WELCOME to the fifth issue of MEttle, a collection of stories and interviews with influential New Zealand business leaders, curated by Minter Ellison Rudd Watts.

From the dairy sector, to banking, to alternative funding options, China’s economy, and beyond, we are undoubtedly operating within a ‘new normal’.

New Zealand’s growing retirement funding deficit presents challenges on a number of fronts, as does the question of how major infrastructure works will be funded and optimised in the future.

These pressures and ongoing fiscal constraints at both Government and business level mean we are forced to respond with creative and innovative solutions. Disruption comes in many guises, whether it’s using data to run our cities’ infrastructure, or rising to the challenges presented by cyber threats.

In the rapidly evolving times we find ourselves operating within, it’s time to capitalise on the disruptive nature of today’s business world and use it to drive NZ Inc. ahead.

CATHY QUINN, CHAIRMINTER ELLISON RUDD WATTS

04 BETWIXT & BETWEEN Gavin Walker throws down the gauntlet: we have to do something about New Zealand’s growing Superannuation deficit.

09 NO MAN IS AN ISLAND Opening the file on cyber crime.

15 GRAEME HAWKINS: REFLECTIONS Governance musings and lessons learned, as told by professional director Graeme Hawkins.

18 KIWIRAIL AND ITS JOURNEY AHEAD Has the time come to shift the rail conversation from cost to value?

22 THE AMELIORATION OF NEW ZEALAND'S FINANCIAL REGULATION Rob Everett on taking the reins and embedding the Financial Markets Conduct Act.

27 A GAME OF TWO HALVES What’s in store - and what to look out for - in New Zealand’s economy.

31 OFF THE GRID Rethinking how we deliver infrastructure in a data-driven, alternative funding age.

35 A NONCHALANT NATION Is New Zealand’s culture too laid back to care about Health & Safety?

40 THE NEW NORMAL: CHINA'S HISTORIC OPPORTuNITY After a turbulent year for China, our trade relationship continues to be incredibly important.

BEt�Ixt AND

BEt�EEn TIRED OF PEOPLE SKIRTING AROUND THE CRITICAL QUESTION

OF HOW WE WILL FUND OUR GROWING SUPERANNUATION DEFICIT? GAVIN WALKER THROWS DOWN THE GAUNTLET TO METTLE

READERS AND NZ INC. TO DO SOMETHING ABOUT IT.

With a rapidly aging population, one might expect that how we’re going to fund the nation’s retirees would be the issue of the decade. Not so.

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Questions are not being asked, and solutions aren’t being explored, as the challenge of funding New Zealand’s baby boomer generation into retirement becomes increasingly pressing.

In this special MEttle feature, we spoke to Gavin Walker, former Chair of the Guardians of NZ Superannuation, to get his personal views on the challenges Super faces, why he thinks politicians need to get their heads out of the sand, and how businesses should step up and do something about it.

A BIG PROBLEM, A SMALL DEBATE Walker doesn’t hold back: “There is no doubt that New Zealand has an aging population, and yet we’re blind to this issue from a public policy perspective. We’ve been very slow in adopting effective policies that would create a solution to the pension funding gap we’re facing.”

MEttle thinks he’s right. When you look at comparative data from similar countries – Australia, Canada, and the UK – New Zealand’s demographics show an earlier and slightly higher aged population. The conundrum is that all of those countries are taking action on their Superannuation schemes, looking 15 to 20 years ahead and asking the hard question of how the needs of the baby boomers are going to be funded. In Australia (and globally), which is often touted as having one of the best approaches to its superannuation in the OECD, funding retirement is a huge issue and a topic of ongoing scrutiny and action.

“It is of great concern that here in New Zealand, there’s just not sufficient debate going on to resolve anything – and the problem is only growing in importance and urgency. There’s a reluctance from politicians to get involved with how to fund the pension and I simply can’t understand why. All other comparable countries recognise the problem they’re all facing; unfortunately, our problem is at least as bad as theirs, but nothing is being done about it.”

GOING BACK TO SUPER’S ROOTS To understand how and why it’s all gone wrong, Walker takes us back to the establishment of the New Zealand Superannuation Fund in 2001.

“Now 12 years invested, the Super Fund was established to smooth the fiscal burden in relation to increased Superannuation payments. Of course, the Super Fund could never be in a position to cover that entire fiscal burden, but with astute and responsible investment decisions, the Fund could certainly contribute to reducing the intergenerational inequity that arises with an aging population to support.”

Since its formation, the Fund has been an outstanding performer, adding significant value to the Crown. In 2015 it was named by JP Morgan as the top performing sovereign wealth fund in the world.

BEST IN CLASS, FIRST TO BE CUT One might expect that leading performers get rewarded for their efforts: not so, when it comes to the Super Fund. Despite its success, the Government contributions to the Super Fund were put on hold in 2009 during the GFC and are unlikely to recommence until 2022/23.

In Walker’s view, the current Government doesn’t see an issue with the ongoing and relatively unchallenged halt to its contributions to the Super Fund.

“The foundation for their position of not reinstating the Government contribution to the Super Fund, is that they want to provide capital contributions out of budget surpluses after they have got New Zealand’s net debt to GDP ratio down to a target 20% of GDP from 28% today. They forecast this to happen around 2022/23.

“I find that problematic: that timing is based on a future forecast of GDP and fiscal outcomes which makes no allowances for disruptions to the economy. New Zealand is not a high growth economy, so we have to be conservative in our forecasts for GDP. The net debt measure used also ignores the future pension liability and the current Fund assets. For example, if the Fund was included in the calculation, the Government net debt would now be 13%. Furthermore, we can’t dispute the facts that by the late 2020s, there will be over one million people in New Zealand, aged 65 years and older – and all of them are entitled to a pension.

“New Zealand Super will cost $11b in 2015. By 2030, that bill will rise to $30b and swell to $100b by 2060. The drive to reduce our GDP to debt ratio does not negate the facts or the size of the bill that will come with these demographic changes.”

Speaking of bills, here’s a quick quiz: do you know who has been one of the largest individual corporate taxpayers for the last 3-4 years? The NZ Super Fund. Walker says that it’s the only Sovereign Wealth Fund in the world to pay tax, which

“There’s a reluctance from politicians to get involved with how to fund the pension and I simply can’t understand why.” Gavin Walker, former Chair of the Guardians of NZ Superannuation

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ThE ThREE TiERs: �ho's got it Right?

Walker points to the common approach to Superannuation – three complementary tiers of cover.

First, is the universal pension through a centrally-funded social insurance system. This has eligibility and generosity requirements. In Australia, the safety net comes under the umbrella of a means tested benefit. New Zealand has a universal Super system, under which couples get 66% of the average Kiwi salary from the age of 65 years.

How those universal payments are paid for and implemented is a core component of the whole debate.

The second tier is a mandatory savings scheme that covers compulsory employer contributions too. In New Zealand we have no compulsory employer savings scheme, and instead we have effectively a tier three voluntary scheme through KiwiSaver.

The third tier is how we are incentivised to save as individuals. The Australian model has a subsidy applied to any additional savings that voluntarily go above the compulsory employee level (the second tier), which is a great encouragement for people to save more than the minimum level.

I use the Australian model as an example. However, most OECD countries have some form of all three tiers to their retirement savings policy, and have had so for a long time due to the known rising demographic challenge.

This begs the question: why is New Zealand so different in policy when our demographics are so similar to Australia and many other OECD countries? Who’s got the model right?

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equates to around $4b that could otherwise have been invested through the scheme. And it’s not only the Fund’s domestic tax outflows that Walker’s concerned about.

“No one is asking the question that seems rather obvious to me: upon meeting its net debt to GDP ratio target, will the Government of the day reinstate its contributions to the Fund to the full extent required to fulfil its purpose? By 2023, contributions to the Fund will have been underfunded to the tune of around $26 - $27b, up from $14b today, and substantial investment returns on those missed contributions will also have been foregone. The formula in the Fund’s legislation requires ‘catch up’ funding, but given the size of the gap I very much doubt it, and the fact that no one’s asking is a great concern to me.”

Neither of the above factors are widely recognised, much less discussed, which is testament to the overall lack of debate and intelligent conversation that surrounds New Zealand’s growing Superannuation deficit.

ASKING THE HARD QUESTIONSIn Walker’s opinion, there’s a critical question that needs to be asked, and answered: “How do we really think we’re going to fund Super in New Zealand?”

In his mind, two major changes to KiwiSaver, as well as the halted Government contribution to the Super Fund, have eroded New Zealand’s opportunity to address the funding gap even further. The first was the removal of the $1,000 Government KickStart grant, which gave many parents an incentive to enrol their children in the scheme. It also gave people thinking they wouldn’t be able to contribute a lot through their current income at least the beginning of savings for retirement, and created an awareness of the issue and what was needed.

The second change, was that the annual member tax credit was halved under the guise of fiscal sustainability; rationale that doesn’t cut it for Walker.

“When it comes to halving the member credit and axing the KickStart grant, the fiscal sustainability argument doesn’t hold much credibility. If there were other forms of compulsory savings, it might make sense.

