Despite only being a few weeks into the job, new mayor Phil Goff has a firm grasp on his council’s priorities, report James Penn and Tim McCready
Auckland Mayor Phil Goff acknowledges that virtually everyone agrees upon the city’s challenges.
“Our population went up by 42,600 last year. Our infrastructure in both transport and housing is creaking at the seams,” explains Goff.
“It has not coped, it has been historically underfunded, and the failure of infrastructure to keep up with growth has given us growing traffic congestion leading to gridlock, and a growing housing shortage leading to gross housing unaffordability.”
On one level, the solution appears simple: increase infrastructure spending. The Unitary Plan will ease previous building consent issues, making it theoretically possible for many more houses (or perhaps more accurately, apartments) to be built. But alongside consent as a precondition for construction sits infrastructure — roads, public transport, utilities — to support them.
“Now, I think that analysis is accepted by almost everybody,” says Goff, moving the discussion along to where things are more challenging: “How is local government going to do that?
“It can’t do it through rates, which is the narrow revenue base that statute gives to us. I made a clear promise — cap it at 2.5 per cent — I intend to keep that promise.”
The next obvious pathway to infrastructure spending might be further borrowing. “Cross that one off the list too,” says Goff.
“Standard & Poor’s gives us a very high AA credit rating, and also gives us a constraint that says the debt-to-revenue ratio should not be more than 265 per cent. In next year’s budget, it will be 256 per cent,” he points out, with impressive adroitness for a man only five weeks into the job.
“I have very little freeboard, and I’m not about to give away prudential reputation or my credit rating — that will cost tens of millions, potentially hundreds of millions, of dollars — so I can’t borrow to do that.”
Selling the council’s assets — such as its 22.4 per cent holding in Auckland Airport — is also off the cards. Being a one-off solution, Goff says it doesn’t sufficiently address the revenue side of the equation on an ongoing basis to warrant consideration. Beyond the airport, the council’s asset ledger is rather limited.
Such is the extent of the need for cash, though, that Goff won’t entirely rule out selling the council’s own office building in the city.
“If I had to sell this building and lease it as the price of an arrangement with government — it’s not a strategic asset.
“All in all I’d probably rather keep the building than sell it, but I’m flexible on that.”
Private sector and efficiencies The mayor stresses that the infrastructure investment effort is not purely a public-sector consideration; he wants business involved as well.
“I think business can be Auckland’s strongest allies in terms of investment spend. I think they’re a critical part of the equation, and their support for the increase in investment in infrastructure will be critical in terms of government’s thinking.”
Goff says he has been doing all he can to send that message to the business community, through discussions with key figures such as Auckland Chamber of Commerce’s Michael Barnett and the EMA’s Kim Campbell in particular.
Council-controlled organisations (CCOs) such as Ateed have been the subject of criticism from the business community in recent times, with Barnett outspoken on the recently-announced new slogan.
Goff is cognisant of the issues around CCOs and how they operate, pointing to Auckland Transport’s light-rail announcement earlier this year as an example. “The sense that I’ve got from being on the campaign trail is that Aucklanders by and large thought that the term ‘council-controlled organisation’ was a misnomer; that we’d set up a group of boards that had taken over the function of council but were not particularly responsive to them.”
How might that be addressed?
The council restructure already imple-mented will see CCOs reporting more directly to council committees, part of an overall effort to make them more responsive to their shareholder — “which is the council and people of Auckland”.
“CCOs will report not only to Finance and Performance, but also to the committees that deal with their particular field. So for example Auckland Transport would be reporting not only to Finance and Performance, but also to Planning because it has jurisdiction over that area of transport.”
One area where Goff wants to bring some of the flavour of central government with him is in utilising the existing accountability mechanisms available to councillors under the Auckland Council Act.
“I want the councillors themselves to be more effective in the manner of a cabinet committee, or even a select committee, in being able to cross-examine and interrogate the council-controlled organisations around their performance.”
The restructuring has also seen the overall number of council committees reduced from 19 to nine. Goff is searching for those sorts of efficiencies across the entire body.
“What I’m looking at is to ensure that we’ve got the best performing council in the country.
“We’ve been through six years where the council has worked out what it means to have one council in place of eight, but I don’t think we’ve done enough in terms of exploring the efficiencies that we might’ve expected.”
He wants to see a reduction in staff numbers — “preferably by attrition” — and a reduction in resource use more broadly.
CCOs are not immune from these efficiencies. Shared services are on the agenda, with functions such as human resources and procurement to be potentially merged and shared among multiple CCOs.
