The Gas Association of New Zealand

  • Bill Birch
Finance

Thank you for this opportunity to talk to you today.

The gas industry, along with the whole energy sector, has been through huge changes since I entered Parliament in 1972.

It was in 1973 that the Government of the day entered into the Maui take-or-pay agreement. That agreement, and the oil shocks of the seventies, saw the development of New Zealand ?s petro-chemical industry. It featured a large scale of government involvement and a reliance on the Maui fields in Taranaki.

It was only recently that there was considerable anxiety over what would occur when the Maui supply ran out early next century.

Times change. New Zealand is now self-sufficient in all energy forms apart from oil - and even with oil we produced 60% of our needs in the year to September 1997. Taranaki is still providing fresh discoveries of hydrocarbons and there are now reports indicating that large areas of the North Island?s East Coast could be the basis for commercial development - of particular excitement being Kauhauroa-1 near Wairoa.

Even our rubbish dumps, or at least the gas emanating from them, are part of today's energy sector.

Expansion is also taking place at the retail end of the gas industry with a new customer base becoming available with the reticulation of the Whangaporoa Peninsula.

A key feature of the industry now is that there is no government involvement.

In fact the last vestiges of government involvement were removed four weeks ago.

On May 12 the Government reached agreement with the Maui Mining Companies that the Crown would pay $56 million (plus GST if any) in settlement of the Post Facto Review of the development of the Maui field.

The Review was contained in the 1973 agreement and provided that the Crown pay the excess between estimated costs and actual costs of the development of the Maui field. If costs incurred were less than anticipated the Crown would have received a payment from the Maui partners.

Settling the Post Facto Review removed an unquantified contingent liability from the Crown's accounts - one which some private sources estimated was as high as $300 million.

This settlement may have been lost sight of as it occurred just two days before another Government announcement, the Budget.

Budget

I would not want you overlook some of its key features.

1. Growth is forecast to be 2.7% in 1998/99, rising to 3.9% in 1999/2000 then 3.5% in 2000/01. Four strong factors are converging to boost growth this year - higher exports on the back of the lower dollar, the budget's full agenda of micro-economic reform, next week?s AMP demutualisation, and the tax cuts starting in just three weeks.

2. The surplus for 1997/98 will come in at $2.8 billion. Next year this drops to $1.3 billion. But that is still a significant surplus after $3.3 billion of tax cuts, the $300m surcharge removal, and the $285 million reduction in tariffs.

3. We will achieve our net public debt target of 20% of GDP in the forecast period, and any proceeds from asset sales will lower debt further. This is a huge improvement from the debt at 52% of GDP we inherited at the start of this decade.

4. Inflation will remain low. CPI inflation is forecast at 1.5%, 1.7% and 1.5% over the next three years.

5. Unemployment is predicted to fall to 5.6% in the next three years, with an extra 118,000 jobs created. Those are the type of figures on which our nation's progress is built.

Strong economic growth with low inflation is what creates jobs and wealth for New Zealanders.

When that growth is backed by prudent fiscal policy it allows us to improve the quality and scale of priority spending.

It allows us to continue to pay off debt and save the amount of money we previously spent on interest.

And that mix also provides the ingredients for more tax cuts in the future.

Micro-economic Reform

We know, however, that these gains have to be worked for.

To strengthen the economy long-term we have to pay continuing attention to improving New Zealand's economic growth.

That is why we are focussing on a very full programme of micro-economic reforms to reduce costs to consumers and businesses, to improve efficiency, and to keep the economy growing.
As the following list shows, we will leave nothing to chance in moving New Zealand ahead into the
21st century.

We are:

Reforming electricity generation and distribution to reduce the costs of power to consumers and businesses

Introducing competition into the ACC employers account from 1 July 1999. Workers entitlements will not be eroded but there will be choice of providers and better incentives to improve costs.

Continuing with a general review of tariffs, having removed motor vehicle tariffs completely on budget night. That move on vehicle tariffs immediately knocked up to $6,000 off the price of a family car.

Taking away the restriction on parallel importing which has worked as a form of import licensing. This will mean cheaper goods for businesses and consumers.

Asking Producer Boards with statutory monopolies to report to government by 15 November this year on how they would work in a deregulated environment. We want to ensure the marketing of New Zealand products overseas is handled in the best possible way.

Working to improve provisions of the Employment Contracts Act relating to personal grievances.

Selling the Crown's interest in Auckland International Airport by way of a public float, allowing New Zealanders to have the first opportunity to buy shares, and continuing to examine our ownership of Wellington Airport.

In the process of divesting our coal mining and marketing SOE, Solid energy. Preparations for the float of Government Property Services (GPS) are also continuing.

Providing for $1.1 billion dollars worth of tax cuts. This improves the take home pay of a person on an average wage of $35,000 by $835 a year. That is equivalent to a permanent pay rise of over 3 percent. On July 1, the three year tax package will mean a single income family with three children on $35,000 a year will be $98 a week in the hand better off.

And last but not least, we are mounting the most ambitious effort so far in this country to transform the lifetime prospects of our large beneficiary population, by focussing on what they can, rather than what they can't do to help them re-engage in the work force.

