand firms and the barriers that prevent them from taking full advantage of these opportunities.

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

The Ministry is involved in a wide range of international issues across many fora, but we are giving priority to three areas we believe have most potential to produce gains for growth:

• Firm internationalisation. We will support the efforts of business to build networks and deepen relationships in other economies, and to identify and pursue profitable international business models.
• Developing a Single Economic Market with Australia. We will advance work on deepening New Zealand's relationship with Australia to advance a Single Economic Market.
• Building a deeper economic relationship with Asia. We will move towards deeper economic relationships with a number of dynamic Asian countries.

Firm Internationalisation

Successive governments have worked to open New Zealand's economy to world trade, particularly through the World Trade Organization, and the agenda to achieve this is relatively well established. The Ministry of Foreign Affairs and Trade leads this process. Other agencies involved in this process, including MED, Treasury and NZTE, continue to build understanding of how best to facilitate connections between local firms and markets overseas.

To advance a strategic approach to engagement with the rest of the world, we will be:

• working with other departments to deepen our understanding about the main ways in which external linkages drive economic development in New Zealand and how to best leverage these linkages to foster globally competitive firms. This includes such areas as foreign direct investment, migration and education, science and technology, and knowledge flows;
• carrying out activities designed to support the development of many more globally competitive firms in New Zealand, including work on the Government's Export Year 2007 project;
• carrying out activities designed to ensure improved policy and regulatory alignment between New Zealand and the rest of the world. This includes relationships between New Zealand standards setters and regulators and their counterparts overseas in areas such as standards and conformance, and financial reporting; and
• considering where New Zealand's future comparative advantage may lie and the role the government can best play in promoting the development of highly competitive industries.

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 (SEM) is a vehicle to ensure that developing the trans-Tasman relationship helps drive New Zealand's economic transformation. This objective can be achieved through encouraging the emergence and growth of more globally competitive firms in New Zealand through their linkages with Australian business. Such collaboration with Australian firms has the potential to greatly increase the ability of New Zealand firms to successfully commercialise innovation on the global stage. Over the coming year, the Ministry will develop vehicles to promote such collaboration.

At the government level, the SEM provides a framework for the deepening of economic links that allows for the possibility of more joint policy development, more institutional coordination, and broader policy trade-offs across issues. The common objectives that need to be considered include the following:

We will be:

• establishing effective networks across government, business and the community on both sides of the Tasman to contribute to the achievement of economic transformation policy objectives. This will include further developing the industry development co-operation agenda; and
• deepening regulatory coordination, such as implementing the work programme agreed as a result of the 2005 review of the Memorandum of Understanding on the Coordination of Business Law (which includes activities on intellectual property and competition law), and the Trans-Tasman Mutual Recognition Arrangement.

Enhanced Economic Relationship with Asia

Growth rates of dynamic Asian countries remain well ahead of those of New Zealand's traditional trading partners. Asia's vast and increasingly wealthy consumer base is shaping the region into a centre of innovation and influence upon global consumer trends. Contributing to these developments has been large inward investment by multinational companies in both production facilities and research and development activities in the region.

To become globally competitive, firms must seek to take advantage of these opportunities. The growth of the manufacturing sector in China and the IT servicing sector in India have increased competition to the extent that global sourcing is becoming necessary to remain competitive. Learning the right mix of onsite/onshore/offsite/offshore business activities can help overcome New Zealand's barriers of size and distance.

New Zealand's economic performance in the region is not keeping pace with Asia's growing wealth nor with the activities of other developed countries. While there are some clear success stories, not enough firms are engaging deeply enough in Asia to be able to boost their productivity and growth.

To make the most of the opportunities, we need to:

• help New Zealand firms build the capability to take advantage of opportunities arising from falling barriers to trade and investment;
• ensure that sector-specific strategies take account of the impact of Asian countries on global and regional trading, investment and production patterns;
• reduce regulatory barriers and related costs for New Zealand firms doing business in Asia. In part, this can be achieved through the successful conclusion of FTA negotiations with China, ASEAN and Malaysian and by deepening regulatory contacts with Japan and South Korea; and
• make a long-term investment in developing relationships with regulatory institutions in the region. We are developing a programme of co-operation with the Chinese Administration for Quality, Standards, Inspection and Quarantine and with the ASEAN Consultative Committee on Standards and Quarantine.