And a more radical restructuring, while not on the agenda, is not ruled out either.
“My first priority is to see that they can work as effectively as possible within the current structure,” explains Goff. “But over time if there seems to me to be a business case for amalgamating I wouldn’t rule that out. But it’s not on the top of my list of priorities, and no definite decision has been made around that.”
Creative funding solutionsGoff’s preferred solutions are a little more creative, and arguably unconventional for a former leader of the Labour Party.
Getting Auckland’s fair share of the Government’s Housing Infrastructure Fund is the first step. While Labour opposed the fund, Goff supported it while still an MP.
The $1 billion fund will provide financial support for projects in the areas of roading, water, wastewater, or stormwater infrastructure. The projects must be intended to support the building of new dwellings and must be from councils in “high-growth urban areas”.
“I would hope to get a significant share of that fund,” says Goff. “Done right, that will enable me to do a whole lot more.”
It’s no surprise that securing Auckland’s slice of the new fund is on the mayor’s agenda. But the idea of a petrol tax might raise a few more eyebrows. “I have been for quite some time a convert to a degree of user-pays in a system,” explains Goff.
“I always thought that was part of the National Party’s philosophy, and I can’t think of strong rational grounds for opposing it, other than — probably — no government wants to be associated with a new form of tax.”
The political ambition of such a plan is not lost on Goff, but he senses potential co-operation from central government in the future.
“I think there is room to negotiate there — it’s maybe about timing.
“The Government has already accepted that a congestion tax would make a lot of sense. A congestion tax is much harder to sell politically. It’s also much more effective because it changes behaviour.
“But nobody thinks that we can get a congestion tax in place short of maybe six or seven years. If you’re going to bring congestion charging in, you would need to set the infrastructure up and expend money on putting in place the admin system, when a fuel tax is simple, cheap, easy to administer, and interim.”
Goff stresses that last word: his fuel tax would be interim. And those raised eyebrows may furrow once the figures are canvassed — which he does, again with impressive acuity.
“Under the Auckland Transport Alignment Project there is a $4 billion deficit over 10 years. We’ve got to find $400 million a year extra to fund even a modest growth in infrastructure that will only slow and not reverse the level of congestion.”
The existing Interim Transport Levy will provide $60 million towards that total. Assuming the Government picks up 50 per cent of the tab, that still leaves a $140 million hole to fill. “A 10 per cent fuel tax probably would produce about $150 million,” argues Goff. “But it would at least make a direct connection between utilisation of the roads and paying for transport infrastructure.”
Another interesting source of revenue mooted is a targeted rate, imposed on large-scale developments. This could be paid off over 20 years, and would provide a revenue source which could in turn enable the council to invest in infrastructure that is required for those developments to actually come to fruition at all — or so the logic goes. “So someone might be paying a targeted rate over 20 years. But if it works, and we get more houses on the market, they’ll be paying a lower capital price than they would’ve if the housing crisis was allowed to continue.”
One important way Goff’s plan functions is that the increase in revenue doesn’t necessarily cover the entire increase in expenditure — it will simply provide the added revenue for council to leverage and take on more debt, while still remaining within the prudential levels demanded by the rating agencies.
Radical incrementalism? The preference for improvements within existing structures seems to be a hallmark of Goff’s thinking as he settles into his new role; a kind of ‘radical incrementalism’.
“It’s not so much that we lack instruments of accountability, but we haven’t properly used the ones that are already in place, and I want to try to work to ensure that that will occur,” he explains.
More stringent enforcement of standing orders is another small change — without overhauling the rules which already exist — that Goff has personally implemented. “A number of councillors have expressed a pleasure that council seems to be operating with a little more discipline and sense of purpose, and that’s what my intention for council will be”
Working with a new government
Goff’s approach to dealing with the Government seems decidedly non-partisan, and entirely unaffected by who sits at the helm. “I will deal with government in good faith, as I will this government or any other government,” says Goff. e”For New Zealand to succeed, Auckland has to succeed.
“I doubt that there’s a parliamentarian — apart from maybe Winston Peters, who has his own particular agenda about provincial areas — that wouldn’t accept that if Auckland fails it will come at a huge cost to the country.”
Goff joked that perhaps with more foresight he could have changed his approach to Twitter — having met with both Key and English the week prior to Key’s announcement, the mayor tweeted a photo with Key but not English. “Maybe I should’ve done it the other way around,” he laughs.
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Phil Goff hopes Auckland gets a good share of the Government’s $1b housing fund, writes Tim McCready
Auckland Council has put in an indicative bid for the $1 billion housing infrastructure fund, and Mayor Phil Goff hopes New Zealand’s largest city will gain a significant share of the investment.
