TELECOM GROWING SUCCESS RURAL SEMINAR

ROTORUA

Special Guests, Ladies and Gentlemen. Thank you for inviting me to talk with you today. You have an interesting programme. I have been asked to talk to you about the future, about trends over the next ten years or so, and finally a little about the dairy industry.

I think it is important every now and then to step back and try and take a broader big picture view of things, in order that we can make better decisions. Often I believe we can become too insular, only looking at things from perhaps one narrow perspective. Even politicians are sometime accused of this.

So today I want to briefly touch on some issues relating to trends and changes in the world, changes in Government, changes in industry and farming.

There is one thing that is certain about the future and that is that the next fifty years will hold more change than the last fifty. If we look back over the last fifty there has been enormous change take place. While we can only speculate as to what the future changes could be, there are some identifiable trends.

Globalisation

The first undisputable trend is that the world is getting smaller. The process of globalisation is continuing at pace.

In today's world, labour, capital and technology know no national boundaries. They simply shift to where they can be best utilised. The challenge for New Zealand is to make sure that we retain our competitiveness so that we can attract the capital and technology, use our labour, and increase our standards of living. Not only is this a discipline that we are going to have to get used to, but an opportunity and resource we are going to have to get better at tapping

Information Technology

means that our children in schools down the road can communicate to children in schools on the other side of the world. It means that we can walk into our office on the farm and tap into shopping lists in America. And the Internet has totally changed the traditional concept of the bricks and mortar library.

But I see you have a Telecom presentation to bring you up with the latest and greatest in information technology.

The world is becoming a village. Some have said that the village will end up with the production being done in Asia, the supermarket in America, and Europe will be the museum.

Other technology

Earlier this week, we had New Zealand scientists isolate a gene which regulates growth. Some are calling it the Lomu factor. Speculation is taking place on what this discovery could mean.

For agriculture, this discovery could also mean much. Perhaps New Zealand's comparative advantage of growing grass and turning it into products will be lessened, or enhanced. We have yet to see.

I note that today you are looking at technology and a rural banking services overview. I would suspect that commerce, transactions, and banking will be conducted in 10 years time using technology we possibly don't even know about today. If we think back to the days when you begged for a loan in front of a bank manager between 9 and 3pm in a great big building, now we can get on the phone seven days a week to get a mortgage or pay our bills.

Globalisation and new technology are the drivers for the uncertainty and change of the future. They force us to change our thinking. The ability to compete on a time basis is crucial if we are to keep pace and increase our standards of living. We have to be able to adapt and respond quickly to these changes.

These drivers of globalisation and technology are forcing other trends on us.

The importance of national economies become less as reliance on the world economy becomes greater. We are no longer in an isolated, self - sufficient economic system.

While capital flows were freed up in the mid 1980's, New Zealand has still yet to position itself to make the most of overseas technology, skills and even capital. There are concerns of the impact of all this on our sovereignty, and sometimes for the wrong reasons. Perhaps in a couple of decades or so the concept of citizenship will be different.

This globalisation has had and will continue to have significant impact on our trading relationships and patterns. We need to have the marketing structures to make the most of the opportunities. Like our national sports bodies, we need to bring our domestic industry structures into the real world. Rather than cast them in stone and protect their past, we need to future proof them. But I will talk about this later

I believe one of the few core roles of Government is to continue to work in the international arena at a diplomatic and political level to ensure that New Zealand's trading interests are progressed. The trend from bilateral to multilateral trade agreements will also continue. CER may be deepened to include more areas and broadened to include other countries.

Our involvement in the WTO, APEC, NAFTA, Cairns group and the like needs to continue. We are also working on freer trade agreements with both North and South America, Taiwan and others. China is a huge potential market for the produce from our clean green paddocks.

These negotiations will always be conducted at a political and diplomatic level. However we also know, and forestry is an example, that overseas investment also can give great benefits with overseas market access.

Government:

As the pace of technology and change increases the role of Government is also changing. We now have mass information, instantly. Government and politicians no longer have the same monopoly over information.