Contributions of Output Classes to the International Linkages Strategic Priority

Why Is This a Priority?

New Zealand's environment contributes significantly to New Zealanders' quality of life. Our relationship to and attitudes about our natural environment and how it is managed help define us as New Zealanders.

New Zealanders take pride in living in a country whose environment is relatively unspoilt and where business is conducted fairly and honestly. People outside New Zealand recognise New Zealand and New Zealanders for these qualities.

These perceptions are very significant assets for New Zealand. They help instil confidence in New Zealand goods and services and allow these to command a premium in world markets.

How New Zealand is perceived will become increasingly more important for our economic wellbeing as countries respond to environmental challenges such as climate change and consumers become more discriminating about how the choices they make affect the natural environment, both locally and globally.

Climate change is an issue of prime importance for New Zealand's future economic wellbeing, not only in terms of how well New Zealand meets future climate change obligations, which can be expected to become progressively more onerous, but also in terms of how New Zealand goods and services fare in markets that are becoming less tolerant of high carbon content.

There are now indications that climate change, in particular, is starting to drive what could be a paradigm shift in consumer opinions and behaviour.

The challenge for New Zealand is to find a smooth but reasonably speedy path to a lower carbon footprint in energy use and in the goods and services we produce and supply.

Many international firms are seeking to take advantage of changing policies and preferences by giving more weight to environmental considerations as a point of differentiation from their competitors.

A number of countries and businesses are also recognising the increasing importance of environmental integrity as a source of competitive advantage and as a driver of economic development, both in terms of new business opportunities and as a spur to innovation throughout the economy.

New Zealand is well placed to leverage off our clean, green image and our reputation for integrity by moving these assets into a more dynamic, forward-looking and transformative space.

To help provide momentum towards this goal, the Government is developing and implementing a programme of action in the following areas:

• Sustainable households
• Government procurement*
• Carbon neutral public service
• Eco-verification*
• Waste management
• Business partnerships*

The Ministry leads on the three themes that are asterisked.

What Are We Aiming to Achieve?

Under this strategic priority, we are aiming to identify where and in what ways the government can best act to assist New Zealand firms respond effectively to changing market and regulatory approaches to environmental issues. This requires us to address both proactive and defensive interests.

In order to manage these interests effectively, we need to be very focused on what constitutes value for business now and for the foreseeable future.

The broad proactive interest is one of market positioning, that is, the positioning of New Zealand and New Zealand firms to be able to take full advantage of the new markets, jobs and opportunities created by the "green wave".

The capacity of New Zealand firms to adopt and, where necessary, adapt overseas technology and smart business practices to their particular needs is critical to the success of this objective. Also important is being able to realise the potential for New Zealand firms and institutions to lead market developments where such potential exists.

A further important factor is how New Zealand and New Zealand goods and services are perceived in world markets. Perceptions are generally subtle and subjective, but they can be influenced positively through appropriate marketing and positioning strategies.

The broad defensive interest is to minimise unnecessary costs to the economy in responding to environmental challenges.

For example, the economy will incur unnecessary costs if it is unprepared for the change in relative prices that is already taking place as countries adopt increasingly stringent climate change policies. At a firm level, New Zealand's defensive interest is played out in relation to issues such as food and travel miles.

The outcome of this strategic priority is, therefore, that we advance New Zealand's national interests in a way that "translates" at the level of the firm.

The goal is that New Zealand firms not only continue to benefit from New Zealand's generally positive reputation in world markets for being clean and green and an honest place in which to do business but also capture new opportunities for growth based on smart, innovative and business-savvy responses to environmental issues.

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

At a broad level, both environmental sustainability and economic transformation are concerned about the productive use of natural resources.