“Done right, that will enable us to do a whole lot more,” he says. “We could build 36,000 more houses with the Government’s assistance. That’s an offer I don’t think they would want to refuse.”
The Government is making the fund available to local councils in high growth areas — Christchurch, Queenstown, Tauranga, Hamilton and Auckland — to assist them to establish “substantial new infrastructure investments” that are crucial to increasing housing supply.
At the time of the announcement, then Finance Minister Bill English said the fund will help bring forward the new roads and water infrastructure needed for new housing where financing is a constraint.
“The Government will invest up front to ensure the infrastructure is in place,” he said. “But councils will have to repay the investment or buy back the assets once houses have been built and development contributions paid.”
English acknowledged that infrastructure and its financing is one of the three key constraints to building more houses, alongside land supply and consenting requirements.
“Councils have strict debt limits which means some lack the headroom to invest in infrastructure now and then wait for future development contributions to recover the costs. The fund will help provide more infrastructure sooner by aligning the cost to councils with the timing of revenue from development contributions.”
Building and Housing Minister Dr Nick Smith stressed that the fund is available only for substantial new infrastructure investments that support more new housing, not to replace existing infrastructure. “To access the fund, local councils must outline how many new houses will be built, where they will be built and when they will be available,” he said.
“Ideally, they will have agreements with developers on these issues.”
Auckland has clearly been struggling to deal with the housing crisis. In order to meet the demand over the next 30 years, the council predicts Auckland will need more than 400,000 new residential homes.
Goff agrees with the Government — in order to build more houses, the city must put more money into infrastructure. “I welcomed the housing infrastructure fund when I was still a Labour MP and my party was opposing it,” he says. “That’s because I knew it was important symbolically. The Government knows that with a fast-growing population, it is a cost not a benefit to a council.”
It is that pragmatism that saw many of New Zealand’s top CEOs in the New Zealand Herald’s Mood of the Boardroom survey — held before the mayoral election — agree that Goff’s connectivity to Wellington is a capability that will help things get done.
But will a portion of $1 billion be enough to break the logjam when it comes to housing Aucklanders?
Stephen Selwood, chief executive of Infrastructure New Zealand, thinks that even if Auckland were to get the entire $1 billion, it would only make a small dent in the infrastructure funding deficit. “New Zealand has a legacy of investing too little too late,” he says. “Even though investment has increased significantly in recent years, it is not keeping pace with growth. The reality is that we need to increase investment with urgency and consolidate growth by lead investment in infrastructure.
“This would enable us to develop residential and commercial development at scale integrated with transport investment and make maximum use of limited dollars.”
Selwood says the current plans allow growth everywhere. The infrastructure providers, especially transport providers, can’t keep up, even if they had the budgets to do so.
Goff agrees that even the entire infrastructure fund wouldn’t be enough for Auckland — let alone being spread around all five centres it is being offered to.
The Auckland Transport Alignment Project, presented in September by outgoing Mayor Len Brown and Minister of Transport Simon Bridges, revealed an extra $4 billion must be found over the next decade to fund transportation projects.
“That means we have to find $400 million a year extra to fund even a modest growth in infrastructure that will only slow — and not reverse — the level of congestion,” says Goff.
He is considering alternative funding tools to supplement above and beyond the housing infrastructure fund, one of which is the adoption of a fair level of user-pays for roading infrastructure.
“I have never understood why rates should fund infrastructure, when a significant section of our population who are retired, or who hardly use the roads or public transport, are paying the same as those of us who are working our roads and transport system to death,” he says.
While there are many different mechanisms that could be used to implement a user-pays system, Goff favours a fuel tax for its simplicity to implement. “A 10 per cent fuel tax would probably provide about $150 million per year. I have been a convert to user pays for quite some time — it would make a direct connection between utilisation of the roads and paying for transport infrastructure. It’s simple, cheap, easy to administer — and interim.”
The chart above, produced by Branz and Pacifecon, projects the value of all construction nationally (historic and forecast), and shows the increasing gap between projected investment in residential construction (in blue) vs infrastructure (in green).
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Auckland Council will play a co-ordinating role, working with central government, NGOs, and the private sector to eliminate homelessness in the city.
“When I walk up from Britomart, I walk past lots of people sleeping on the street,” says Mayor Phil Goff.
“It’s not simply the perception that’s bad for the city — it’s the reality. Who in their right mind would be sleeping on the pavement if they had some alternative,” he says.