These micro-reforms will all help competitiveness and growth. They need to be made, and they need to be made now, to help keep New Zealand moving ahead.

And don't forget the moves to come in areas such as roading, occupational licensing, and the reviews of the Commerce Act, Securities Act and Resource Management Act. Or that the budget also contained significant changes in the way schools and tertiary students are funded which should see improvements in the quality of compulsory and tertiary education over time.

I will speak, in a little more detail, about just one item on our reform list.

Electricity

The electricity reforms have one underlying theme: a better deal for electricity consumers.

We expect to see lower prices and greater security of supply than the system is able to deliver now.

ECNZ, which currently dominates the sector by generating around 70 per cent of the country's power, will split into 3 separate SOEs: SOE1, with about 13 per cent of the market, will comprise the Waikato hydro system; SOE2 (17 per cent) will comprise the Huntly thermal station, the Tongariro hydro system and the Te Awamutu station; and SOE3 (30 per cent) will comprise the South Island hydros, including Manapouri.

Contact will supply 25 per cent, and private generators 15 per cent of the market.

These are the market shares expected in 2002.

All generators will be able to compete for generation supply and for customers across New Zealand, and the present restrictions on ECNZ, for example on building new capacity, will be lifted.

At the same time as ECNZ is split, there is a package of reforms at the retail end of the market.

All retail companies will be subject to an improved information disclosure regime and revised asset valuation rules.

The Government will fund and publish greater analysis of power companies' performance statistics.

And in a key change, to ensure that existing power companies have the greatest incentives to allow competition to flower, the lines (or monopoly) business of these companies must be separated from their competitive business components.

Separation will be ownership separation.

Consumers will be able to choose their own energy supplier, and the Government will be encouraging deemed profiling and particularly household metering to be available to consumers so that people can make informed comparisons and choices.

Reforms

It is only to be expected that micro-reforms will not be universally applauded by those in the affected sectors. Those affected will always oppose change.

In electricity we struck opposition from our own government business, ECNZ. It is unrealistic to think anyone else affected by change will react any differently.

But the benefits of reforms are for the whole country. And they are about higher growth, more jobs and better incomes.

These gains are important not just because we want higher living standards for New Zealanders. Reducing costs to families, and increasing discretionary incomes is crucial if we are to increase our
savings.

Current Account

With the uncertainty of the Asian financial crisis and the deterioration of the current account, several Government policies take on increasing importance.

The OECD, IMF and the rating agencies all emphasise the importance of maintaining international confidence by running visibly responsible policies, such as on-going surpluses and debt reduction, and continuing micro-reform, to go on improving our competitiveness.

Our prudent approach to fiscal policy over this decade has been designed to mitigate against external shocks.

Keeping our own books in order is the most critical thing the government can do to provide the conditions within which individuals and firms are able to prosper.

And it is the best possible approach to the current risks facing New Zealand.

Running surpluses, reducing debt, and strengthening the balance sheet are constructive approaches at any time.

In the current climate it is essential that the Government reiterates its commitment to these fundamentals.

That is why we made the decision to defer $300 million worth of spending over the next two years to strengthen surpluses. And we reinforced our commitment to debt repayment by moving the Government's net debt objective from the current 20% target to a goal of less than 15% of GDP.

You will also have noted the Treasurer's confirmation last week that the Government will reassess its spending if circumstances change significantly.

Building government surpluses and continuing to repay debt is even more important given Moody's impending review of our foreign debt rating.

Finalising our asset sales programme - and achieving the best possible return for those assets - could retire an extra $1 billion or more of public debt in the next 12 months.

As is obvious from our track-record of debt repayment, however, the Government is not contributing to the current account deficit - the Government is a saver.

A structural problem in the economy is that the private sector, particularly households, are not saving enough. Putting it more bluntly, New Zealanders in the private sector are enthusiastic spenders of savings from other countries.

Some of the spending, of course, is in the expansion of our businesses and is beneficial. However we should not disguise the fact that if we spend offshore savings we are building up our stock of overseas debt and our obligation to use more of our future earnings to service it and repay it.

The answer to the problem is for New Zealanders to save more and they should start now.

Our economic framework has already begun the process of adjustment necessary to bring the current account deficit down over time.

The decline of the New Zealand dollar and the opportunities for faster export growth are forecast by the Reserve Bank to reduce the current account deficit from 8% to 5.5% by the year 2000-01.

And both the Reserve Bank and Treasury are also expecting household savings levels to lift - beginning with next month's tax cuts.

The 1996 tax cuts were largely spent in advance. There is little evidence of that occurring this time. With New Zealanders as a whole having consumed and increased their levels of debt from the mid-90s as the economy took-off, it is a sensible option for those who have a choice to use their tax cuts to lower debt.

Similarly, next week's AMP demutualisation, which will put as much as $2 billion into the hands of domestic AMP policy holders, provides the opportunity for people to hold on to their shares, or cash them up for other types of saving.

Moreover, just as we have shown our commitment to address areas inhibiting growth and competitiveness, the Government will also be pro-active in addressing issues to increase New Zealanders' savings rates.