While economic and environmental objectives are not inherently incompatible, environmental choices are not necessarily costless. Costs are typically incurred in the short term, while benefits tend to accrue in the long term.

There are obviously limits to what can be achieved, especially in the near term. For example, the bulk of New Zealand's merchandised exports, both now and for the foreseeable future, are commodity-based, and the cost of production will remain a key driver for the businesses concerned.

New Zealand's transition to a more sustainable future cannot be achieved overnight, although in many areas such as energy New Zealand is now well underway in charting how this future will be achieved (see the Infrastructure strategic priority).

There will also be difficult tensions and choices to confront. For example, with respect to the issue of carbon pricing, New Zealand needs to look beyond the short term to an almost certain future in which the use of carbon in the world economy will become increasingly constrained.

The Ministry contributes to the development of climate change policy through various inter-departmental processes that come within our infrastructure-related activities described under the Infrastructure strategic priority above. Issues relating to climate change are central to the development of the New Zealand Energy Strategy, with respect to both stationary energy and transport. The Ministry also contributes to work on the sustainable management of water, led by the Ministry for the Environment.

In addition to these activities, key issues relevant to this strategic priority are:

• government procurement;
• eco-verification; and
• business partnerships.

Government Procurement

As New Zealand's largest single purchaser of goods and services, the government, through its many agencies, can exert a significant influence in encouraging New Zealand firms to produce and supply innovative, environmentally-friendly goods and services.

By focusing more on the whole-of-life characteristics of the goods and services it purchases, the government may also be able to reduce financial costs and longer-term impacts on the environment.

This has been recognised by the Government, which has announced that it will strengthen the existing Govt3 programme run by the Ministry for the Environment and work to develop a single government purchasing policy that delivers a much stronger commitment to sustainability.

The Ministry is well placed to lead the development and implementation of such a strategy, given the recent consolidation of responsibility for procurement policy within the Ministry. A key issue to address will be the extent to which the government should require certain minimum standards to be met, and in which areas.

As well as working with stakeholders to identify such areas, the Ministry will be developing and implementing suitable training support for both suppliers and those making purchasing decisions.

The Ministry will also be investing in the collection and analysis of performance data and management information to help inform the government on the quality and effectiveness of its spending against stated outcomes.

Eco-Verification

The government can assist the positioning of New Zealand firms in world markets through supporting the development and uptake of scientifically-robust standards, verification methods, and certification and auditing processes.

The environmental performance of New Zealand firms in overseas markets will come under increasing scrutiny. For example, we can expect overseas buyers in markets such as the United Kingdom to become increasingly more discriminating in selecting goods and services that have a low carbon footprint.

The government has a strong interest in ensuring that New Zealand firms can readily avail themselves of relevant standards and related services that help them to establish the environmental credentials of their goods and services.

Through its trade promotion and marketing agencies, and various arms that engage with international standards-setting processes, the government also has an interest in standards issues from a national perspective. This involves considerations such as how the country is perceived in terms of its environmental integrity and how standards can influence that perception in a positive way.

The Ministry will be working with relevant interests within and outside government to advance New Zealand's strategic interests in this area.

A component of planned work under this theme is working with industry interests to speed up developments already underway that aim to position New Zealand as a market leader.

An example is New Zealand's promising aquaculture industry where, through the development of scientifically-robust standards and certification processes, New Zealand aquaculture can set the benchmark that others have to meet, not only in terms of product quality but also sustainable business practice.

Business Partnerships

How work under this strategic priority will bear fruit will ultimately depend on the willingness and ability of New Zealand firms to manage risks and seize opportunities. Even where the government decides to set requirements in some areas, such as minimum standards for government procurement, it will still be for individual firms to respond.

The underlying issue for this and the other work streams is, where can the government work in partnership with business to provide leverage that individual firms or sectors cannot create for themselves, or cannot create quickly enough?

An area that the Ministry proposes to explore is whether the government, through agencies such as NZTE, can strengthen the role it is already playing in supporting firms in understanding and responding to how consumer preferences are evolving in relevant markets. This work will focus specifically on those sectors where there is high growth potential, for example, the food and beverage and tourism sectors.