Goff’s policy to help the homeless will be based on the principle of “Housing First” — where priority is given to obtaining stable housing. Once accommodation is provided, wraparound services can be provided to address the issues that lead to homelessness.
“I would argue that by the time you take into account hospitalisation of people of the street, law and order, and imprisonment issues, there is a strong economic case as well as a social case,” he says.
The People’s Project, operating in Hamilton, adopted the Housing First model in 2014. Following the lead of Canada, the United States, Europe and the United Kingdom, it aims to address the public’s concerns about the number of people living on the streets and sleeping rough.
Key organisations — including Hamilton City Council, New Zealand Police, Ministry of Social Development, Child, Youth and Family, Housing New Zealand, Department of Corrections, Waikato District Health Board, Midlands Health, Hamilton Central Business Association, Te Puni Kokiri and the Wise Group — work collaboratively together to end homelessness, rather than manage it.
“I went to visit the People’s Project where they pull it all together,” says Goff. “It just makes sense.
“NGOs have told me the best thing council can do is co-ordinate things. We have 50 different NGOs doing different things. On top of that, government departments are not coming together.
“The People’s Project has had a 93 per cent success rate keeping people in their homes. It works,” Goff says.
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Auckland Mayor Phil Goff has expressed a strong desire to see “assets sustained and protected for generations to come”.
In line with this, many of his campaign policies in the lead up to the election were environmental, including protecting Auckland’s marine environment and the Waitemata Harbour, planting a million additional trees in three years, reducing the city’s waste, addressing global warming, and reducing carbon emissions from transport.
The new council may have only been in place for a couple of months, but many of these policies are already underway.
Reducing waste Goff wants to increase the city’s recycling efforts, implementing initiatives that will work towards an aspirational goal of zero waste to landfill by 2040, set out in the Auckland Council’s Waste Management and Minimisation Plan.
Of the initiatives, one expected to pass fairly quickly is a charge on plastic bags.
“The truth of the matter is that we all know we shouldn’t use them. But we are all lazy,” says Goff.
“Unless we’re pushed, we won’t do it. We could probably cut 500 or 600 million plastic bags a year out of the waste stream in Auckland when we do it.”
Governments around the world have been taking action to ban plastic bags or charge customers for them, beginning with Bangladesh in 2002.
Even some supermarkets in Myanmar are now promoting “No Plastic Bag Day Fridays”, and instead pushing reusable and recycled bags.
California is one of the most recent regions of the world (and the first US state) to ban all retailers from handing out single-use plastic shopping bags at the checkout.
California Proposition 67 — or the “Plastic Bag Ban Veto Referendum” — was included on the ballot in the United States election last month, and passed with 52 per cent of votes.
But rather than an outright ban, a more likely model for Auckland is a plastic bag charge similar to that implemented in Britain in 2015.
British retailers with more than 250 full-time employees are required to charge 5p per plastic bag, which has resulted in a reduction of around 80 per cent.
There is an exemption on certain products (such as uncooked meat, poultry or fish), and small business in England are also exempt as the administrative burden is considered too high for them to manage.
“It’s simple,” says Goff. “Focus on your supermarkets — New World, Countdown, Pak’nSave, which already does it, as does The Warehouse.
“We would allow exemptions for meat, fish and vegetables, and encourage people to use reusable bags.”
Goff has two options for implementing charges on plastic bags.
“I can get an agreement from the supermarket chains to do it voluntarily,” he says.
“I have ready talked to both Foodstuffs and Progressive Enterprises.”
Alternatively, legislation could be passed through a local bill in Parliament.
Outgoing Prime Minister John Key was ambivalent about introducing any national policy to force a behavioural change.
But assuming New Zealand is serious about living up to its “100 per cent Pure New Zealand” tourism slogan, rolling out a policy throughout not only Auckland but the rest of the country must surely be just a matter of time.
Goff points to a 1 NEWS Colmar Brunton poll conducted last month, which found that 78 per cent of those polled thought it was a good idea to charge for plastic bags, and use the money raised to go towards reducing plastic’s impact on the environment.
“It’s a no brainer. I’ll be pushing hard on it,” says Goff.
A Million Trees programme
On the campaign trail, Goff announced an urban forestation programme for Auckland, aiming to plant a million, predominantly native, trees and shrubs across the region during his first term with council — in addition to those already being planted.
His goal is to “green our city”, offset carbon emissions, protect Auckland’s water quality by planting along rivers and coastlines, and improve our living environment.
