Economic Development, and Industry and Regional Development Portfolios

Office of the Minister for Economic Development

CAB (00) 82

28 February 2000

To: The Chair
Cabinet

Contents

• Proposal
• Executive Summary
• Background
• Comment
  • Vote Structure
    • Economic Development
    • Industry and Regional Development
  • Key Objectives
  • Management Structure
  • Accountability and Reporting Flows
  • Implementation
  • Transition Issues - Making Progress with Establishment and Policy
• Consultation
  • Treasury Comment
    • Current Industry Assistance
    • Funding
• Fiscal Implications
• Legislative Implications
• Compliance Cost Statement
• Publicity
• Recommendations

Proposal

1. This paper seeks Cabinet's agreement (in principle) to a proposed vote and management structure for the new portfolios of Economic Development, and Industry and Regional Development. This would involve the establishment of a new Crown Entity (Industry NZ) and the transformation of the Ministry of Commerce into the Ministry of Economic Development.

Executive Summary

2. The Government has established two new portfolios: Economic Development, and Industry and Regional Development. The vote and management structure for these portfolios now needs to be determined.

3. I propose that the Economic Development portfolio have an overarching role, with responsibility for developing economic development strategies and co-ordinating policies to work toward the goal of economically sustainable development. The Industry and Regional Development portfolio covers both policy advice specific to this area, and implementation of assistance programmes. These assistance programmes will encompass those currently purchased under Vote Business Development and new programmes that emerge as policy is developed.

4. I propose that the two new portfolios be supported by a new Ministry of Economic Development. This Ministry would be formed from the current Ministry of Commerce. Commerce will be refocused to take on this new role. In addition to the responsibilities currently discharged by the Ministry of Commerce the Ministry of Economic Development will be responsible for providing policy advice in the areas of industry and regional development and on other matters relevant to economic development.

5. A new Crown Entity called "Industry NZ" will be established to deliver Industry and Regional development programmes. To best incorporate private sector views and to prevent a bureaucratic culture dominating, I propose that we appoint a Board for Industry NZ drawn primarily from the business community. This will be done in consultation with the Prime Minister, Minister of Finance, Minister of Research, Science and Technology and Minister of Maori Affairs. The CEO of the Ministry of Economic Development will also be a member of the Board.

6. This structure will ensure that ministerial control is retained over policy, and that programmes are delivered effectively and efficiently, in partnership with the private sector and local government.

7. In order to make rapid progress it is necessary that policy work be progressed this financial year. To facilitate this it is recommended that the wording of the appropriation for Vote Business Development be changed, and new funding of $2.75 million (GST inclusive) be made available for the remainder of this year. Officials will be reporting back to Ministers in March on implementation of the new structure including funding for outyears.

Background

8. Both Labour and the Alliance emphasise the crucial role of active industry and regional development policies in ensuring strong and sustainable economic development. The first pledge on Labour's "commitment card" was to "create jobs through promoting New Zealand industries and better support for exporters and small business". In the Alliance's Partnership 2000 document we said that economic development was "the outcome of a vibrant partnership between the Government, private business and local communities." I have a strong personal commitment to these policies, and I know that this is shared by my colleagues.

9. In my view, we need to make substantial progress in economic development and towards delivering on the pledges of both the Alliance and Labour. The scope of each of the new portfolios of Economic Development and Industry and Regional Development, and the way in which they will be managed now needs to be determined to allow work in these portfolios to be progressed.

Comment

Vote Structure

Economic Development

10. I propose that the Economic Development portfolio will have an overarching role, encompassing the provision of advice on:

• Economic development strategy;
• Aligning individual policies with an economic development strategy;
• Assessing the contribution new policies could make in assisting economic development.

11. The objective will be to develop and advise on Government policy across a range of ministerial portfolios so that policy works together, in an integrated, coherent way, for the development of New Zealand. That will mean providing advice to me as the Minister for Economic Development, the rest of Cabinet, and to government agencies responsible for implementing economic development strategies. It will also mean working with other departments on their policy design and review. Primary responsibility for policy on individual policies will, of course, remain with each individual minister and corresponding department.

12. The Cabinet Economic Development Committee will provide the forum for high level economic development policy debate and determination. Once established, I propose that the Ministry of Economic Development take a significant role in supporting this Committee. As with other Cabinet Committees, an officials' committee will be working to ensure that a whole of government approach is taken. The Ministry of Economic Development will provide the lead in this work.

Industry and Regional Development

13. This portfolio covers two specific areas:

• Policy advice on the development of policies to directly assist industry and regional development;
• The implementation of assistance programmes.