The trend from centralisation to decentralisation will continue. As former communist countries know, centralised models are unable to keep pace with change, and have little flexibility. They therefore become less relevant as they grope to cope with issues at the coalface, but can't.

As the pace of change increases, Government and its institutions become less relevant. Simply they become cumbersome and uncompetitive. They can't change quickly enough. If they introduce rules and regulations to try and cure a problem, by the time they do it, the problem is changed and the regulations are a constraint.

Where previously, if someone wanted a price changed on a consumer item they used to put up a remit to their local branch of their political party. The remit would then go to the divisional conference which would then go to the regional conference, which would then go to the national conference, which would then go to the parliamentary party, which would then go to a policy group, which would then perhaps go to caucus, then to a minister, then to the bureaucracy, then back to the minister, to cabinet and then through the regulatory or legislative programme and then the tariff rate or the price of the good would change. Of course, this would take some time.

Now the same person can go and push a different key on their computer and select a good with a lower price without any reference to anyone else, from anywhere in the world.

The trend for more devolution will continue. In New Zealand, many parts of central government have been devolved over the last decade in order that New Zealand citizens can better receive the services and help which they want and need. The trend to have enabling legislation focussing on outcomes, rather than prescriptive legislation focussing on inputs will continue although there are some teething problems. This is why my Commerce Ministry is currently reviewing the RMA and other legislation to see if we can improve the way they work in practice.

There is a trend from representative democracy to participatory democracy as people feel more confident about making their own decisions and less confident about their politicians. Direct Referendums are on the increase.

At the same time we have had the move from FPP to MMP. This along with recent changes in Standing Orders have reduced the power of the executive. This power is moving down and out to the community.

More people can participate in democracy if they want to. Interestingly those that are most critical of Government seem to want more of it, and tend not to want to participate in the increased opportunities they now have.

The trend is also moving from institutional help to self help and reliance as individuals are empowered with information, freedom from government constraints and technology.

The size of government is also changing and will continue to change as people themselves want to make their own decisions generally better than some well meaning politicians.

My personal view is that the size and role of Government is still too big. From over 40% of GDP we have reduced Government as a proportion to about 34% of GDP. To me, below 20% is a better level, because after all, governments don't create wealth, they merely transfer it. Our fast growing Asian neighbours have a government sector of about 20% of GDP while some of our slow growing and indebted European friends are running government at levels over 50%.

Bigger Government doesn't bring a bigger economy, normally the opposite. Governments should keep out of your way and free you from needless constraints such as compliance and regulatory costs, so that you can get on with the job of creating the wealth we need to meet our social and environmental goals.

A recent article in the Economist talked about the reducing tax base as commerce was conducted on the Internet and the problems that this presented for particularly high taxed economies. There is a real risk to the Government tax base with new technology. In addition to the positive impact of growth we also are better to beat the trend of a reducing tax base and reduce the size of Government now than be forced to go cold turkey when the tax base erodes.

There is a strong trend to free things up in order to remain competitive. If we remain constrained we will fall behind. For example the 1991 Employment Contracts Act freed up the labour market in New Zealand and gave our productive sector the flexibility in labour arrangements to remain competitive. It didn't lower wage rates overall, but did give greater variation.

Industry:

At industry level there is a strong trend from the production to a market based systems. Quality, design and service are gaining far more importance in the market place. Environmental and health issues are increasingly important as consumers become more discerning. The consumer, as they say, is always right. Farmers have to keep pace with these trends to ensure they have an acceptable product for their ultimate buyer, the consumer.

Markets are being fragmented as products are increasingly customised and niche markets are carved out. For a smaller country such as New Zealand this trend presents many opportunities. Bigger is not always better.

New organisation configurations are beginning to dot the landscape. We only have to look at the gutting of middle management in New Zealand and the move to flatter management structures. We are also seeing more contracting out and dramatic increases in self employment.

We are seeing big changes in sector institutions. In the last few years we have seen changes with institutions, for example, such as parliament, the rugby union, Federated Farmers and major changes in our fishing, forestry and manufacturing sectors. Even the insurance industry changing its structure and demutualising after over 100 years in mutual ownership structures.

