Sector Engagement: Vertical Sectors
Levels of Sector Engagement
21. Government engages with vertical sectors at a range of levels - a reflection of its different roles (for example, as a regulator, funder of RS&T and provider of education and training), the nature of different sectors and the changing issues confronting sectors over time.
22. This paper proposes a framework for the highest tier of vertical sector engagement - whole-of-government engagement involving all appropriate agencies to develop a sector-led strategy in partnership with the sector, with the aim of facilitating sustainable economic growth.
23. Below this highest tier of engagement are two further tiers of ongoing, "business as usual" engagement. There is the engagement by the delivery agencies (NZTE, Tertiary Education Commission (TEC) and the Foundation for Research, Science and Technology (FRST)). Based on the commonalities between firms, these agencies have adopted similar approaches to inform the delivery of their programmes and services.
24. There is also "issue specific" engagement. This involves a wide range of policy and delivery agencies responding to issues raised by sectors and, where there is a role for government (subject to consideration of the economic costs), taking the appropriate action. This form of engagement may take place after the highest tier of sector engagement, as is occurring with the wood processing industry, or in response to a direct approach from a sector e.g. the minerals sector.
25. A key element of high-level sector engagement should be co-ordination and alignment across agencies, but it should not replace ongoing engagement by the delivery or policy agencies (or to address identified issues). Nor should it affect their operational decision-making.
Rationale and Aims
26. There are four broad rationales for this highest tier of vertical sector engagement:
1. A Management Tool for Facilitating Economic Development
The government's economic development goal is to raise New Zealand's sustainable rate of economic growth. This requires greater numbers of well functioning firms, rising productivity across the economy, and an increase in the proportion of firms pursuing higher value-added, higher growth, activities. Because of the commonality of interests between firms in a sector, sector engagement is one tool that government can use to identify how it can facilitate this outcome.
2. Inform the Development and Improve the Consistency of Government Activity Influencing a Sector
The government significantly influences all sectors across the economy. It has a dominant role in funding education and training, infrastructure, and research, science and technology, as well as a regulatory role. It also exercises a range of other powers that impact on sectors. Collectively, these activities influence the disposition of a significant part of the economy's resources.
Sector engagement can inform these activities, including the design and delivery of generic firm level programmes and the development of foundation policies (including regulatory and standard setting policies) that help shape the business environment. It can also enable government to assess whether all these activities are impacting on a sector in a consistent and mutually reinforcing way, and align them as necessary.
3. Improve Public and Private Sector Co-ordination
Public investment in areas such as education and training and RS&T, and private sector investment in physical and human capital, R&D and marketing should be complementary. But exploiting the gains from this requires good co-ordination and information flows on investment decisions and the provision of services.
Sector engagement provides an opportunity to improve this co-ordination, by facilitating the development of networks and linkages between government and the sector, as well as facilitating networking and co-operation between firms themselves.
4. Assist Sectors in Transition
A further rationale for sector engagement may arise when economic reform and rapidly changing patterns of international trade induce rapid structural change in a sector. Government may choose to engage with these sectors both to help find higher value activity that is sustainable in the new environment and help find an adjustment path to ease transitional social impacts.
27. These rationales suggest that the aim of the highest tier of vertical sector engagement should be to help the sector develop a clear vision of how it might improve its sustainable economic growth. This vision should be supported by a strategy and a plan of action that clearly identifies: the actions for the sector itself; the role of, and actions for, government (including any well-justified actions for modifying government activities impacting on the sector); and actions for the sector and government working in partnership (including any actions to improve public and private sector coordination).
Focusing Vertical Sector Engagement
28. The question that then arises is which (and how many) sectors should the government engage with in this way?
A: Focus on Sectors with Potential for Scale and Specialisation?
29. One school of thought is that productivity can be higher when economic activity is concentrated in a few sectors. Because of New Zealand's small size and distance from world markets, our sectors are mostly small by world standards. It has been argued that government might wish to focus resources on a limited number of sectors, to develop world-class scale and specialisation.