14. The objective will be to develop and implement a set of high quality and coherent policies that provided assistance to industry and regions.

15. To make best use of the knowledge of those already working in the regions, and the relationships they have developed, programme delivery would be carried out in partnership with Industry NZ, the private sector and local government. This will ensure that programmes are responsive to regional needs and are able to adjust quickly to changes in needs over time.

16. The Prime Minister has already stated that the Industry and Regional Development portfolio will encompass the existing Vote Business Development. The main question around the scope of the portfolio is the extent to which it will encompass existing government programmes outside Vote Business Development. Labour Party policy identified that the Industrial Supplies Office (ISO) and the Energy Efficiency and Conservation Authority (EECA) would be incorporated in Industry NZ. I suggest these issues be considered as part of the detailed work on establishing the portfolio.

17. The Government currently spends more than $200 million per annum on business development and support, of which only $15.662 million (GST inclusive) comes under Vote Business Development. With expenditure spread across a wide range of programmes administered by various government bodies, there is a clear need for high quality co-ordination. The new Ministry will be charged with ensuring that this co-ordination occurs.

Key Objectives

18. I propose that the Government's key objectives for the two new portfolios would be:

1. To deliver quality policy advice and co-ordination under both Vote Economic Development and Vote Industry and Regional Development. This requires that:
   • a clear strategic view is developed by the Government;
   • private sector views are incorporated to best effect;
   • the views of all groups in society, including Maori and Pacific Islanders, trade unions, regional and local government, and community organisations are incorporated;
   • advice is co-ordinated across government;
2. To deliver policy advice that is aligned with government and ministerial priorities;
3. To deliver programmes under Vote Industry and Regional Development to the standard required by government. This requires programmes to be:
   • responsive to regional and sectoral needs and to changes in needs over time;
   • co-ordinated across government;
   • responsive to the different needs of groups in society including Maori and Pacific Islanders;
4. To deliver advice and programmes cost effectively. This requires ensuring value for money in both implementation and ongoing costs, and regular monitoring and evaluation of the effectiveness of programmes;
5. To offer effective accountability to promote good decision making and performance, requiring:
   • having consistent objectives;
   • minimising opportunities for conflicts of interest;
6. To be established and able to deliver policy and programmes in a minimum amount of time.

19. Ongoing consideration of Maori issues and close co-ordination with groups representing Maori interests is one of the keys to the achievement of these objectives. The issue of the integration of the work of the Ministry of Economic Development and Industry NZ with other work being undertaken on Maori Development must be carefully worked through. I hope to see a respectful and close working relationship develop between the agencies involved. To this end, I propose to obtain on-going access to advice on Maori development issues and to encourage the Ministry of Economic Development to work closely with the Ministry of Maori Development.

20. I propose to report at regular intervals to the Cabinet Committee on Closing the Gaps (GAP) on progress in economic, industry and regional development.

Management Structure

21. The structure I propose to best meet those objectives is a new Ministry of Economic Development together with a Crown Entity for programme delivery.

22. The Ministry will be established by a refocusing of the Ministry of Commerce and the introduction of new policy advice functions. The new Ministry will provide advice to me and the rest of Government in the areas of industry and regional development and on other matters relevant to economic development.

23. Labour's Industry NZ policies and the Alliance's strategic industries development policy ideas will be implemented by the establishment of Industry NZ as a Crown Entity. I intend to bring to the Cabinet Economic Development Committee a proposal for the make up of an establishment Board before the end of March.

24. The establishment of Industry NZ will require legislation. In order to prepare that legislation further work will be required on, amonGST other things:

• the precise responsibilities of the Ministry and Industry NZ; and
• the relationship between the Minister and Industry NZ.

25. The establishment of a new Ministry provides a fresh approach to economic development policy in New Zealand. The Ministry will need to refocus and develop a new culture if it is to be viewed as capable of bringing this fresh approach to economic development policy and programmes.

26. What is being asked of the Ministry is a challenge. If it is to work we will need to ensure the Ministry has adequate resources for the new tasks we are giving it.

Accountability and Reporting Flows

27. Clear lines of accountability are essential if this new structure is to work effectively. The accountability requirements mean that the CEO of Industry NZ will be appointed by and report to the Board of Industry NZ.

28. In consultation with the Prime Minister, the Minister of Finance, the Minister of Research, Science and Technology, and the Minister of Maori Affairs, I will appoint a Board. This will help provide assurance that business and other private sector input is obtained, outputs are consistent with Ministerial goals, and bureaucrats do not take control. The Board will be made up predominately but not entirely from the business community. The CEO of the Ministry will be a member of the Board.