“However, recent studies show that over 40% of KiwiSaver members didn’t even contribute enough to claim the tax credit, so I would ask; what does that say about the country’s savings mentality and preparedness for retirement? I think that’s very disturbing data which demonstrates a disconnect in terms of New Zealand’s need for Superannuation in retirement and the Government’s willingness to act on it.”

Walker says watering down two of the key incentives for members was a short-sighted move by the Government to reduce its expenditure in a bid to reach surplus, and as far as public policy goes, it’s the wrong move.

“The Government has got itself in a bind: the current Government, and more recently the leader of the Opposition party, have both said they won’t raise the age of retirement above 65, despite that being the trend internationally. The fact is, people are living longer and yet the powers that be are responding by putting their heads in the sand. It’s as if policy makers are incapable of having an open and mature debate about this issue, and I’m worried about the impact that’s going to have on the quality of life of retired New Zealanders in the not so distant future.”

THROWING DOWN THE GAUNTLET TO BUSINESSPolitical posturing or blame game aside, the time has come for discussion and change. Walker says that businesses large and small have a responsibility to be involved in the discussion around Super.

“Businesses need to educate their employees around the need to have a disciplined savings regime. It’s a win-win to have more education in this area. Beyond the realm of their own businesses, employers of our larger companies need to engage with the political community and advocate that retirement is an issue that desperately needs to be addressed.

“I’d like to see business leaders start to press for policy change. It is only through better policy setting that we’re going to be able to protect future generations and ensure that everyone can live in comfort and financial security upon retirement.”

“Superannuation as we currently know it, is not sustainable” Gavin Walker, former Chair of the Guardians of NZ Superannuation

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“Company directors are high profile targets. Public information about them can be exploited to construct attacks and gain access to their companies and staff.”Sebastian Madden, PGI Cyber Academy

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TWO LEADERS IN THE CYBER SECURITY SPACE SAY THE QUESTION OF CYBER ATTACKS ON BUSINESS IS NOT IF,

BUT WHEN, AND THE WAY WE RESPOND WHEN THEY DO HAPPEN, IS TOGETHER.

Cyber crime: it’s a risk that is finally growing in importance for businesses around the world. This year, cyber crime is named as the third biggest risk for businesses globally, with a recent article on New Zealand’s Security Watch website placing total market exposure from NZD$500 million to $1 trillion.

With New Zealand’s stated focus on innovation and R&D, the threat of IP theft and cyber espionage is not to be underestimated. Yet, despite being a recognised risk, business attitudes, actions and board-level responses still leave much to be desired.

Cyber crime may be slowly creeping into the agenda, but has the need for action and preparedness been left too late? MEttle got the download from two of the leading minds on cyber security issues: Paul Ash, Director of the National Cyber Policy Office, and Sebastian Madden, Group Director Cyber and Technology of the PGI Cyber Academy and former Chief of Staff to the UK's National Security and Intelligence Coordinator.

NO man Is an Island

OpEnIng thE FIlE On cYbER cRImE

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WHOSE RISK IS IT ANYWAY? Is New Zealand any more or less at risk from cyber attacks than other countries? Sebastian Madden says that the precise nature and severity of cyber risks actually varies more from sector to sector than from country to country:

“Companies that invest heavily in R&D or exploration, such as pharmaceutical or extractive companies, have long been high priority targets for IP theft; banks and financial services are at the top of the list for serious and organised crime gangs. Retailers, charities, medical insurers and other firms with large quantities of financial or personal information about their customers are the targets of criminals who want to steal and sell the data.”

Madden makes a salient point: if businesses investing in R&D are more at risk than those that don’t, and there’s a nationwide push for New Zealand to proceed down a pathway of more innovation and knowledge creation, are we opening the flood gates to more risk? A balance between the two must be struck: investing in cyber security measures at the same time as R&D and innovation are commercialised, elevating New Zealand’s standing on the world stage and protecting its future in the process.

A GROWING ISSUE FOR THE GOVERNANCE COMMUNITY Paul Ash says that only a year ago, it was hard to discuss issues of cyber crime and cyber security with the governance community. The tide is changing.

Ash says that his office has noticed that organisations have increasingly started to think about what kind of board and expertise they need to deal with cyber security – but there’s still a long way to go: “At present, the demographics of many boards don’t lend themselves particularly well to tech savvy people being around the top table. Boards need to bring them on, and soon.”

Madden, on the other hand, says his organisation is seeing a mixed picture when it comes to the level of importance boards are placing on cyber risks: “Many boards absolutely understand the risks that cyber crimes present to their business and are taking measured and proportionate steps to mitigate those risks. Others have realised that they need to do something but have yet to implement a sensible response. And yes, we do come across a few that are in denial or believe that the risks are being overstated.

“One of the main problems is the lack of education at board level about the risks that exist, and the scarcity of skilled individuals within companies who understand what needs to be

done. As a result some boards have been badly advised and are taking steps that are needlessly cumbersome, expensive or just believe that their IT department has the situation under control – when that is not the case.”

BUILDING DIRECTOR LEVEL CAPACITY TO RESPOND TO CYBER ISSUES Madden says that company directors need a good, balanced understanding of cyber risks for two reasons.

“Firstly, the strategy and investment plan for a company’s response to cyber threats has to be set in the light of an appreciation of its assets and supply chain and the damage a successful cyber attack could do to future products, reputation, brand, customer trust, regulatory responsibilities or share price. This means that discussions of a company’s cyber strategy should be led from the top and this requires a baseline understanding of the principal cyber risks.

“Secondly, company directors are high profile targets. Public information about them can be exploited to construct attacks and gain access to their companies and staff. I would strongly recommend that executives attend tailored cyber training, that boards take a half day to have collective coaching and discussions of their cyber strategy, and that they conduct a scenario-based exercise on how their company would respond to an attack in progress.”

As highlighted by our contributors, boards need to think about how their composition will enable or hold them back from addressing cyber security issues. Expect to see more emphasis placed on cyber skill sets as a key part of board criteria in the months and years to come as board roles are refreshed.

“It is estimated that there are one million fewer cyber security professionals in the world than are needed, and this cyber skills gap is growing every day.”Sebastian Madden, PGI Cyber Academy

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INTERNAL TEAMS HAVE TO FACE UP Madden says that while cyber security shouldn’t be the IT department’s responsibility, it pays to equip your internal team to face up to cyber issues in more ways than one:

“It makes financial sense to equip the in-house team with the tools they need to identify and resolve the majority of successful attacks. A lot of our clients complain that security specialists are expensive, hard to find and spend a long time getting sufficiently up to speed with the networks and operational drivers of the business to make valid recommendations.

“Developing the in-house team makes even more sense when it is estimated that there are one million fewer cyber security professionals in the world than are needed to do the work that is required and that this cyber skills gap is growing every day. External response teams are even more expensive so it helps to have had the IT team doing a good job on the initial response and containment to minimise the costs of any external support if it is eventually required.”

COLLABORATION OVER COMPETITION It might be counterintuitive, but when it comes to security, working with your competitors could be a useful strategy to win the fight against cyber crime.

Ash says that larger companies have to think about how a collaborative approach could be applied: “Two to three years ago, many firms considered that keeping up barriers and protecting only yourself against cyber risks was a way to distinguish yourself from competitors. Today, there’s a growing recognition that in the long run, it profits no one if even one business in the sector has a cyber breach.

“Ask yourself: what kind of collaboration might be possible in this space? If you can lift the cyber security of your sector more, while still protecting any commercial-in-confidence material, then everyone wins. It’s important to recognise that we don’t stand alone: no one is an island in the cyber eco system.”

“No one is an island in the cyber eco system.”Paul Ash, National Cyber Policy Office

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INSURING FOR THE FUTURE If no one is an island, then in the context of cyber security, it’s no surprise that collaboration and co-operation come to mind. Working with your insurance provider to protect your business is just as important in equipping yourself against the threats at bay. Despite the fact that cyber insurance is no silver bullet and may not cover off all liability, insurers named cyber crime as one of New Zealand’s top five insurance risks for the first time this year (it’s currently named as the number one risk in Australia).

When it comes to cyber insurance, Ash says the Kiwi market has taken longer to take off than other large economies, but is now maturing quickly: “In days gone by, it was easy for New Zealand to see itself as removed and protected from cyber threats due to our geographic isolation.

“Today, with the internet facilitating the exchange of information and communication like never before, our relative geographic barrier has become something of a moot point. As a reasonably well developed economic nation, New Zealand is very attractive to cyber criminals and we should act accordingly.”

Madden says cyber insurance forms part of a company’s response and should be considered in the light of the other steps the company has taken: “Once the board has considered all the cyber risks it faces, such as which groups are targeting it, what they are wanting to steal, what the most likely attack routes are and whether the company’s systems are vulnerable to them. The board will then need to consider how much should sensibly be invested to mitigate those risks, how much on hardening the defences and minimising vulnerabilities and

how much on detecting threats once they are in the system and mobilising an effective response.

“Cyber insurance can be used to mitigate residual risks, the risks that are less likely to materialise and to identify where the cost of prevention is too high to absorb. One word of warning: the quality and scope of cyber insurance varies widely. Some policies are good and comprehensive, others have less substance to them and much of what is most likely to happen or would matter most is excluded.”