However, whilst there has been some change I don't believe there has been sufficient change in the agriculture sector. There are still far too many constraints. I believe it needs to be freed up a bit more because the risks of the current straight jacket in the dairy industry in particular, are very high in terms of stifling innovation and curtailing investment.

The Farmer:

Over the last 10 - 15 years there has been some dramatic changes for the farmer. Farmers have turned themselves into businesspeople. They are more productive than ever. Farmers work smarter. Animal husbandry, use of technology and hard work have never been greater.

The political framework within which the farmer works has been dramatically altered with less government intervention.

There has been a trend towards increasing size of farms and herds. I believe this will continue to happen while we're still essentially commodity traders. Until such time as we start adding real value through more investment and innovation, the only way that we as farmers can respond is to increase the size of our operations. This just takes more capital and hard work. I think we need to reverse this trend.

Bulk commodities all follow trend lines of lowering prices. Incidentally the real price that farmers receive per kg of milksolids has fallen twice as far as that of a kilo of beef since the early 1950's

Dairy industry:

On this point I have recently given a couple of speeches on the future of New Zealand's biggest export industry, the dairy industry. These speeches follow earlier speeches I have given on this important issue in 1994 and at various other times over the last ten years.

Given the trends mentioned above, as dairy farmers we cannot afford for our industry to be constrained by politicians and politics and not reach its full potential.

I want to say quite clearly that I only want to grow the dairy industry and enhance its structures. I believe that we need to ask questions as to how best to evolve the industry in a carefully considered way to improve your incomes and standards of living.

If we are the best dairy farmers in the world, why is there a trend that means we seem to have to work harder, buy more cows and more land, just to maintain our standard of living. Why are other sectors in NZ that don't have a natural comparative advantage, making greater progress than dairy in the international marketplace?

Forestry, fishing, telecommunications and some other government sectors, have progressed a long way since the farmers of New Zealand successfully sought the removal of statutory protection and political interference from these and other input and service providers. A real ownership interest has been established and things have been freed up to allow investment and innovation.

My impression is that innovation is currently occurring more rapidly in commerce and industry than in agriculture at present as a result of this freeing up.

These business's have every pressure to remain focussed and to perform for their owners. Something perhaps not so apparent in current dairy industry structures.

Competition has created the right incentives, allowed investment and forced innovation. Innovation and profits, rather than politics, have been the key focus. We have all benefited from these developments. I believe the trend to get politics out of our most important sector, agriculture, should continue.

And I have always had a healthy scepticism of monopoly providers of service, because in the end the farmer pays the costs one way or the other. As minister responsible for competition policy in New Zealand, I can assure you that the trend to remove monopolies that have cost farmers much in the past, will continue.

So where does the New Zealand dairy industry fit into all this?

Today, while the Board may be seen as a single desk seller of New Zealand dairy exports, it is anything but a dominant player in the international market place. It is actually one of many competitors. Undercutting happens now. But then the commodity price is always determined this way.

The Board has a monopoly in the provision of marketing services to New Zealand's 14,000 dairy farmers. Simply if the Board doesn't do it, or licence it, it doesn't happen. They are expected to have all the great ideas, and you are expected to have all the capital.

How much better off could you be in a more competitive environment that allowed for more innovation and improved marketing and investment choices?

Current industry structures stifle investment and innovation with increasing concentration in processing, and the monopoly provision of marketing services by the Board. This lack of competition gives lower than optimal levels of investment , innovation, accountability and information.

As a result, there is a strong bias toward large scale commodity processing. Innovation is not encouraged by the current cost model, or the monopoly provision of marketing services by the Board. Farmers are left in the dark over their investment.

I am informed that the Board sells less than 30% of its $4.4 billion export earnings as consumer branded product. This means that 70% of your product is sold for someone else's structure to add further value through to the consumer. This is an improvement of 3% over the last two years. At this rate of progress NZ farmers will wait a long time to get all of their dairy sales out of the fluctuating and downward trending commodity market.