Implementation

29. It is recommended that Ministers direct officials from the State Services Commission, Treasury, Te Puni Kokiri, and the Ministry of Commerce to report back on the details of implementing the proposed vote and management structures for the new portfolios. This report should contain implementation details for the two new votes as well as an outline of the financial requirements for delivering the services and structures described in this paper.

30. An appropriate time frame for officials to report back is expected to be one month. The report would be before Cabinet by the end of March.

Transition Issues - Making Progress with Establishment and Policy

31. It is also imperative that policy development work be progressed under these two votes. I therefore recommend that officials within the Ministry of Commerce / Economic Development be directed to take the lead on policy development in tandem with the work conducted on implementation and in consultation with other relevant departments such as Te Puni Kokiri, Treasury, and the Ministry of Research, Science and Technology.

32. To facilitate this it will be necessary to:

1. Adjust the wording of the appropriation for Vote Business Development, Departmental Output Class D1 Policy Advice: Business Development to read:
   "Providing policy advice on assistance to industry and regions and on the development of the New Zealand economy, and on business development and contract management for the BIZ programme. Policy advice and support will also be provided to assist in designing and implementing the proposed Vote and management structures for the new Economic Development and Industry and Regional Development portfolios"
2. Provide new funding for the 1999/2000 financial year of $2.75 million (GST inclusive) for Vote Business Development, Departmental Output Class D1 Policy Advice: Business Development, to be met by an increase in revenue Crown of $2.445 million (GST exclusive), to cover both establishment costs and interim policy advice.

33. These changes will be included in the 1999/2000 Supplementary Estimates and it is recommended that in the interim the costs be incurred under Imprest Supply.

34. Although the exact amount of expenditure in the 1999/2000 year cannot be accurately forecast, the figure has been based on half of the proposed ongoing cost for four months of expenditure on policy development and administration plus transition costs.

35. At present, I would envisage the additional expenditure to be involved in the portfolios to be as follows:

36. This spending would be in addition to existing commitments in Vote Business Development. The allocation for Industry and Regional development includes provision for policy advice (through the Ministry of Economic Development).

37. I propose to submit a Budget bid for this allocation. In the short time available it will not be possible to have detailed policies developed for the precise expenditure within the next month. It is, however, critical that we allocate an amount for these programmes to show the Government's commitment and to allow for establishment of a viable Industry NZ. The funds will not actually be appropriated until the detail of the policies have been approved by Cabinet in due course.

Consultation

38. The Treasury, State Services Commission, Te Puni Kokiri, and the Department of Prime Minister and Cabinet were consulted in the preparation of this paper.

Treasury Comment

Current Industry Assistance

39. The paper proposes that the Energy Efficiency and Conservation Authority and the Industrial Supplies Office be considered for incorporation within Industry NZ. In this context, The Treasury and the State Services Commission consider that it would be appropriate for Ministers to review all Government expenditure on business assistance. Such a review would determine whether there are benefits from delivering these activities through Industry NZ or whether they should remain in other agencies but with the Ministry and Industry NZ having a co-ordination role.

Funding

40. The 1999/2000 budget ($2.750 million, GST inclusive) is based on a percentage of the estimated full year costs of policy advice and administration for the Ministry and Industry NZ. As The Treasury has not been provided with a detailed breakdown of either the funding sought for 1999/2000 or the estimated outyear funding we are unable to comment on the reasonableness of this expenditure.

Fiscal Implications

41. This phase of establishing a new portfolio structure and support requires sufficient funding to allow for efficient and effective structures to be developed and implemented in a timely manner.

42. The cost of this additional policy advice and implementation is estimated to be $2.75 million (GST inclusive) incurred in the 1999/2000 year. Following the conclusion of this phase of the implementation, as part of the report back to Cabinet the new Vote structure will be finalised and Cabinet's agreement in principle sought on the outyear amounts subject to the funding approved in the 2000 Budget.

43. The changes have a negative impact on the Crown's operating balance of $2.75 million (GST inclusive) in 1999/2000.

Legislative Implications

44. Legislation is required to establish Industry NZ. An Industry NZ Bill is already included in the legislative programme and has been given priority 2. Any technical changes required as a result of the change in name can be incorporated in this Bill.

Compliance Cost Statement

45. There are no additional compliance costs associated with this proposal.

Publicity

46. A communications strategy is being developed in consultation with the Prime Minister, the Minister of Finance, the Minister of State Services, the Minister of Research, Science and Technology, the Minister for Small Business, and the Minster of Maori Affairs.

Recommendations

47. It is recommended that Cabinet:

Jim Anderton
Minister for Economic Development
Minister for Industry and Regional Development

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