The transformation of Te Auaunga Awa (Oakley Creek) is already underway. It is Auckland’s longest stream, and is undergoing a transformation to replace the concrete channel and underground pipes with a wider, natural flowing stream with cycle paths, walking trails — and 50,000 new trees.
Goff wants a formal plan for the Million Trees programme to be in place in autumn, in time for the start of next year’s planting season.
The programme has a budget of $1 million a year, which will fund practical support and help provide an overall strategy around which tree species to plant and where.
Local boards, schools, service and social sector groups, private entities, farmers, the Department of Conservation, New Zealand Transport Agency and developers are among the organisations which already plant trees and shrubs around the region. Council will work alongside all of these groups, and offset costs through partnerships.
“We have also got the potential to use nurseries within prisons and those used for training purposes,” Goff says. “Things are underway.”
Addressing global warming
Reducing carbon emissions from transport was a key priority on the campaign trail for Goff’s mayoral bid. Extending beyond an ambitious tree planting exercise, Goff plans to increase public transport use with non-polluting electric trains and light rail, and by building more walkways and cycleways.
“We’re more than a third of the country’s population, we have to demonstrate that we can pull our weight as well,” he says.
Interestingly, in the lead up to the byelection to appoint his Mount Roskill successor (which Labour’s Michael Wood won convincingly), Goff wouldn’t commit to paying half the $1.36 billion cost for Labour’s pledged light rail service from Mt Roskill to the CBD — instead disclosing he would negotiate hard to protect ratepayers.
“It will be carrying far more passengers than many other roads around New Zealand that are funded 100 per cent,” he said.
“We’d want to negotiate between the Labour Party position of 50 per cent funding and what would currently be paid for a road of national significance by central government, which is 100 per cent.”
Goff has said he would like to reduce the council’s 800 cars, and convert those that remain over time to electric vehicles.
Changing his own car has been something he’s quickly acted on.
“I don’t believe that council needs 800 cars, just like I didn’t believe the Mayor needed two chauffeurs and a big Holden — I have neither of those things now.”
Goff is now driving a Toyota Prius, and makes use of an electric bike.
“It’s fantastic because I can peddle up Albert St and look like I’m really fit — and it’s quicker.”
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Issues of social mobility rather than inequality may be to blame for the current rise in anti-establishment politics
As anti-establishment politics continues its seemingly unassailable rise, the concept of ‘inequality’ is often invoked to explain it.
While there is no doubt inequality has driven many to the polling booths in support of Donald Trump, Brexit, Pauline Hanson and others, arguably what is at stake is more an issue of social mobility.
People will tolerate inequality. Many accept it as a natural by-product of an economy that encourages entrepreneurship and growth. Indeed, Americans have voted in as their president a man who embodies that inequality.
But that tolerance comes with hope; a hope that they, or their children or grandchildren, can reach the upper echelons of the economy if they continue to work hard, make prudent long-term decisions, and have a little bit of luck.
Increasingly, Western economies have represented a closed circuit of economic enrichment.
Alan Krueger coined the term ‘The Great Gatsby Curve’ to describe the way inequality affects social mobility.
As Krueger summarised in a Brookings Institution blog, “greater income inequality in one generation amplifies the consequences of having rich or poor parents for the economic status of the next generation”.
Once the working class gets the sense that their prospects of upward mobility are waning, they are willing to turn to a circuit breaker.
For decades, the left have adopted the rhetoric and policy that implies the economy is a ‘zero-sum game’.
Specifically, the consistent premise of their arguments has been that something that benefits the rich must automatically, and equally, cost the poor. A gain to one is a loss to another, they argue.
This is simply not the case when it comes to economic growth. But that is beside the point in relation to the present climate. The bigger problem is that such a paradigm becomes easily transported to the flow of people. Priming voters to see the economy as a zero-sum game makes it very easy for the nationalist right to argue that immigration is likewise a zero-sum game. It becomes difficult for the left to then argue that immigration is the one area where a benefit to one (the migrant) is not a cost to the other (the destination economy).
Perhaps that is why we are beginning to see some New Zealand’s political parties tentatively embracing anti-immigration policy.
The Greens recently released a new, population-based immigration policy, stating they would cap overall net migration at one per cent of the population — including returning New Zealanders. “We know that immigration is becoming more of a concern for people and in my experience the vast majority of people aren’t concerned about immigrants, they’re concerned about the impact on house prices, and infrastructure,” says James Shaw, Green Party co-leader.
“Others around the world think as New Zealand First does,” said New Zealand First leader Winston Peters this year, at the party’s 23rd anniversary. “They were tired of being fobbed off about issues like immigration.”