However you have also bought and paid for a vertically integrated industry structure which is designed to capture the added value to the market place.

Your total off-farm investment is significant. From the 1996 Board annual report each of New Zealand's 14,700 farmers own about $100,000 of the Capital & Reserves of $1.458 billion. They each share about $240,000 of total assets. And, according to the conservative accounting policies of the Board, these assets are undervalued. In addition, each farmer also has around $100,000 invested in his/her local co-operative.

At around $300,000 at least per farmer, it equates to about 10 new HiLux's, 20 new kitchens, about 30 years worth of boarding schooling, or a pretty good house on the shores of Lake Taupo.

Your on farm investment is significant also. The Economic Survey of Factory Supply Dairy Farmers of 495 dairy farmers conducted and supplied by the Board, tells us that for 1995/6 average on farms assets were $1,516,846, liabilities$365,592 with owners equity being $1,151,251. For the last two years return on farmers equity was 2.8% and -.08% respectively. Sharemilkers haven't fared as well.

These figures supplied by the Board do include asset revaluations, but then the asset values has also fallen sharply over the last 12 months.

Because of both the vertical and horizontal cross subsidisation, your investment has often been in the name of the common good - often to the benefit of the retiring sheep or beef farmer.

I notice that you are having a session on the very important issue of farm succession. With the current straightjacket on the dairy industry you have little flexibility. However if we freed things up a bit along the possible lines I propose, you will have much greater flexibility in transferring your hard won assets to the next generation.

Dairy Industry Freeing Up

We in the dairy industry are no different to other sectors of the New Zealand economy. We are quite wrong to believe that we can get a better return by hanging on to statutory controls on who can invest in the dairy industry's processing and marketing facilities and by limiting competition in the provision of marketing services.

So what would happen if we freed things up a little? What would happen if we allowed investment in the New Zealand dairy industry on the same basis that we have seen in such sectors as telecommunications and forestry?

I believe that the value of both our on and off farm assets would increase in much the same way as the value of shares in companies such as Telecom or Air New Zealand. This would be achieved through greater efficiency, innovation and product differentiation.

And I want to emphasise that this need not spell the end of the Dairy Board. It should have the capability to continue to compete as a marketeer of dairy products from its current base. If anything, these changes will enhance it. This could be the beginning of the next exciting growth phase in the boards ongoing evolution and development.

A Set of Proposals

So where should we go from here to improve your standards of living? My personal view is that the status quo is not an option. The risks are too high.

We need to evolve our industry structure to one where farmers have a true ownership interest. Such a structure would not need statutory protection and the Board would be freed from this imposition. So here's a possible plan:

Corporatise all the commercial assets of the board into a company, the New Zealand Dairy Corporation, under the Companies Act.

This company should operate on purely commercial principles, making transparent profits and paying a dividend to shareholders.

The new company could ultimately list on the stock exchange. Large company shareholding would ensure control as long as farmers wanted it. Alternatively individual farmer shareholding would do the same.

Allow investors other than farmers to own a proportion of share capital.

Remove the requirement of the Board/Corporation to purchase all export product, but perhaps allow it to retain a real advantage by allocating it the quota market premiums.

Retain a small licensing authority to licence exports, monitor marketing activities, and assist Government, if required, with market access issues.

Require the new Corporation to apply for an export licence like any other exporter.
This would allow farmers to receive three income streams from their assets and efforts: from their on - farm milk production; from their substantial capital invested beyond the farm gate in their processing factories; and from dividends on their shares in a provider of marketing services.

This would give farmers greater accountability, a more transparent return on their assets, the right market signals, and a more portable and transparent "superannuation scheme".

It would allow more flexibility with farm succession. For example, perhaps the land and building could be sold to a keen young son or daughter, while the shares in the provider of market services, the Dairy Corporation, could be kept in the name of the retiring parents as a source of income, or vice versa. The choice would be yours.

It would give the Dairy Board and its 6500 employees the freedom to operate without statutory constraints. It would focus responsiveness on the market and less on political issues. It would mean the Board wouldn't have to sell surplus production at a loss. And it would provide them with real incentives to lower costs and sharpen marketing focus.