So then, where does that leave entities looking to up their game when it comes to securing the right level and type of insurance against cyber threats? Map out your risks, get expert advice, and be prepared to have cyber security be a constant issue that requires ongoing attention, because as Ash points out, the organisations doing best at defending themselves against cyber security threats are the ones who constantly ask: how are we doing?

CYBER CRIMINALS TARGET SUPPLIERS AS LARGE BUSINESSES LIFT THEIR GAME As large organisations become increasingly sophisticated in their cyber security measures with robust support services, and insurers are turning their attention more towards cyber crime, cyber criminals have started to target suppliers who provide services to those larger businesses.

Ash says that thinking outside the bounds of your own organisation to combat this worrying trend is critical: “What we’re seeing happen now is criminals targeting the services sector; they’re going after the accountants and the lawyers, to get to their client bases. By thinking outside the boundaries

“New Zealand’s prosperity is only enabled through its cyber security settings.”Paul Ash, National Cyber Policy Office

of your own business, you can identify suppliers that you work with, and engage with them on cyber security issues. This type of collaborative approach has a network effect, where everyone can thrive together.”

A QUESTION OF PROSPERITY? In that vein, Ash makes a compelling case for New Zealand's prosperity and potential to thrive, depending in part on the nation's level of cyber security.

“Cyber security is a key part of businesses and individuals being able to prosper. New Zealand’s prosperity is only enabled through its cyber security settings, so it’s important to share costs, resource and capacity. For countries that are being proactive about cyber security and are doing it well, it is much easier to do online business there.

“If you aren’t on top of cyber security or you don’t do it well, there’s a much less trusted environment and less reason for people to conduct online business with you.”

POWERING UP: PARTING WORDS FROM THE EXPERTS Far from being exaggerated, Madden says the threat of cyber risks is, in fact, downplayed and underestimated: “The risk of cybercrime is real, here to stay and growing. Much of its extent is still hidden. I was shocked to see that the crime rate across England and Wales doubled over the last 12 months when recorded cybercrimes were added for the first time. Until we counted cybercrimes, the crime rate had appeared continually to be falling. It is now clear that it hasn’t.”

“To compound the problem, many companies have been attacked and suffered damage without knowing it. According to US figures, 50% of the organisations that have reported suffering a cyber crime first found out when they were informed about it by government authorities. So, it is a safe assumption that the true rate is far higher than the recorded rates and that the large majority of companies that have been successfully attacked still do not even know it. I often find myself telling businesses that it is not a question of if your network gets compromised, but when, and how you respond.”

Ash’s advice is pointed straight at directors:

“If you’re on a board, it’s important to get cyber security on your agenda before it becomes the agenda. You don’t want to be in an emergency situation looking at the risks for the first time.”

With the governance community increasingly at risk of cyber crime, the onus is firmly on directors and company executives to ensure that actions, plans and thorough testing is done to protect their businesses, NZ Inc. and its future prosperity. Directors should also be checking that the entities they govern have insurance that covers cyber security.

TRICKS OF THE TRADE:

RESOURCES FOR DIRECTORS

Paul Ash offers a few practical tips for the governance community to stay on ahead of cyber risks:

“By all accounts, the onus is very much on directors and executives to lead the development of a cyber security culture in their organisation. Even seasoned professionals are surprised to hear that up to 85% of cyber attacks can be prevented through basic information risk management, so everyone has a responsibility to step up their efforts, get informed and act now to mitigate these risks.

“Connect Smart is a well-resourced and accessible hub of information on cybersecurity. Taking on the theme of ‘Leading in a Digital Era’, directors and executives alike can register for courses and browse tailored advice and guidelines, to help ensure Kiwi businesses are protected as much as practically possible from cyber threats.

“For a comprehensive and very useful risk management approach, the Cyber Risk Practice Guide, issued by the Institute of Directors in June 2015, is a valuable reference document for the governance community. Posing critical questions that directors have a duty to ask, the guide is a practical way to solidify cybersecurity as a must-address issue, from the highest level of an organisation. I’d thoroughly recommend readers look into both of these resource hubs and get equipped to lead in this important area.”

MORE RESOURCES & TIPS ATCONNECTSMART.GOVT.NZ

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“Making a difference as a director has always been my main point of satisfaction.”Graeme Hawkins, past Chairman of Ports of Auckland Ltd

GRaEmE ha�kIns

REFLECTIONS

Professional director and immediate past Chairman of Ports of Auckland Ltd, Graeme Hawkins, offers his reflections and musings on governance and lessons learned from his many years of sitting at the top table of some of New Zealand’s most high profile businesses.

During Mr Hawkins’ time on the Ports of Auckland Board, the company experienced a 400% increase in dividends – an incredible transformation by anyone’s standards. As you will read in these reflections, making a difference as a director has been a consistent source of satisfaction over the years for the respected governance figure…

GRaEmE ha�kIns

QUALITY IS THE KEY TO AN EFFECTIVE BOARD If there’s one thing I’ve learnt over almost two and a half decades of sitting on boards as a director, it is that a company’s board is only as good as the people who serve on it.

The most important thing for the future of governance is to ensure the directors are the best candidates for the job. It’s up to these people to agree upon a common pathway into the future for the business and, over the years, this has become more difficult to achieve, as the directors sitting on boards continue to become more diverse.

Reaching and achieving consensus is, in fact, quite a hard task and it is certainly not as easy as it might look. I say this because every director offers their own unique perspective to key issues that a board has to address and reach a consensus to which all directors can commit. This might sound basic, but it’s sobering to reflect how many times I’ve seen it go wrong, often resulting in deadlock, dysfunctionality and the inability to reach an agreement on important decisions.

Good quality people with a fair share of common sense are generally able to break such impasses.

WHEN THE GOING GETS TOUGH, THE TOUGH GET GOINGBeing a director at an organisation during a disaster is never a pleasant experience. These tricky situations are a stern test for any board and not all directors handle it well; especially with the possibility of reputational damage lurking around the corner. In these situations, it is often a case of “all hands to the pump” which often involves inordinate time demands by directors.

“When the public and media are calling for heads to roll, facts go out the window and directors start looking at the fine print of their D&O insurance.” Graeme Hawkins, past Chairman of Ports of Auckland Ltd

The irony is that people who survive and learn from these experiences become much better directors as a result. I was a director of Mercury Energy when the Auckland CBD experienced a power crisis in 1998, which was a difficult time for everyone involved – I still use the learnings from that incident to this day.

COMMUNICATION AND RELATIONSHIPS COME WITH THE JOBOne of the core elements of an effective board is the ability to communicate clear, consistent messages to the CEO and senior management.

It is the responsibility of the Chair to maintain effective two-way communication with the board. The Chair should also have a strong relationship with the CEO, offering support and mentoring, as well as criticism and discipline when necessary. The relationship needs to be close and supportive, while maintaining enough objectivity for the Chair to judge the competence and performance of the CEO. This requires a delicate balance of what I call “professional trust”.

I believe former CEOs are better suited to directorship positions, as they tend to have a much broader view of how businesses operate than specialists, who often fall into the trap of trying to do management’s job for them. However, former CEOs have strong leadership skills, and can find it difficult to accept the consensus nature of board decision-making.

PUBLIC CYNICISM TOWARDS BIG BUSINESS GROWS - BUT IS CSR THE ANSWER? One thing I’ve noticed change significantly over the years is the public’s cynicism towards private organisations and the desire to make them more socially accountable, following the mantra “people before profits”.

Despite capitalism showing centrally-planned systems are less effective and efficient time and time again, many people disagree and want the government to have more control over business.

As a result, businesses and lawmakers have responded to the pressure to make boards take on more societal responsibilities, making the boards’ tasks more difficult, as it’s harder to keep focus on multiple goals, particularly when they are conflicting.

It is primarily for this reason that I believe central and local government ownership has such a poor track-record.

Teaching basic economic history at schools would go a long way to solving this problem, giving young people a greater understanding of the role business plays in delivering the goods and services they need as well as creating wealth for society at large.

HAS THE REGULATION PENDULUM SWUNG TOO FAR? Lawmakers need to enact a more practical balance between the costs of compliance and the benefits it provides. At present, and in my view, the pendulum has swung too far.

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This can be seen in the United States with the Dodd-Frank Act, which hands over power to civil servants to interpret and enforce compliance. The Federal Reserve has interpreted its role in regards to the banking system as to roll back 30 years of deregulation. When the next GFC comes along, as it will, it will be interesting to see how much accountability is sheeted home to regulators and the government, given their increasing influence.

Business does not like this sort of uncertainty and, as a result, there are a number of perverse reactions occurring in the U.S. For example, firms are avoiding growing above the thresholds when the Act applies, overseas banks are pulling out, and unregulated shadow markets are developing to provide business finance.

In this increasingly regulated world, one of the risks for boards is the temptation to use the regulators’ settings as the default position for risk management. Boards should determine the appropriate settings for their organisation first and foremost, then deal with the issue of regulatory differences afterwards. If everyone sticks to the regulators’ settings, it will only increase the chances of mass casualties when the Black Swan strikes.

SATISFACTION FROM MAKING A DIFFERENCE AND ADDING VALUE As a way of critiquing my performance and learning from my mistakes, I have tried to answer this basic question after every board meeting: “Did I add value today, and if not, why not?”

In recent years, I’ve enjoyed contributing to the IOD Mentoring programme; watching my mentees develop has been very gratifying.