Much has been made of a potential ‘Trump moment’ occurring in New Zealand in the future. Already, we may be falling into the same trap of the establishment in the US: being paralysed, fascinated even, by the phenomenon; musing over, sometimes analysing with impressive depth, its causes; but in doing so, failing to consider its remedies.
But viewing inequality through a predominantly economic lens — incomes — fails to account for all the other things that make for an upwardly mobile life.
Anxieties do not only stem from income levels, but from not being able to get your child into a good state school, poor health, intolerance, a lack of social support, or few opportunities to progress.
Income is not everything. Indeed, it is everything aside from income that matters most for social mobility. From upward mobility, higher incomes follow.
This is partly the reason why existing measures of inequality are flawed.
The Gini coefficient is the most used measure of inequality and looks through the lens of wealth at the income distribution of a nation’s residents. The number ranges from zero to one, where zero represents perfect equality — where everyone has the same income, and one represents perfect inequality. A higher Gini coefficient means greater inequality.
New Zealand’s Gini coefficient of 0.33 ranks New Zealand at 22nd — below the Netherlands but ahead of Norway.
However, aside from the fact that the measure cannot tell the difference between a society where everyone is equally poor and a society where everyone is richer, but incomes are more unequal, it is also deeply flawed as it fails to reflect the fact that inequality is about far more than simply income.
If the measure cannot reflect differences in health and social support and education outcome and opportunity and job quality, it means that you miss the root malaise that is behind Brexit, and to a certain extent Trump.
The Legatum Institute released its 10th annual global Prosperity Index last month — a huge study that measures the prosperity of 149 countries based not only on their wealth but also on a series of other factors including education, personal freedoms, how safe people feel and how strong community networks are.
This year, New Zealand topped the world for prosperity, and ranked first in the Index’s measure of economic quality, first for social capital, second for business environment, second for governance and third for personal freedom.
Harriet Maltby, head of policy research at the London-based Institute’s Prosperity Index team says that it is important to look at all inequalities combined, through one measure (prosperity), otherwise you miss the very reinforcing nature of deprivation.
“The problem is that traditionally, national success and related issues such as poverty and inequality, have been looked at from a purely economic perspective. While we recognise that wealth matters, so too does wellbeing.
“Income measures miss so much about what makes for a good life. That’s why the Prosperity Index looks at wealth and wellbeing combined.
“It is opportunity — real life chances — that drives prosperity, not money,” says Maltby. “This all feeds in ultimately to a country’s long-term success, which matters to business.”
Maltby, who is visiting New Zealand over January, explains that we need to shift our perceptions of what inequality looks like. “Making people richer in itself is not the answer”, she says. “We need a measure like prosperity that can look at wealth alongside all the other things that matter in life, and make policy decisions based on that. The New Zealand Government is already thinking like this, and other countries should do the same.”
“Britain is achieving what it achieves with a significant proportion of its population totally left behind in a whole load of dimensions. Imagine the potential and prospects for a nation if it could use and develop the talents of all?”
While it is useful to analyse the impact of globalisation on America’s rust belt, too much time spent examining the causes of those anxieties allows the establishment to feign intellectual interest in the winds of change, while making little or no progress in harnessing them for the good.
At last month’s Apec leaders’ summit in Lima, the leaders of the Pacific Rim pushed back against the creeping global protectionism, promising to continue to strengthen economic ties.
“If the United States doesn’t want to participate in free trade, [president-elect] Trump needs to know that other countries will,” said John Key at Apec.
“We hope he is part of the programme.
“But if not, we are going to continue doing things.”
Meanwhile, Australian Prime Minister Malcolm Turnbull warned that protectionism is the way to poverty. “We have seen this film before, the world did this in the 1930s after the Great Depression and made it much worse,” he said. “It’s not only missing out on a positive but risking a very big negative in terms of destabilising the global trading and strategic system.”
What is often overlooked is that businesses, particularly those that benefit most from a globalised world, can play an important role in helping to find the solutions, and will benefit from operating in a country that offers up the talents of all its people.
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Maintaining a balance between economic and social progress is a key part of investing in our country
Should businesses provide more opportunities for employees to share in their firm’s governance, and ensure communities benefit more from their profits? These ideas appeared briefly on the radar in Britain recently.
British Prime Minister Theresa May appeared to suggest employee representation on company boards may be mandated while campaigning for the Conservative leadership, and mooted the idea of lump sum payouts (thought to be up to 10,000 ($17,746) per household) to communities affected by fracking.