Work is already underway on how the government can support the positioning of New Zealand firms as sustainable businesses in areas such as tourism. In partnership with the industry, the Ministry intends to accelerate aspects of this work. An example is bringing forward current plans to incorporate an environmental accreditation scheme under the successful Qualmark brand.

Contributions of Output Classes to the Sustainable Business Strategic Priority

Why Is This a Priority?

International evidence highlights the importance of having at least one outward-facing, global city to lead a nation's economic development. A globally competitive city attracts world-class firms and highly skilled workers which have significant, beneficial, flow-on effects throughout the economy.

Auckland is the only city in New Zealand that can realistically be transformed into a city of international scale. The concentration of activity will allow both employers and employees to benefit from specialised labour markets, allow for greater tacit knowledge flows between and within firms and research organisations, and provide the right platform for scale effects. Auckland doesn't yet play this role to the extent that major cities do in other economies.

Auckland's potential to become a world-class city is reflected by its inclusion as one of the five subthemes of the Government's economic transformation agenda. For Auckland to become world-class, it will need a bold agenda backed up by strong leadership from local government, business, the community and central government. International literature and practice on cities/regions demonstrates that strategic integration and collaboration between government and other sectors is critical for achieving this transformation.

What Are We Aiming to Achieve?

Six generic factors underpin the most successful and competitive cities:⁶

• Economic diversity
• A skilled workforce
• Connectivity, both internally and externally
• Strategic decision-taking capacity
• Innovative firms and organisations
• Quality of life

To achieve world-class status Auckland must be a vibrant, dynamic city where highly talented people want to live, work and study, and where firms want to do business. As the major gateway between New Zealand and the world, Auckland needs to be more internationally connected in terms of its businesses, its people and its knowledge base.

To lift its performance, Auckland also needs to deepen its innovation clusters and have world-class infrastructure across transport, energy supply and broadband. It must embrace its social and cultural diversity. It needs strong, well-aligned leadership to enable a step up in performance to occur.

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

For Auckland to achieve world-class city status, a number of critical issues must be addressed - these are broad in scope and complexity. From a Ministry perspective the most important enabler is leadership. International experience suggests that urban transformation cannot be successfully imposed by central government. It must be co-led by the region itself. Therefore this critical issue must be addressed in partnership with the region for progress to be made. The two areas for the Ministry to focus on consist of working with other parties, central government, local government and other stakeholders to:

• develop one agreed vision and plan for Auckland; and
• put in place appropriate arrangements to ensure that the vision and plan are delivered.

Many of Auckland's other critical issues hinge on addressing leadership. Others identified for Ministry involvement include:

• addressing infrastructure bottlenecks and failures, especially in relation to security and reliability of Auckland's energy supply, developing a world-class public transport system, and achieving affordable high-quality, ubiquitous broadband;
• encouraging innovation - improving the collaboration between firms and research organisations in Auckland and deepening key innovation clusters;
• showcasing Auckland to the world - enhancing Auckland's international image and urban form, starting with making the most of the potentially magnificent Auckland waterfront; and
• building on Auckland's strengths and points of difference to grow globally competitive firms.

Auckland Governance/One Plan

In order to be world-class, the Auckland city-region needs to have an appropriate governance structure to provide a framework for effective leadership in the planning, funding and delivery of regional strategy.

The current governance structure in Auckland falls shorts of this - there is generally adequate strategy, but this is not fully integrated or aligned into an overall direction that indicates the region's priorities. The region fails to deliver on strategy because of fragmented powers and accountabilities for funding and service delivery and commitment to fund. There is heavy reliance on voluntary and statutory joint decision-making fora, but these are not able to "bind" or influence expenditure and other decisions of organisations. The result is a lack of certainty (especially in funding), clarity, understanding, mandate, leadership and single voice for Auckland.

