21st Century ICT – maximising the benefits for NZ

Speech to Telecommunications & Broadband Summit 2016

Thanks for the opportunity to be here.

What a huge topic. Maximising the benefits of 21st century ICT for NZ.

When preparing I thought about how others would approach it.

Sherlock Holmes would have said something pithy like ‘It’s elementary, Watson”

IBM might now shorten that to “Ask Watson”.

Tempting though that answer is – I didn’t think I can stop there. 

So, where to start.

Artificial intelligence, the internet of things, big data, robotics, sensor technology, UFB, mobile technologies.

Competition policy, interoperability and the risks of proprietary control of interfaces, monopoly pricing.

Cyber security.

Surveillance – not just by public authorities but by private interests.

Privacy, the health and insurance implications of information about genetic predispositions.

Convergence, Broadcasting. Social media. Copyright.

The future of work, and implications for the sharing of opportunity, income and wealth, or ever increasing gaps between the 1% and the rest of us. 

Education and training - school curricula, post school education, retraining, skill shortages, immigration.

Divides – be they poor rates of rural connectivity, or the socio economic digital divide.

Capital allocation.

Disruptive technologies, stranded assets.

I obviously can’t do justice to the myriad of issues that must be addressed by the private sector and governments in order to maximise for New Zealand the benefits of 21st century ICT.

Some I choose because of their importance, others because of their currency. I will focus on the opportunities that arise from and drive demand for ICT rather than the roll out of telco services.

I should qualify, or perhaps disqualify, myself. I’m old enough to say I was at university in the days of mark-sense cards for programming, and tutored at Uni.  I then chose accounting over information systems, before pursuing law over commerce.

The law firm I joined, Anderson Lloyd was, along with Russell McVeagh, the first computerised firm in the country.

Two of the companies I was involved in founding prior to entering parliament - A2 Corporation and BLIS Technologies - relied upon gene sequencing technology for their differentiated products.

I embrace most technology; though choose not to use some. I am not active in social media, probably to my detriment.

I have no doubt that the revolution we are privileged to be part of will benefit humanity, and help the planet which sustains us.

There are some who yearn for a less complex, slower paced past. But really, how many want to go back to agitator washing machines, when automatics save effort, produce cleaner clothes, while using less energy and less water?

Progress improves lives, and we could not hold back these life changing new technologies even if we wanted to. 

There are undoubtedly productivity gains. The cost of many goods and services has and will decrease. Quality will improve.

The commercial opportunities in ICT goods and services are already enormous – witness the behemoths that have already grown - IBM, Microsoft and Apple. Google or Amazon could become the largest company in the world.

Yet these will (in my view) be much, much less significant than the sum of the smaller but broader opportunities arising from ICT.

The myriad of new or enhanced services and products enabled by the new technologies in all aspects of our lives will transform our economy. Environmental outcomes should improve too.

It is often said that the commercial opportunities are expanding exponentially.

But exponential growth curves don’t last forever, even if Moore’s law has lasted decades.

The law of diminishing returns will eventually prevail.

Human nature mimics physics in this regard – and nature abhors a vacuum.

The opportunities are being chased down by the individual and collective efforts of millions if not billions of people around the world. The human race is on.

Many so called verticals are small in breadth, but their global reach means substantial rewards.

The commercial objective is to dominate these new niches before someone else seizes the opportunity. 

Firms and entrepreneurs I meet who are mid-race routinely share their realisation that if they do not rapidly commercialise their innovation, others will soon take their prize.

I believe we are further along that exponential opportunity curve than many realise.

Software opportunities are being rapidly exploited.

The automation of the production of consumer goods is largely complete.

The sensor technology, positioning systems and robotics needed to automate many other spheres of activity already exist. Ubiquitous mobile and broadband coverage, essential prerequisites, are improving by the day.

We must race as a country to maximise our share of these global opportunities.

I am not going to give you the long list of the opportunities. McKinsey and others have done that.