The commercial end of town might also reconsider hiring policies.
Much resentment arises from a sense that upward mobility is limited for the working class. A significant driver of this is the growing norm that a university degree is essential to gain a corporate job. In the past, aspirational individuals from low income backgrounds could pursue an apprenticeship at prestigious firms in financial, administrative, or legal areas. Now they cannot without taking on three years (or more) of university fees and foregone income.
EY have already removed their GPA-threshold for screening university graduates in the UK, stating their research had “found no evidence to conclude that previous success in higher education correlated with future success in subsequent professional qualifications undertaken.”
It would also be helpful — though, granted, high risk — for some businesses to enter the political sphere when it comes to issues that affect their bottom line and, in turn, their workers. Being willing to more staunchly defend out-sourcing and its benefits — both to foreign workers and domestic consumers — would be helpful. Radio silence on globalisation implies shame about globalisation, and allows its opponents to steal the narrative.
This isn’t limited to the Trans-Pacific Partnership (TPP) debate.
Before New Zealand signed the much lauded China free trade agreement in 2008, protests were held up and down New Zealand, with claims that “so-called free trade with China has cost tens of thousands of skilled jobs in New Zealand manufacturing industries” and “under such an FTA the negative impacts will be felt by working New Zealanders and their families while the profits of transnational corporations will soar”.
The outcome was benign.
New Zealand’s trade relationship with China has nearly tripled over the past decade. Two-way trade has risen from $8.2 billion in the year ended June 2007 (the year before the free trade agreement was signed), to $23 billion in the June 2016 year.
At Apec last month, New Zealand and China announced they will upgrade the historic agreement to ensure it remains one of the highest standard agreements ever negotiated — particularly now that e-commerce has become increasingly significant for bilateral trade.
Like the Trans-Pacific Partnership, this deal received much support within the business community. Yet most businesses remain silent on why they think it is good for New Zealand. Some will argue it is for selfish reasons — that it allows the rich to get richer — but these arguments will be levelled by opponents regardless.
And very few business leaders actually made the argument for why the TPP could benefit their workers, New Zealand consumers, and citizens overseas (who, yes, are deserving of our consideration).
This will become more important as the negotiation of the Regional Comprehensive Economic Partnership (an Asia-Pacific agreement that includes China instead of the US alongside a range of other countries), gathers momentum after the breakdown of TPP.
Opposition may become vehement, with widespread public scepticism of Chinese trade potentially dwarfing that of the US, making the political cost of New Zealand’s participation high. Unless the success story of the China free trade agreement is told — and not just by politicians — our participation in this key part of the region’s future trade architecture may be hindered.
It may also be prudent for businesses to bear the costs of retraining when jobs are displaced.
Maintaining a balance between economic and social progress is a key part of investing in the future. Building strategies to invest in society will create better, brighter and stronger communities. What’s more, an investment in social change is difficult to reverse — once it takes root, it can only grow.
It is more important now than ever that New Zealand’s top businesses take a serious role in this, and consider whether certain protection measures are necessary to minimise disruption. What these companies say and do could ultimately help — or hinder — New Zealand’s ability to solve those issues that will impact the future of the country.
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A handful of forces are shaping the future of what global business will look like
Four global forces are breaking all the trends and shaping the future of what global business will look like: greater global interconnections, industrialisation and urbanisation in emerging economies, an ageing world and disruptive technologies.
These disruptive forces will clearly have an impact on the business environment and will have an impact on investing for the future.
Consulting firm McKinsey & Company outlines the four global forces in its presentation: ‘No Ordinary Disruption’.
Greater global interconnections
The world is becoming increasingly connected through trade and cross-border flows of capital, people and information. Since 1990, cross-border flows have increased five-fold. Data flows are surging and connecting more countries — in 2005, 4.7 terabits per second were transferred globally, growing 45 times larger by 2014 to 211.3 terabits per second.
Australia and New Zealand are noted as two particularly well-connected economies in all five types of cross-border flow (goods, services, finance, people and data).
Relative to the size of the economies, Australia and New Zealand have more exchanges than most pairs of countries — people and data are rated particularly high, with 27 and 25 per cent share of total flows between the countries, respectively.
However, Australia and New Zealand rank lower in global connectedness — Australia is ranked 27th (down 10 places from last year) and New Zealand is ranked 48th (down five). This is in contrast to Singapore, the Netherlands and the United States who take out the top spots.
McKinsey & Company notes that the current slowdown masks digital transformation, but creates opportunities for smaller firms to participate. While Australia and New Zealand are strong together, it is important to acknowledge there is much more that can be done.