30. However, most sectors do not exhibit such scale effects on productivity and the circumstances under which they do vary across time and countries. It is also difficult for government to predict accurately when a sector is likely to "take-off", raising the risk of poor resource allocation. A focus on only a few sectors would also risk raising expectations about the outcomes of engagement, and may intensify demands for engagement. It may also have an adverse impact on investor confidence in those sectors not selected for engagement.
B: Focus on Emerging High-Value Added Sectors?
31. Another school of thought is that, in the interests of facilitating economic transformation, government should focus engagement on and allocate resources to emerging higher value added sectors, particularly those with an apparent comparative advantage based on the application of new technologies.
32. But even (and perhaps especially) current low productivity sectors may offer significant potential for productivity growth through, for example, firms applying branding or research and development. Furthermore, for large sectors, even incremental improvements in productivity can have a significant overall economic impact.
33. On balance, the arguments do not support a sector engagement focus on either the development of scale and specialisation or on emerging higher value added sectors.
C: Focus on Sectors that Can Make, or Could Make, a Substantial Contribution to Sustainable Economic Growth
34. Because raising the rate of sustainable economic growth requires all sectors to contribute to higher productivity, with as many firms as possible within these sectors engaging in higher value added activities, officials consider that the government should, over time, engage with all "economically significant sectors", i.e. all sectors which do, or could potentially, make a substantial contribution to sustainable economic growth as determined by:
- the sector's current contribution to GDP, and potential to grow (material impact)
- the value that the sector can add across a range of other sectors (spillover effects).
35. Whole-of-government vertical sector engagement aimed at the development of a sector led-strategy is resource intensive, both for the sectors themselves and for government. Subject to the size of the sector and the scale of engagement, government is unlikely to be able to engage with more than two or three sectors at any one time. Engagement with all economically significant sectors over time could still be achieved by starting a new high-level engagement when the development phase of one engagement is concluded.
36. Although the number of engagements likely to take place over time will depend on the level at which the engagements are pitched, as well as the views of individual sectors, there will be a finite number of economically significant sectors that the government will engage with, given the criteria of material impact and spillover effects. A preliminary assessment by MED of the economic significance of different sectors suggests a short-list of potential candidates for whole of government vertical sector engagements over the medium-term (see paragraph 68), although initial engagements with broad sectors may then be divided into further engagements with sub-sectors within these. In addition, government will continue to engage with a much broader range of sectors on specific issues and through the activities of NZTE, FRST and TEC.
37. In addition to criteria (i) and (ii) above, the selection of sectors for each of these new engagements should be based on:
- the commitment of the sector to work in partnership with government, and its preparation and ability to lead development of a vision and strategy, and to implement action points
- the ability of government to add value (for example, by improving co-ordination across government agencies, developing better linkages between the sector and public sector training providers or by changing regulatory settings), recognising the costs and risks of government intervention.
38. There may also be timing considerations such as the need to respond to rapid change, enlivening existing sector strategies, or the interaction with government's other objectives, such as environmental sustainability.
39. Although each high-level engagement should have a clear exit strategy (see Appendix One: Section A), engagement is unlikely to have a "hard and fast" end. It may, in particular, be followed by agency specific engagement with the sector, either through the delivery agencies or on specific issues. For example, the wood-processing sector, which was the subject of high-level engagement, is now working with the Ministry of Agriculture and Forestry (MAF) and NZTE on specific issues.
Risks
40. This process of rolling engagement and application of the selection and prioritisation criteria (i-iv in paragraphs 34 and 37) will ameliorate some of the potential risks and economic costs of sector engagement, including the risk of focusing engagement on sectors of limited economic importance or of engagements leading to poor decisions on resource allocation. The potential risks can also be mitigated through the careful design of sector engagement (see Appendix One: Section B).
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