Another significant reward has been experiencing a wide range of management styles, helping me to realise there are many other ways of solving a problem rather than just how I would do it. If you reach a disagreement on the board, I’ve learnt that trying to bully my colleagues into making a decision they’re not comfortable with is unproductive, even if it’s the right decision. You can’t win every argument, but equally you have to be able to support the consensus decision.

“You can’t win every argument, but equally you have to be able to support the consensus decision.” Graeme Hawkins, past Chairman of Ports of Auckland Ltd

Making a difference as a director has always been my main point of satisfaction. The greater the difference I’ve made, the greater the satisfaction I’ve experienced. As a corollary, when I don’t think I am making a difference, it’s time to move on - I find I don’t get any satisfaction from turning up just to tick boxes.

“If everyone sticks to the regulators’ settings, it will only increase the chances of mass casualties when the Black Swan strikes.”Graeme Hawkins, past Chairman of Ports of Auckland Ltd

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Here to stay

KI�IRaIland Its journEy

ahEad

HAS THE TIME COME TO SHIFT THE RAIL CONVERSATION FROM COST TO VALUE?

The value to New Zealand’s exporters, the value of lower carbon emissions, and of course the value of reduced congestion on the nation’s roads, are points that are all too often cast aside when it comes to the sticking point of ongoing taxpayer funding for KiwiRail.

Peter Reidy, KiwiRail’s candid Chief Executive, is using a combination of culture change, advocacy and a focus on efficiency and performance to reposition the (often-beleaguered) state owned enterprise in the eyes of the public - and people are starting to get on board.

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CULTURE IS KING In numerous 2015 forecasts, organisational culture was named as the standout area of focus for HR and performance – in some cases, ranked ahead of leadership in importance. With Reidy at the helm, KiwiRail has placed culture at the heart of its internal operations. This approach positions KiwiRail’s people not only as an important asset, but as the single most significant driver of achieving the company’s vision of being a “trusted, Kiwi-owned logistics partner, growing New Zealand.” Reidy explains the investment in more detail.

“An organisation’s most valuable asset is its people and no more so than when you are running a 24-hour, 7 day a week operation. We are working with unions and our staff to develop a “High Performance – High Engagement” culture which will involve staff having genuine input to providing answers to some of the challenges we face. The best ideas often come from staff with the greatest understanding of how their part of the business works.

A BALANCING ACT In recent times, opposition political parties have taken shots at the Government for underfunding rail, and for treating it as a separate beast to the national transport network; a situation which sees roads and motorways receive far more funding in comparison to rail infrastructure.

However, when it comes to the modes of transport that will drive New Zealand – and Auckland in particular – forward, Reidy knows that rail cannot be the only vehicle for that momentum. It’s a fine balancing act between investment, resource and regional demands.

“The Government and local authorities are investing in rail, and this shows that they recognise the value of rail as a transport option nationally and in their regions. Rail does take cars off the road and is an effective means of public transport, but there are other transport and infrastructure considerations that also require funding, and all these need to be balanced against what financial resources are available. We favour, both in Auckland and nationally, an approach that considers road, rail and sea transport together, making the best use of each mode.

“It’s about making the best use of financial and other resources to achieve the most efficient and sustainable outcomes.”

And KiwiRail is making good on its commitment to working with and integrating other modes of transport into its operations: the delivery of its 1000th container flat top wagon

in October means that a quarter of the carrier’s fleet is now intermodal, meaning containers can be easily moved between ships, trains and trucks, reducing waste in the supply chain.

PICKING UP THE TABThere has been a degree of criticism levelled at the Government by some in the freight sector who believe that some ministers are not giving transport issues sufficient attention. But from where Reidy is sitting, the Government’s actions speak louder than its words – and those actions are becoming increasingly positive towards KiwiRail.

“I have no criticism of the Government. They have given a great deal of financial support to KiwiRail, are taking the time to understand the business and in Budget 2015 they not only committed to providing $400m in funding over the next two years, but also said they were committed to a national freight network. We will continue to talk to them, and the public, about the true value of rail, but we also understand that there is a lot of demand on taxpayers’ money.”

Despite the constant need for taxpayer funding, Reidy is laser-focused on reducing KiwiRail’s costs and increasing its revenue, with the aim of alleviating some of the company’s reliance on Government contributions.

“Our job is to run the business as efficiently as we can, making every effort to increase our revenue and reasonably lower our costs. Aside from that, we’re increasingly talking about what we call the “above rail” and “below rail” costs. By that we mean that above rail is the cost of running the actual services, while below rail is the cost of the infrastructure on which those services rely. One view is that the below rail infrastructure is a public asset – much like roads are – and that’s where the Government’s annual contribution is spent, while the above rail costs are largely covered by the revenue the company earns. In most comparable countries, governments fund the track infrastructure and then rail companies use it to run their businesses.”

Of course, criticism inevitably arises that taxpayer investment in KiwiRail could be better spent elsewhere. But is Reidy fazed about this? Not particularly.

“Lots of people have views on how taxpayer money is best spent and those decisions are up to the Government. We would simply say that rail plays a key role in many of our export industries, as well as reducing congestion, and carbon emissions.”

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REDUCING GOVERNMENT FUNDING While many other businesses spend their time working on getting more funding from Government, KiwiRail is the unlikely posterchild for a large scale business that is actively working to reduce its own levels of Government funding by increasing efficiencies and productivity across all strands of the business. However, as Reidy highlights, the fact remains that KiwiRail will continue to be a destination for taxpayer investment via the Beehive.

“Under all likely scenarios, KiwiRail will continue to require Government support, but it is also realistic to expect us to do everything we can to reduce the level of funding we receive. Rail in this country has suffered from years of under-investment, while also having a range of high fixed costs. For example we maintain 3500km of operational tracks, even though some lines have very few trains on them. The Government expects us to keep on driving efficiencies and productivity in our business and we are focussed on doing that.”

THINKING BEYOND ROI Cost and return is the backbone of any commercial environment, forming the basis for many decisions and hard calls. But when it comes to rail, the questions of cost and the potential for return are more nuanced. It is for this reason that Government continues to invest in KiwiRail, Reidy says.

“Rail delivers benefits to New Zealand over and above a purely commercial ‘return on investment’ analysis. A lot of the benefits of rail actually accrue to road users, not to KiwiRail. That’s why the Government is committed to providing $400m in funding for the next two years. If there was no rail network then there would be more than a million extra truck trips made on our roads, increased carbon emissions, more congestion and probably more costs to passengers and freight customers. We are interested in that wider debate around how rail contributes to New Zealand’s economy and society, rather than just the cost of rail.”

“Exporting is so important for New Zealand’s economic growth, and central to this is how we develop and enhance our local supply chains”Peter Reidy, KiwiRail

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GROWING NEW ZEALAND, WITH RAIL So, what’s in store for the future of rail in New Zealand?

Reidy argues that there are gains to be made from developing rail further as an alternative to road transport in some areas, saying there is a lot of unused capacity on the rail network. With it being difficult and expensive to get resource consent for new roads, sweating the rail assets that are currently underutilised could be a smart move – and one that supports New Zealand’s growth. Reidy is passionate about the direction of rail.

“As a low-carbon and sustainable transport industry, rail is here to stay and our job is to make KiwiRail more efficient and to work with planners to build an integrated land strategy that provides the best results for New Zealanders and the economy.”Peter Reidy, KiwiRail

“Furthermore, there are many opportunities for KiwiRail to contribute to our export industries. Exporting is so important for New Zealand’s economic growth and central to this is how we develop and enhance our local supply chains.

“There’s no doubt that New Zealand companies compete with the best in the world, but usually at a considerable distance from their main markets. By assisting them in efficiently moving their products to ports, by rail, then that is a useful contribution to them and to the economy.

“We are very focussed on understanding that we move freight and people, not trains and ferries. That focus reminds us that customers’ needs come first.

“We are seeing increased investment going into inland container hubs, such as the Port of Tauranga site at Rolleston in Canterbury, and improvements to our harbours to cater for larger container ships. This is where rail plays an important role. KiwiRail has the capability to move large volumes of freight and connect our factories and depots with our ports.”

KIWIRAIL CONTRIBUTES 0.16% OF NEW ZEALAND’S TOTAL CARBON EMISSIONS

IT ACCOUNTS FOR LESS THAN 2% OF THE ENERGY USED BY THE TRANSPORT SECTOR

BUT COMPLETES 16% OF THE NATIONAL FREIGHT TASK

GOVERNMENT COMMITTED $400M OF FUNDING TO KIWIRAIL IN THE NEXT TWO YEARS

KIWIRAIL MAINTAINS 3500KM OF OPERATIONAL TRACKS

WITHOUT A RAIL NETWORK THERE WOULD BE MORE THAN A MILLION ADDITIONAL TRUCK TRIPS MADE ON OUR ROADS

ArOund thE tracks: Rail by thE numbERs

0.16% 2% 16% $400M 3500 1M +

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ROB EVERETT ON EMBEDDING THE FINANCIAL MARKETS CONDUCT ACT, ONE YEAR ON

Rob Everett, Chief Executive Officer of the Financial Markets Authority, has had quite a ride since taking the reins of the market regulator in 2014. The challenge of implementing and bedding in the Financial Markets Conduct Act – the most significant reform New Zealand's financial services sector has seen in three decades – is a task Everett is relishing.