Local and central government officials are working to devise a new governance structure to address these problems. The structure would provide a good basis to bring about One Plan, which aims to integrate the decisions of councils, central government and non-governmental agencies in the Auckland region.

Central government intervention is required in the governance work, as:

• governance change is likely to involve legislative change;
• central government can apply leverage through funding and funding tools; and
• central government is the largest public spender in Auckland, so there are opportunities to achieve a more joined up central government approach to national objectives (for example, economic transformation).

Auckland Broadband

High speed, low cost communications/broadband infrastructure has become, or is rapidly becoming, an essential component of any international city. It contributes to the productivity and success of almost every industry, and presents an opportunity for New Zealand to overcome some of the problems of distance to markets.

Across New Zealand, there is opportunity to spur the uptake of broadband, and the measures outlined in the section on infrastructure are aimed at supporting this. Facilitating broadband uptake in Auckland presents unique opportunities through better coordination of local government approaches to broadband investment and deployment, and assessing whether there are any further barriers to encouraging levels of investment and competition that can be observed in other comparable international cities.

The Ministry is:

• working with the region through the Auckland Broadband Champion for the Metro project to develop buy-in for a regional business case for broadband in Auckland;
• assisting any Auckland local authorities in developing broadband policy and business cases; and
• promoting the development of open access infrastructure.

Auckland Innovation Project

The Government's economic transformation agenda and the Metro Auckland Project Report highlight the importance of the development of a world-class innovation system in the Auckland region. Although central government policy-makers have thought about innovation at the national level, the same level of analysis has not been applied regionally, particularly in Auckland. The Auckland theme provides an imperative to do this.

Officials will work with the Auckland Innovation Leadership Group in order to implement the Metro innovation strategies. A significant policy component will involve bringing together relevant officials to collate existing, disparate research to identify the key elements that will be required to establish a world-class innovation system in Auckland. This will include applying the framework and methodology of the recently completed National Innovation System review to Auckland, supplemented by benchmarking with comparable cities overseas and in-depth research on innovative networks, clusters and companies in the Auckland region. The project will culminate in a Cabinet paper seeking agreement for the substantive actions required.

Auckland University has recently submitted a proposal to departments and Ministers for the development of a technology park, the Auckland Innovation Centre (AIC), to be established as a site for collaboration with industry and researchers. Officials will work with the University and other stakeholders on the design of a successful regional technology park and to further develop the feasibility and business case for the AIC.

Auckland's Waterfront

Redevelopment of Auckland's waterfront provides an opportunity for an area where the city can step up to world-class status. It is one of our strongest points of difference and could be a standout feature of the city-region on the international stage. Global cities use their waterfronts to raise their international profiles. In addition, the redevelopment provides a significant opportunity for economic activity both in the short and longer term and could represent New Zealand's largest urban project.

The Ministry's initial analysis suggests that the current vision is somewhat limited and does not reflect the full potential of the waterfront. The governance arrangements and supporting tools (funding, concept plan, implementation) are suboptimal when compared with other similar projects already underway overseas. Left to the controlling parties - Auckland Regional Council (ARC) and Auckland City Council (ACC) - there is a risk that we will undervalue the investment opportunities.

The Ministry is working with the ARC and its subsidiaries, ACC and the business community to test the most appropriate structures to deliver a world-class waterfront. As an immediate step we are facilitating the early release of Auckland's central wharves in time to showcase the waterfront by the Rugby World Cup 2011.

Rugby World Cup 2011 - Legacy

When New Zealand hosts the Rugby World Cup (RWC) in 2011, we will showcase both Auckland and New Zealand to the world. It is also an opportunity to leverage some long-lasting economic development gains. In order to create a legacy from RWC 2011, the Ministry needs to start moving now on working with others to develop the leverage and legacy opportunities associated with the event.

The Ministry will engage a team of international experts over the next few months to scope out the possibilities. There will be strong synergies with the national legacy work and work being done regionally by local government. The Ministry will work with local government to ensure their efforts are aligned so that the legacy from the RWC is ongoing.

Contributions of Output Classes to the Auckland Strategic Priority

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