Industrialisation and urbanisation emerging
The rise of China, India and other emerging economies over the past 10 years has seen the global economic “centre of gravity” shift at an unprecedented pace. Emerging markets are going through simultaneous industrial and urban revolutions. The acceleration of output per person is occurring at roughly 10 times the pace of that following Britain’s Industrial Revolution and 300 times the scale — creating an economic force 3000 times as large.
McKinsey projects that by 2025, 46 of the global top 200 cities will be Chinese (in terms of 2025 GDP) and emerging regions of the world will be home to almost half of all Fortune Global 500 companies.
This massive scale and momentum means big shifts in economic power, but it is the mid-tier cities that are driving growth — not the megacities. Nearly three billion people will join the consuming class by 2025, bringing new consumers and competitors for businesses to consider.
An ageing world
The population of advanced economies is ageing rapidly. There are currently three countries where one-fifth of the population has passed the age of 65 — Germany, Italy and Japan. By 2020, 13 countries will fit this profile. By 2040, about one in four people in advanced economies and China will be 65 years old, or older.
Productivity, which is needed to meet the demands of an ageing population — and therefore becoming increasingly critical — is going the wrong way. This has implications for skill gaps and successions, and without an increase, a smaller workforce will constrain consumption and slow the overall rate of economic growth by up to 40 per cent over the next 50 years.
Mobile internet and advanced robotics have seen massive increases in development pace. It took 115 years to advance from the first phone call to the launch of the first website — and then 16 years until the first iPhone was launched in 2007.
We have all seen the statistics demonstrating how quickly the adoption of new technologies is accelerating. The amount of time taken to reach 50 million users has decreased from 38 years for the radio, 13 years for television, three years for the internet, nine months for Twitter, to an incredible 19 days for the 2016 mobile game phenomenon of Pokemon Go.
Despite these advances, McKinsey reports that digitisation is still in its early days, with advanced economies capturing only a fraction of their true digital potential.
Smaller firms and large sectors (such as agriculture, construction, hospitality, government and healthcare) remain laggards in technology adoption, and are still a long way away from achieving potential benefits.
Both New Zealand and Australia are currently lagging behind the OECD average in terms of STEM qualifications.
Of all graduates, 18 per cent in Australia graduate from across science, technology, engineering and mathematics. New Zealand is slightly higher at 21 per cent (up five per cent from last year), yet talent across these subjects will be critical in shaping the future of our economies.
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The high level story for the 2016 Top 200 Index is one of consolidation — and mightily effective consolidation at that.
All indicators showed an improvement on their 2015 figures aside from revenue, with profit after tax up an impressive 18.8 per cent. Among those doing the heavy lifting are notable Kiwi companies such as The Warehouse Group, Air New Zealand, and Z Energy.
While total revenues fell by 0.7 per cent compared with the 2015 figure, underlying earnings (EBITDA) rose by 11.1 per cent. This indicates that Top 200 companies have achieved a far greater reduction in costs than the fall in revenue.
The trend of doing more with less is reflected when one digs deeper too. Cumulative return on equity ticked up to 20.88 per cent this year, from 19.38 per cent in 2015.
At the high end of the Top 200, the revenue gap between Fonterra and the rest closed somewhat, as New Zealand’s dairy co-operative saw an 8.7 per cent drop in revenue.
However, after-tax profits rallied, increasing 64.8 per cent for Fonterra (a reflection of a move towards higher-value products) and 68.9 per cent for Fletcher Building (ranked second in terms of revenues and third in terms of after-tax profit).
The opposite is true for Woolworths New Zealand Group, who increased revenue by 6.6 per cent but saw after-tax profit fall 204.6 per cent, into negative territory (posting a loss of almost $190 million).
Xero, after debuting on the Top 200 last year, once again performed strongly in terms of revenue, with 60.1 per cent growth. As expected, the company once more posted a loss, as it continues to spend on sales to gain market share throughout the US in particular.
Silver Fern Farms’ profit growth has been particularly impressive. An increase from $474,000 to $24.9 million saw them ranked second in terms of percentage increase in profit — the result of a new value chain strategy that has improved returns.
A similar story of a company reaping the rewards of a highly strategic approach is that of the A2 Milk Company. They are a new entrant to the Top 200, ranking 97th in terms of overall revenue, and topped the list in terms of revenue growth.
One area where revenue certainly did increase was in the Government’s tax take from the companies that comprise the Top 200.
Tax paid increased by 14 per cent, contributing to the much-vaunted Crown surplus increase announced in October.
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