MEttle spoke to Everett for a quick fire Q&A, to gauge his temperature on the challenges the financial sector continues to face, why culture is just as important as skill when it comes to the omnipresent matter of compliance, and what the sector could look like in five year's time.

ThE amElIoratIOn Of NE� ZEalands

fInancIal REgulatIOn

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METTLE: It’s been a year since the Act was fully transitioned into law in December 2014. Who’s been supportive and embraced the changes, and where are the barriers that still exist?

EVERETT: Broadly speaking, we have had a lot of support and positive engagement from the industry, the NZX, and from the industry bodies. Political support, in Cabinet and amongst policy people in Wellington, remains high, which is pleasing.

However, some significant challenges do remain. Raising understanding as to how to bake-in a proper assessment of conduct risk to existing systems and governance, is proving tough. That’s partly a problem for us - in giving firms a clear idea of what we expect from them - and partly for boards and management teams that have to take on the challenge directly.

We’ll be focusing our efforts and actions more in this area in the coming two years, because we know it’s one of the hardest environments in which to fully embed the changes we need to see.

METTLE: You’ve mentioned challenges - tell us what you see as the three biggest challenges facing the New Zealand financial markets at this time.

EVERETT: The first would be complacency; the “don’t you worry, it won’t happen here” attitude at some firms. This is despite the fact that there are examples all over the world that show it can and does happen almost everywhere.

The second is dependency; the idea that someone else will sort it out. Some examples we see are a lack of responsibility or due diligence from investors when handing over their money. There is also the sense from sections of the industry that they expect the regulator to promote their value proposition to the public. That’s definitely not everyone or every firm, but there are some elements of that attitude in New Zealand.

The last would be depth and breadth. For a quality capital market with a fully-participating and influential investor base, the big question is how New Zealand makes itself attractive as an investment location. The size of the New Zealand market poses a long-run challenge. The FMC Act and KiwiSaver are major mitigants in terms of creating investment and investment opportunity, but they don’t solve the critical mass challenge on their own.

METTLE: You’ve spoken about your desire to instigate a cultural shift across the financial services sector, and within the FMA, taking the Authority from being an enforcement agency to a more proactive organisation that uses its legal powers to address issues as they arise. Talk us through how that affects the people and practices within the FMA.

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EVERETT: I’ve been vocal in my expectation that the FMC Act should drive a major and long term cultural shift, not just for the FMA, but for the financial services sector at large. In practical terms, that means firms are embracing the cultural change and demonstrate this through their systems, practices and governance. In fact, much of the FMA’s work to date has centered on engaging with boards to ensure the changed culture we expect to see is understood and promoted from the top of financial services businesses.

For the FMA, this culture change means an internal focus on developing pragmatic and informed approaches to broad industry issues which are designed to influence the sector and indeed, specific firms, to adopt practices and standards that we believe will serve the interests of customers.

Those are very different skill-sets to the ones you find in traditional law enforcement agencies. That’s not to say we don’t need those skill-sets anymore; we need both.

It adds up to a new approach for New Zealand; this is a type of regulator not seen here before.

METTLE: What would you highlight as the key differences between the financial sectors of the UK, US and NZ?

EVERETT: In the UK, there is very low trust in the industry amongst users of financial services and very low trust in the

politicians amongst those leading financial services - in both cases, justifiably so.

In the US, in addition to some overly complex and politically driven law-making, there is a plethora of regulators both as entities and individuals (often within the same regulator) who have varying views as to who should regulate what.

In New Zealand, we are fortunate. There’s a bedrock of trust, which firms and investors recognise. Political leaders on all sides prioritise the interests of New Zealand and the economy over those of specific interests. In that sense, New Zealand has advantages that other countries lost long ago.

Lastly, even though it is barely out of the cot, the FMC Act sets a really good and clear framework for the regulation and operation of our capital markets, and the provision of financial services to consumers. The clarity of the legislation - in black letter and in spirit - was a major incentive for me to take the FMA job, so I could have a role in bedding it in.

METTLE: Any final thoughts on New Zealand’s financial markets and the current regulatory environment?

EVERETT: Honestly, do you really think it can’t happen here? Not on the same scale as the US and UK, but the global risks apply in New Zealand, as they do elsewhere. We can’t afford complacency.

↗ The regulator’s priorities in terms of risk to markets and consumers will be understood and broadly accepted by the industry and other stakeholders.

↗ Consumers and investors will recognise they are getting more information, faster, and information that helps them.

↗ New Zealand will be recognised, in the Asia-Pacific region, as a capital market with standards among the best, and standards that are applied consistently.

↗ The regulatory system will accommodate new types of businesses relatively easily, and with the market and consumers understanding what they are getting.

↗ The regulatory system will endure any downturn, without the need to completely rejig it.

↗ The situations where the FMA steps in, and influences and guides, and where it takes tough and uncompromising enforcement action will be better understood by all.

INTO THE CRYSTAL BALL Everett recently said that it will take a good five years for the benefits of the FMC Act to manifest.

So, we ask the CEO of the FMA; what could the picture look like five years from now?

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“Honestly, do you really think it can’t happen here? The global risks apply in New Zealand, as they do elsewhere. We can’t afford complacency” Rob Everett, Financial Markets Authority

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“History shows us that the economies that have maintained openness have demonstrated the most stable performance through volatile cycles.” Karen Silk, Westpac NZ

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A game Of twO halvEs

WHAT’S IN STORE - AND WHAT TO LOOK OUT FOR - IN NEW ZEALAND’S ECONOMY

MEttle speaks to a banking heavyweight to establish the bright spots for the New Zealand economy and to acquire observations on everything from GDP, to digital technology and data, and the

economy as a vehicle for greater participation from everyone.

Karen Silk, General Manager, Commercial, Corporate & Institutional of Westpac NZ, and a prominent member of the influential BusinessNZ governance group, takes the

view that New Zealand’s growth is still desirable by global standards, and what is more, the next five years will see the

fruits of the Trans-Pacific Partnership come to bear.

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GROWING PROSPECTS FROM A BRIGHT SPOTKaren Silk says that despite some concern and commentary about the health of the economy in the first half of 2015, Kiwis needn’t be too worried about the rate of growth we’re experiencing:

“We need to keep in mind that even at lower forecast levels of around 2%, NZ growth is seen as a desirable state relative to other economies - a point definitely borne out in discussions I have had with European bond investors in recent weeks.”

It is true that there are several bright spots for the Kiwi economy: record inward migration levels; housing and construction are strong; tourism is booming; and agricultural exports - with the exception of dairy, which is facing challenges on a number of fronts - are doing well.

A GAME OF TWO HALVES New Zealand’s economic performance over the next five years has the potential to be a game of two halves - and it’s a game we all need to be part of:

Says Silk: “In the first half, we’ll see a slower China growth story, in part offsetting the positive impact of higher levels of net inward migration, plus Auckland and Canterbury investment activity, and a continuing low interest rate environment in the first couple of years.

“In the second half, the TPP should start to bear fruit. The value to New Zealand of the TPP measured by tariff

reductions is forecast to be two times the Chinese FTA. However, as seen with that FTA trade, volumes and value have been higher than anticipated which reflects the compound factor that simply making market access easier creates.

“At the same time, Canterbury rebuild activity will decline and an improving Australian economy is likely to see net migration to revert to more sustainable levels, reducing its prior stimulatory impact on the economy.”

RETHINKING THE AGRI ECONOMY

Do we need to pay more attention to the shape of the economy, rather than the size and state of it?

Many pundits agree that we need higher savings rates to cover the growing retirement funding deficit, and diversifying New Zealand’s economic reliance on the agricultural industry towards a more innovative and knowledge-based model is often mentioned as a smart approach.

However, rather than shift attention from the agri economy, Silk says New Zealand should keep its focus on the areas we excel in:

“I don’t believe there is an over reliance on agribusiness. Volatility in earnings is something this sector and the economy are used to and are largely set up to deal with. While of course it is important that we continue to expand the breadth of Kiwi business, we also need to make sure that we keep a

“The value to New Zealand of the TPP measured by tariff reductions is forecast to be two times the Chinese FTA” Karen Silk, Westpac NZ

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focus on those things we are good at. This includes efficient, quality food production and the associated intellectual property created.”

Silk takes a view on New Zealand’s collective obsession with adding value which may seem counterintuitive to some, but it’s a position that holds sway: “NZ Inc. needs to continue to focus on how we participate in global and regional value chains. The idea that we need to add value to every product that leaves these shores is actually at odds with the way the world is going.

“Production and distribution processes are increasingly being broken up in to value chains, with each link potentially completed by different entities and / or in different geographies. We need to understand where we have the best opportunity to participate on those chains to maximise returns rather than harking back to vertical integration as nirvana.”

Silk points to the examples of the proposed investment by Shanghai Maling in Silver Fern Farms, as providing not only new capital to support better operational efficiency domestically, but also an opportunity to improve returns for current farmer-owners through easier access to broader distribution channels in target markets.

WHICH REGULATORY REFORMS WOULD KAREN SILK OF WESTPAC NZ ENACT IF GIVEN THE CHANCE?