Government's only legitimate role would be that of international trade access and lowering internal cost in the New Zealand economy.

Transition issues are important to move to such a model. A carefully managed 2-3 year time period could be used. Although some may think this is too slow, this would give any new corporate structure plenty of time to make the shift from political and production driven, to profit driven.

I believe we need to free things up to encourage innovation and allow new investment to add real value and move out of commodity trading. The status quo is not a runner.

The best protection that we can give the family farm that you want to pass onto your sons and daughters is to get out of the commodity cycles and into investment in higher value added products.

Interestingly, Professor Cartwright from Auckland University has identified similar issues that need to be addressed in the industry. However the solution he offers doesn't not allow the flexibility that is needed. I was interested though by his suggestion of the Irish example, which isn't at all like his original proposed solution, but clearly fits the model suggested above.

In this model farmers floated their company while keeping a majority ownership interest. In ten years their asset has grown from 35 million pound to 1.1 billion pounds. In ten years this one company with freedom to attract investment and to innovate, has grown to a larger size than the New Zealand Dairy Board has since 1921. However it is not a monopoly provider of milk marketing services, but has the spur of competition to continually improve. For you interest I have attached the newspaper clipping to my speech notes briefly telling that story.

The dairy industry is currently New Zealand's biggest and most important export sector. I just want you to think about how we can best evolve your industry to keep up with the changing world and enhance your incomes and standards of living.

Future:

My vision for the future farmer is one, rather than a person who considers he or she owns a farm, will be someone who considers they have an asset portfolio. For a dairy farmer, this will be made up of their asset in their stock, in their land and buildings, in their processor and in their shares in a provider of marketing services. Farming is a business, not a political movement. So farmers will be focussed on return on investment and have more transparency and accountability from those to whom they give their money.

Neither farmers, or New Zealand can afford the indulgence of restricting investment and growth in our most important industry.

Providing for your retirement and succession will be more flexible as a clear ownership interest is identified for all your assets. Increased profitability from real value added will mean that farms wont have to get bigger to maintain standards of living.

The Dairy Board will become the New Zealand Dairy Corporation and remain the largest exporter of dairy products from New Zealand. It will be a listed company with most farmers remaining as shareholders. The Corporation will have grown markedly to become the New Zealands largest capitalised company on the sharemarket, with Telecom comming second.

The whole industry will be very consumer focused concentrating on high value niche products. Investment and innovation will not be constrained and Kiwi ingenuity will continue to be very competitive in the market place.

Government as a proportion of GDP, will less than 20% with many current assets privatised and many current functions contracted out. Accordingly tax rates will be lower. If there is one thing we have learned from the past, that is you cannot make the economy bigger by making the government bigger. Governments merely transfer wealth, they don't create it. To build our future we need the wealth creators in our country, such as you, not to be constrained by politicians in Wellington.

We live in a society where time and speed will become the main battlefield of competition. The answers to uncertainty are speed, flexibility, responsiveness, adaptiveness. We need to be able to adapt quickly. We cant afford to have barriers disadvantaging us and lowering our standards of living.

Parliament will be far less relevant as the legislative process becomes too cumbersome and slow to keep up with the changing pace of the world.

A famous sportsperson, gardener or cook, will be better known than the Prime Minister.

Population levels will be higher as we allow more immigration to increase our skill base and develop relationships with our Asian neighbours.

We may also introduce pro-children policies as some European Countries have done in order to increase the ratio of working to retired people.

Trade patterns will continue to change.

Education will be flexible and free from the tyranny of powerful unions as parents react to protect the interests of their children's education.

Conclusion:

Today I have just touched on a few trends and changes as I see them. There are of corse many more. Our children seams to grow up quicker, be noisier and watch too much TV, but I hope I have given you a few ideas to think about.

However, despite the trends and the changes that I have talked about, I believe that we will still be growing grass, putting on our gumboots and aprons and milking cows for some time yet.

Thankyou for listening to me today. I wish you well for a successful day and productive and profitable season. Thankyou.