Ongoing reduction in the size of the Government (central and local) footprint in the economy.

Better understanding of the level of inefficiency and risk transfer created in the economy as a result of the quantum uplift in regulation imposed on NZ business.

Elevated discussion around the benefits of maintaining an open economy; history shows us that the economies that have maintained openness have demonstrated the most stable performance through volatile cycles.

Similarly, the Haier acquisition of Fisher & Paykel is another example where investment by Haier has resulted in increased New Zealand-based R&D, and the creation of additional higher value New Zealand-based roles to support an offshore production and distribution model.

NAVIGATING THE CHALLENGES AHEADSilk is pragmatic about the challenges NZ Inc. faces:

Silk says that as an export-dominated nation, New Zealand’s growth will be influenced by those of our key trading partners: “In part, 3.3% growth in a weaker global economic environment was underpinned by the stimulus created by an abnormal domestic economic driver, the Canterbury rebuild, and above normal prices for one of our key exports, dairy. The reversion of dairy pricing and plateau in Canterbury rebuild activity is taking growth back to levels more closely aligned to global growth, which is positive.”

IGNORE DIGITAL PROSPECTS AT YOUR PERIL Silk is more than ready for the digital wave that is sweeping across all industries - not least, what digital technology and rich data means for the banks.

Silk explains: “Over the next five years you can expect to see digital technology play a greater part in supporting the delivery of core banking services and solutions to our customers. Customers are seeking options to access services at a place and time that is convenient for them and we, along with other industries, ignore this at our own peril.

“The other key theme is the greater use of data to enable the development and delivery of customised service offerings and improve ease of access to service for customers. Both themes require a strong customer centric design which is focused on delivering value.”

A MORE SUSTAINABLE, PRODUCTIVE, PARTICIPATIVE ECONOMY Sustainability is a topic that weighs heavy on the mind, and there’s more credibility and drive behind it than the business sector has ever seen.

Silk, in her role with BusinessNZ, has been vocal in encouraging business to take more responsibility in the sustainability space, and the group has called repeatedly for clear obligations, measures and mechanisms to enable individual entities to reduce their emissions. A recent survey by the lobby group found that over half of all respondents said that climate change represents a material issue, and 61% reported taking steps to reduce emissions.

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OFF THE GRID REtHINKING

HOW WE DELIvER INFRAStRuCtuRE

Aging infrastructure and increased pressure on assets due to population growth are driving debates around how to fund, deliver and manage New Zealand’s foundations. Although around NZD$110b will be spent on infrastructure in the coming decade by Central and Local Government, more is needed from other sources.

With the recent release the National Infrastructure 30 Year Plan, as well as a major report to Auckland Council on alternative sources of funding and asset optimisation, questions are being raised as to the best way to finance future development. But is the state of Auckland’s infrastructure just the tip of a bigger, national iceberg?

In this special infrastructure feature, we spoke to Infratil Chief Executive, Marko Bogoievski, and Auckland Council Chief Executive, Stephen Town, to find out what needs to be done to deliver the desired outcomes for New Zealand’s infrastructure assets.

NATIONAL INFRASTRUCTURE PLAN: DOES IT GO FAR ENOUGH? Marko Bogoievski says that although The National Infrastructure Plan clearly frames the debate and is a sensible, high level framing of the sorts of decisions we have to get right in the not so distant future, it doesn’t go far enough.

“It’s got a shorter-term orientation than you’d ideally like, so we’ve ended up with something of an ‘inventory’ of what’s going on rather than future milestones that you can create a solid plan around.

“A further iteration could push further into questions of how outcomes for New Zealand can be optimised overall. What’s harder to do, and what I think is missing from the plan, is how we should think about prioritising and sequencing activity, and which activities would have central government playing a bigger role than others.”

CAN AUCKLAND BE THE WORLD'S MOST LIVEABLE CITY WITH ITS INFRASTRUCTURE?Honing in on one of the country’s most pressing regions for better infrastructure, we can see that despite Auckland’s much touted quest to become the world’s most livable city, we’re not stacking up as well as we need to. Town is the first to point this fact out:

“Many cities clearly do it in a superior way to Auckland. There are four Australian cities ahead of Auckland in the “most liveable cities” rankings. Auckland is let down by its infrastructure score which is well below these cities.”

FAST GROWTH DEMANDS FAST RESULTSStephen Town knows that at the rate Auckland's growing, meeting infrastructure needs isn't a ‘nice to have’, it is essential.

“With close to 45,000 new residents being added to Auckland’s population each year every three years, a city the size of Hamilton will need to be integrated into Auckland. This means new infrastructure demands at a faster pace and new service delivery volumes across nearly all services. We need to partner with Government, the private sector and the philanthropic sector to succeed in meeting the growth challenge.”

If it's the joint responsibility of Local Government, Central Government, business and philanthropists to meet the infrastructure needs of the city, do we need to evaluate alternative forms of funding development? The answer seems clear and reports on asset optimisation options for Auckland Council indicate that the time is ripe for changes in the approach taken to infrastructure planning, funding and delivery.

ALTERNATIVE FUNDING MODELS: WHO'S DRIVING THE DEBATE?New South Wales has developed a unique approach to finding new infrastructure: long term leases of key assets to free up capital for investment, while retaining long term ownership.

Is it the right approach – and one from which New Zealand could borrow? Town says that any alternative approach has to be tailored to Auckland's unique needs and growth projections.

“In my role it will be the Mayor and Councillors debating and determining policies on the Council’s approach to some of Auckland’s long term assets. Significant change in asset ownership and/or management will also require engagement with Auckland citizens through the annual or long term planning processes. The Council recently commissioned independent advice from Cameron and Partners and EY about asset optimisation options and this advice is now being considered by the Mayor and Councillors.”

“PPP is but one option for financing and delivering infrastructure. It will never be a silver bullet that meets all of New Zealand’s challenges. It has its place alongside other forms of procurement, financing and delivery.

“It is highly likely that any change in approach will be tailored to New Zealand’s landscape. This has already occurred with NZ PPP projects such as the Wiri prison and Transmission Gully transport route following a tailored and consistent approach.”

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Bogoievksi says that when it comes to alternative funding models, New Zealand should be taking the lead not only from New South Wales and its long term lease of assets, but from other jurisdictions too.

“What we ideally need is a menu with a variety of funding options. To my mind, this would see long term asset leases on the agenda, as well as a full suite of other options including Government-funded Design and Builds, green field development, private ownership, and Public Private Partnerships.

“The question that has traditionally been asked is; which structure lends itself most appropriately to allocating risk to the party that manages it? I propose that it’s more mature to ask; which party is best placed to optimise the outcome sought?

“By that I mean that PPPs for example are a little bit hamstrung when compared to funding on a public sector balance sheet, but they are relevant and useful in other areas because they in fact do maximise a number of other outcomes.

“Consider that if you were using a PPP approach for a school, you’d have to ask; do you want teachers worrying about leaky gutters or about teaching your kids? The good thing about long term asset leases and PPP is that at least they clarify the total cost of funding an asset rather than just the initial up front cost of developing that asset. Long term views and prioritisation is what we need more of.”

GOING FURTHER AFIELD TO FIND THE BEST IN CLASSBogoievksi says that it is difficult to come up with whole geographies of developed markets that have nailed every aspect of their infrastructure. He says that “if we’re waiting to see a model economy for the delivery of infrastructure, we’ll be waiting a long time.

“As far as places doing it well, Singapore comes up a lot, parts of China are doing it well and for a long time, the UK had a very sensible approach to infrastructure and a high level of policy around its delivery. Of course, with the stroke of a regulator’s pen the UK’s infrastructure approach changed.”

He points out that the common thread among these top performers is a long term infrastructure plan and a clear understanding of what assets and capabilities need to be delivered and in what order.

“In China for example, there are crystal clear priorities and a more centralised approach in delivering infrastructure – which of course, wouldn’t be politically acceptable here in New Zealand. In saying that, New Zealand would be well-placed to borrow from the effective approaches being used overseas, and take a clear and coordinated view of infrastructure assets. That would be a solid starting point from which we could develop further.”

“If we keep doing what we’ve always done, history shows us that we already know what we will get… incremental failure.”Stephen Town, Auckland Council

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THE SHARING ECONOMY AND DATA: INFRASTRUCTURE’S ROAD INTO THE FUTURE? According to Bogoievski, data is the real deal for delivering optimised infrastructure outcomes. However, New Zealand is being held back from completely embracing the opportunities at hand, due in part to a lack of capital growth funding, and also because of a degree of political reluctance to adopt the technologies needed to fully realise the benefits of data and the sharing economy.

Bogoievski says, “The changes we’re about to see with the industrial internet will impact the performance of whole infrastructure networks and systems, and that’s quite exciting. We’ve only just begun to appreciate the impact that data-driven business models will have on the infrastructure decisions we make.

“In the future, having the ability to use data to optimise real time performance of infrastruc-ture assets will enable massive productivity gains and without getting carried away, it’s very exciting to consider what will be possible.”

“The benefits of these new ways of working will be further enhanced once we have systems and software that tell us how to optimise whole networks and assets, for example, how we’ll get more productivity out of wind turbines and photo voltaic. With a data-driven economy, we’ll be able to deliver the right signals at the right times to make better and more productive choices. For NZ Inc., there is huge potential to explore.

“You can see the technology is starting to be used now to manage public transport and some congestion, but we need the political confidence to introduce real time pricing of CBD parking and congestion and so on, because once autonomous vehicles arrive, we’ll be dealing with scenarios we can’t even begin to imagine.

“Infratil has spent time looking at different early stage ideas for alternative funding models, and while desktop research is useful, what we need is a more buoyant capital growth market to fund more innovation in these areas so we can trial and then commercialise more rapidly.”

Similarly, when it comes to adopting elements of the sharing economy into the infrastructure sector, Bogoievski sees great potential: “The technology is there, and the consumers who would acquire services would adapt quite readily. It is political will that holds us back from being able to utilise the sharing economy in the infrastructure space.

“Consider distributed energy generation for example: we know how to deliver it, so it’s not a question of having the technology. It is now up to the regulators to consider the appropriate pricing and regulatory models to enable the sharing economy to occur.

“Taking that further, autonomous vehicles will turn up sooner rather than later, and it will mean users can order the unit and the capacity they require for a certain situation. Rather than saying ‘if this happens’, we need to ask; how will that system work in the future? How do we manage the transition? What’s the position of the local authority, of regulators - and how are insurance issues treated? Answering those questions now will enable us to adopt and benefit from these exciting innovations sooner.”

STEERING AWAY FROM INCREMENTAL FAILURE Town makes it clear that when it comes to Auckland’s infrastructure, something’s got to give: “If we keep doing what we’ve always done, history shows us that we already know what we will get: incremental failure. We need a better outcome for Auckland and New Zealand.”

For Bogoievski, the national solution could well sit with a change in approach to how we plan for and fund infrastructure assets.

“Central Government is well-placed to show leadership on infrastructure plans and projects around New Zealand, and that should of course accommodate for private and public sector ownership of assets.

“However, in my view, over time the conversation need to be less about ownership of these assets and more about who’s managing what risk and who is best to deliver the outcomes we need. There are some philosophical hurdles that dictate and constrain how we deliver funding.”

“It takes a lot more commitment and political results being delivered to make alternative approaches a real option. At present, fiscal constraints are driving us to consider alternatives and that forces everyone to be creative, which is positive.”

With two major reports on infrastructure planning, funding and optimisation now in circulation, entities and executives involved in the infrastructure debate will be called upon to weigh in with views on how New Zealand can best address this growing issue. Will you be part of the conversation that gets the country’s infrastructure on the road into the future?

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A nonchalant

nationIS NEW ZEALAND TOO LAID BACK TO CARE ABOUT HEALTH & SAFETY?

New Zealand’s innovative, risk-taking, ‘she’ll be right’ culture is responsible for many of the businesses and inventions that are now firmly on the world stage. This approach means Kiwis are well-placed to add value and innovate where others may struggle to see the same opportunities.

But is New Zealand’s ‘Number 8 Wire’ mentality creating barriers to the country having safer, healthier working environments?

As we sit on the precipice of the Health and Safety at Work Act 2015 coming into effect in April 2016, MEttle spoke to John O’Rourke, a Health & Safety director with over 20 years’ experience, most recently as Group Director H&S for Lion Ltd in Sydney. O’Rourke has joined Minter Ellison Rudd Watts as a Health and Safety consultant, and explains why culture is so central to ingraining better workplace practices here on our shores.

NEW ZEALAND’S LAID BACK CULTURE CREATES BARRIERS FOR HEALTH & SAFETY O’Rourke says that Kiwis are often viewed by Australians as being too laid back and risky, particularly when it comes to H&S issues at work.

“Since the harmonisation of H&S regulations, safety is given much higher priority in Australia than in New Zealand, and the fines associated with incidents have been increasing significantly. Of course, in New Zealand you will find that most, if not all, large organisations take their H&S responsibilities very seriously. However, it can be difficult to put those systems in place and be systematic in the approach for smaller SME’s.

“Complacency is a risk for companies who do not review their current approach to H&S and make the changes required to reflect the new expectations of society: to keep people safe at work. I’ve seen a cultural shift in Australia over the past two years, where businesses are now embracing the joint effort required to be safe, and New Zealand needs to find a way to follow suit.”

Perhaps it took something like the Pike River Mine tragedy to focus national attention. As O’Rourke explains, it’s been a long time coming: “Safety experts have long predicted that an overhaul of H&S legislation was due because the risks were evident, so questions have inevitably arisen about any perceived lack of action. Society and Parliament are now responding.”

WHAT INTERESTS MY BOSS, FASCINATES ME: CREATING A TOP-DOWN H&S CULTUREWhen it comes to creating a safety culture, it has to be driven through a top down effort.

O’Rourke says that directors and officers will either be a barrier or an enabler for safer work environments: “This requires a greater level of understanding of the risks each business may have, and ensuring these risks are controlled and reported upon appropriately.”

The natural dynamics between the board and the executive leadership team will increase as the new legislation brings the two parties closer than ever. O’Rourke says with increased personal liability and due diligence responsibilities, directors will have to ask even harder questions of management.

“At the board level, H&S issues shouldn’t be a ‘tick and flick’ line item. H&S reporting, which should include both lead and lag indicators, needs to be ingrained into board and executive meetings, with an emphasis on identifying proactive opportunities to enhance safety.”

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“If you don’t know what keeps your H&S team up at night, then you are vulnerable to problems you don’t even know exist.” John O’Rourke, Group Director H&S for Lion Ltd

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ARE YOU PREPARED FOR THE H&S REGULATIONS COMING INTO EFFECT?

Do you have a Health and Safety plan which will stand up to independent scrutiny if audited?

Do you personally understand (and can talk to if questioned) the unique Health and Safety aspects of your business?

Do you understand the changes in D/O liability under the new legislation and have the plan, process and reporting

structures in place to prove your actions to the regulator if an accident does occur?

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JOHN O’ROURKE’S THREE QUESTIONS

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O’Rourke says that having the CEO deliver H&S messages to governance, leadership and employee groups signals their importance: “All too often, if there’s a H&S director/manager in the room, everyone will defer to them on safety issues. I challenge that notion; it should be the role of the leaders of the business. It’s your people, your culture, your company – so take a stand and be heard when it comes to promoting H&S.”

“In a leader-led culture, the oft-mentioned adage of ‘What interests my boss, fascinates me’ takes on a new meaning. If site managers and foremen know that their manager is likely to be asking about H&S issues at the site, because they have also faced questions from the CEO or board, then they are more motivated to equip themselves to have the answers available.”

WORKSAFE FINDS ITS TEETHWorkSafe has become increasingly visible in the lead up to the regulatory shift, and they’re sending some pointed messages to directors. It’s not just the visibility that is ramping up: it’s the fines too.

“In the new environment, serious breaches could be met with fines upwards of $100,000, whereas the same incident would have been met with a fine of $10,000 - $20,000 under the previous regime. One recent example, which should send a strong signal of WorkSafe’s intent to the governance community, was a $115,000 fine handed down to an inflatable slide operator charged with obstructing a safety inspector investigating an incident. This demonstrates the increased gravity with which WorkSafe is treating incidents.”

O’Rourke also says the H&S changes in Australia came with a ‘grace’ period to allow organisations to come to grips with the changes – and they needed it.

“It took boards a good six months for the message to sink in across the ditch, and a further 12 months for them to build their understanding and awareness and to start getting on top of what to do about it. The risk is having a level of false confidence in New Zealand – directors think they have it under control, but if you scratch below the surface there are significant gaps. In New Zealand, I don’t believe we will have the luxury of that initial leniency, so we will start to see the impact of the new laws in the next 12-24 months as the prosecutions work their way through the courts. In short, directors and officers need H&S to be a priority now.”

THE BUCK STOPS HERE, WITH YOUIt can be all too easy for issues to be swept under the rug, whether that’s through intentional ignorance, the pursuit of cost savings, or through a cultural approach that is too relaxed

when it comes to workplace safety. However, the arrival of new legislation, liability and the public pressure that has evolved following the Pike River Mine tragedy has created a tipping point where something must change.

O’Rourke says that turning the corner is a shared responsibility, but that some of us have a greater obligation and responsibility to step up and lead than others.

“Safety is a value that we can sometimes take for granted. It needs constant focus and involvement by everyone.”

Though safety is everyone’s responsibility, ultimately the safety culture of an organisation reflects the level of involvement by the board and senior leadership in the business. Therefore, directors and officers have to be engaged in this aspect of their business – this is the time for leadership, cultural shifts, hard questions, and no more excuses.

“What would I be doing if I was on a board, where the buck stops with me? I’d be talking to the person responsible for H&S i.e. the business/site leaders, and truly understanding what keeps them up at night. If you can’t answer that question – then you are vulnerable to problems you don’t even know exist as a board member.”

So what’s at stake if NZ Inc. doesn’t fully embrace the new H&S legislation? O’Rourke says nothing less than the moral and financial responsibilities of every party involved.

“The impact on New Zealand will be significant if these changes are not fully supported by every stakeholder involved; not just morally or financially, but NZ Inc. and the business brands here will continue to be labelled ‘laid back’ in regards to safety on an international level.”

Is that what we want for New Zealand’s future? I wouldn’t think so.”

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thE nEw nORMal

ChIna's hIstOrIc OppORtunIty

It has been a turbulent year for China after months of volatility in its financial markets and economic conditions deteriorating in the fourth quarter of 2015. Against this backdrop of some uncertainty, New Zealand’s trade relationship with China – one of the world’s largest economies – continues to be incredibly important to our economy.

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In 2014, the trading relationship between the two nations passed the NZD$20b mark for the first time. While falling dairy prices in 2015 saw two way trade reduce, China remains at any time either our number one or number two trading partner.

With an update to the Free Trade Agreement being discussed, and the continued interest by Chinese investors in New Zealand, we took the opportunity to talk shop with New Zealand’s Chinese Ambassador Wang Lutong, about the opportunities and challenges of the bilateral relationship, and how China’s ‘new normal’ could play out on the world stage.

We also hear from the formidable force, Ruth Richardson, director of the Bank of China (NZ) and Synlait Milk Ltd (of which 39% is owned by China’s SOE Bright Dairy), with her comments and four stories that highlight the modern China and how several young professionals are breaking the mould in this ‘new normal’.

MONTHS OF FINANCIAL TURBULENCE PUTS CHINA IN A 'NEW NORMAL' STATEAmbassador Lutong is optimistic about what he calls the 'historic opportunity' in front of us.

“As China’s economy is entering a ‘new normal’ phase, New Zealand companies should seek to harness this historic opportunity. New Zealand companies should leverage business opportunities driven by China’s consumer driven economy to benefit Chinese consumers and further expand the scale of bilateral trade. Taking a positive view towards Chinese investment, opening their hearts to welcome Chinese tourists to New Zealand is also appreciated.”

INVESTMENT INTO FARM LAND AND REAL ESTATE: A TOUCHY TOPICElsewhere in this issue of MEttle, some of our commentators have spoken about the need for investment to be shifted away from the agricultural economy and real estate, with more emphasis on the tech and innovation economy.

“Of course, the buzz concerning Chinese investment in New Zealand from time to time also creates some doubt in the mind of the Chinese business community; with Chinese business people wondering whether New Zealanders are touchy on this aspect” Ambassador Lutong comments.

The topic of China’s investment in New Zealand’s residential properties and farms has been a hot button issue in recent times. However, Ambassador Lutong says it’s not fair to attribute some issues in the New Zealand economy to the ‘over’

purchase of New Zealand land and housing stock by Chinese entities.

“Chinese companies were attracted to invest in New Zealand due to the friendly relations between the two countries, the comparative advantage of New Zealand’s agricultural industry and the level of return on their investment. The result would be quite different if the advantages of New Zealand as an investment destination were to weaken.”

Indeed, New Zealand’s safe, stable, easy and business-friendly commercial environment has often been touted as our most attractive elements for offshore investment. Perhaps national conversations should shift slightly from arguing over where international investment comes from, and more towards what we can do to ensure it continues.

WE’VE GOT THE RECIPE, CHINA’S GOT THE READIES As Richardson points out, there is a significant level of international investment by China and Chinese individuals and entities, and this is actively promoted by the state authorities.

“Some New Zealanders recoil from that investment, and that’s the ‘dark side’ of the relationship. On the ‘bright side’, you see what Synlait Milk and Silver Fern Farms are doing with Chinese capital, and you’ll see that investment is essential for them to execute their international intentions. Synlait Milk and Silver Fern Farms are both securing their place higher up the value chain and securing premium returns, and that’s only possible through the injection of Chinese investment.”

For Richardson, the relationship between China and New Zealand is straightforward: “I capture the relationship in these terms; China’s got the ‘readies’, but New Zealand has the recipe. As long as we make sure the business recipe remains ours, then there’s a payoff for both sides.

“The fact is, New Zealand is not a country that has generated surplus savings so therefore we have to rely on offshore capital. I say that it’s just as well that we have investors from other countries!

“With the recipe we have, we can take New Zealand’s excellence to the world. The fact is though, that we need a ton of cash as well as a truck load of talent to take that excellence to the world – and that’s where China comes in.”

NZ INC: SUPPORT THE FTA UPDATE As Ambassador Lutong notes, since the implementation of the FTA in 2008, cooperation between China and New Zealand has been progressing well, and there’s a lot more to come yet.

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“As China’s economy is entering a ‘new normal’ phase, New Zealand companies should seek to harness this historic opportunity” Ambassador Wang Lutong

“China has become New Zealand’s largest trading partner and an important source of foreign investment. Currently, government departments from the two countries are discussing the upgrade of FTA, which will open a new chapter in bilateral cooperation. Obtaining complementary advantages and enhancing mutually beneficial cooperation should be the main objective of the FTA upgrade.

“All concerned parties should render their full support for the upgrade.”The updated FTA is not the only international agreement on the table that sits between New Zealand and China. Ambassador Lutong says New Zealand’s membership of the Regional Comprehensive Economic Partnership (RCEP) should be front of mind, even as New Zealand becomes party to the TPP.

“As a TPP member country, New Zealand has recently reached agreement with 11 other member countries. Meanwhile, New Zealand is also a key member of RCEP, in which China is actively engaged. We hope that New Zealand can continue to maintain an open mind, and work with China to promote trade and investment cooperation in the Asia-Pacific region, to realize the stable development of the global economy while actively maintaining the multilateral trading system.”

BEYOND BORDERS: KIWI BUSINESSES SUCCEEDING IN CHINA

Ambassador Lutong suggests that Kiwi businesses looking to enter the Chinese market should consider focusing their efforts outside the mainstays of Shanghai and Beijing, where there’s less competition but just as much opportunity.

“With regard to market development in China, New Zealand businesses should divert their focus from tier one cities such as Beijing, Shanghai and Guangzhou to tier two, three and even four cities, based in Midwest China where there is market space and less competition. The key objective is to achieve complementary advantages and mutually beneficial cooperation between Chinese and New Zealand companies.”

Richardson highlights that the rapid development of e-commerce has become one of the major business opportunities in today’s market.

“The ability to transact across borders using electronic platforms is a massive opportunity for Kiwi businesses to succeed in Chinese markets. E-commerce allows access to exploding Chinese demand for trusted New Zealand products. The Bank of China (NZ) recently staged an e-commerce forum to showcase the two way opportunities for goods and services – our reputation and creativity feeding into a modern and massive market but one that is increasingly discerning.”

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A BRIGHT YOUNG DIRECTOR BREAKS THE MOULD The recent appointment of a 32 year old Chinese director to Synlait’s board demonstrates the willingness of the modern Chinese community to engage with Kiwi businesses.

The appointment of Qikai (Albert) Lu at Synlait’s 2015 AGM was sanctioned at the highest levels of a state-owned enterprise in Shanghai. In doing so, the historic mould of China appointing much older and more experienced directors, was broken – and it was broken based on the outstanding merits of the young director.

THE FINANCIAL CONTROLLER AND HER PROFESSOR Liu Yining is the Bank of China’s NZ Financial Controller. A smart young professional woman, Yining is also undertaking a PhD that explores how China can converge on international best practice when it comes to the publication of its national accounts. And guess which country is Yining’s template for best practice? New Zealand.

Yining’s supervisor, Professor Feng, is a top Chinese politician and the equivalent of our Chairman of the Finance and Expenditure Committee. Professor Feng is examining how China can consolidate its national accounts by 2020, using the NZ GAAP approach.

These are two impressive professionals, both committed to breaking the public sector accounting mould, and finding new and better means of financial reporting practices for China.

TAKING NZ GOVERNANCE SERIOUSLY How many Kiwi directors do you know that would be willing to travel to China and take part in a week-long course, delivered in Mandarin, on best practice governance for the region? Ke Li, one of Synlait’s Bright Dairy-appointed directors, recently undertook the NZ Institute of Directors’ week-long governance course in Queenstown, which is conducted exclusively in English.

With a Master’s degree from an Australian university, Li’s story demonstrates China’s willingness to put not only its money, but its talent here in New Zealand.

THE YOUNG CEO GETS PRIDE OF PLACE ON THE WALL In the main ceremonial dining room of the Bank of China’s Shanghai HQ, on a wall of photographs of notable people, the image that takes pride of place speaks volumes.

The photo is of President Xi Jinping, NZ Prime Minister John Key, the Chairman of the Bank of China – and the Bank’s NZ CEO, Wang (David) Lei.

At just 45 years old, Lei would normally never get to meet the global chairman of the bank, yet alone the President of the People’s Republic, or New Zealand’s Prime Minister. You cannot get more integration than that, and the new found photographic prominence Lei has within the Bank of China would not have happened without his New Zealand connection.

FOuR stORIEs OF thE nEw ChIna

RUTH RICHARDSON SHARES FOUR ANECDOTES THAT TELLS THE STORY OF A MODERN, TALENT-RICH CHINA; A NARRATIVE WE DON’T OFTEN HEAR IN THE NOISE AROUND INVESTMENT AND TRADE AGREEMENTS.

To understand the modern China story, it helps to look at individual operators and their stories so we can demonstrate the degree of interaction between China and New Zealand. These interactions are the glue between our two countries, and it’s what will propel the relationship to more productive outcomes for both parties.

CURATED BY MINTERELLISON.CO.NZ