I will mention one area where I believe New Zealand should try to lead: automation in horticulture.

Already some farmers are improving water utilisation and nutrient losses to water ways through sensor technology linking through mobile communications to water application rates.

Leading blueberry growers go further and intensively monitor soil moisture, phosphorous and nitrate levels, recycle their irrigation water, and capture for reuse the nitrates and phosphorous in that water. 

We have amongst the best soils in the world and relative to others abundant fresh water.

Big parts of New Zealand can grow the highest quality fruit and vegetables in the world. Food critics from New York to Europe wax lyrical at the quality of our produce.

Take apricots. New Zealand produces the highest brix level apricots in the world near Alexandra. Our plant breeders have developed fantastic new varieties that taste delicious, store well, and have IP protection. They are a much higher value output per hectare than livestock farming, with a better environmental footprint.

The automation already under way in apple and kiwifruit grading and packing is stunning, but is largely in the pack house.

The opportunity for improved export performance from in-the-field automation is immense, and New Zealand should be striving to profit from it – both from the increased value in what we produce but also from the new technology products that enable this hugely profitable shift.

This needs and deserves a contribution from government to the R&D effort, which will not otherwise occur.

I visited Scott Technology again recently. On an earlier visit they were using their world leading white ware production automation and software skills to develop robotic freezing works gear. Their robots, now used in New Zealand and Australia, are being taken to the world via their new Brazilian shareholder. They’ve also developed robots that replace worn parts on the giant conveyers which continuously move Australian ore. Replacing these parts while the conveyor is still working is too hazardous for humans, but is done by their robots.

I asked Scott’s how far we are from having the capability to develop automated pruning and picking. I was told all of the requisite parts exist now.

The sensors, robotic and mobile technologies exist, but need to be optimised and applied to this opportunity, and integrated with suitable growing configurations.

Think of the applications: Kiwifruit, apples and other pip-fruit, apricots, cherries and other stone fruit, grapes.

Our purple and red berries, which have the highest antioxidant levels in the world partly because of the hole in the ozone layer above NZ.

In the far north, citrus. 

These tangible opportunities are so exciting. And so important for our regions.

The development cost is tens but not hundreds of millions. It needs government involvement, together with the private sector.  While this may be beyond the means and technical capability of orchardists by themselves, it is within the means and capability of New Zealand.

This brings me to capital allocation more generally.

Whether it is capital to commercialise what I have just spoken of, or the capital needed to maximise New Zealand’s share of global software verticals, we must ensure our current economic settings are improved to assist.

 Yes, I am proud that successful New Zealanders have already produced Datacom and Trademe. That Orion is prospering in healthcare software. Xero in accounting. Vista in cinema management and film distribution. E-Road and Cortex in transport logistics. Fisher and Paykel in respiratory devices. Weta in animation, and our successful computer gaming gurus, Scott Technology and so on.

But our ICT and related industries would be doing even better if we allocated more capital to these crucial parts of our economy and less to speculation in land based asset classes.

Before getting to what’s wrong, let’s acknowledge what has improved.

The combination of the Venture Investment Fund, the Cullen Fund and KiwiSaver has worked to improve the capital cycle.

Early stage funding has improved, leveraging greater private sector investment.

Private capital from millions of kiwis is finding its way into wider asset classes, with private equity enjoying inflows ex KiwiSaver schemes.

While the prime reason for the NZ Super Fund was to sustain government superannuation, the co-benefit in improved analysis of and investment in NZ capital markets has been significant.

Some KiwiSaver managers are following the trusted and expert analytical lead into private equity shown by the managers of the larger-sized NZ Super Fund.

These major initiatives of the last government have improved the economy, as did our then controversial reforms of the Telco sector.

While National unwisely ceased contributions to the Super fund, and has undermined incentives to get young people joining KiwiSaver, to their credit National has continued with the push towards ICT.

Industry has now had close to two decades of consistent policy in this regard.

But we could be doing so much better if as a country we grasped the nettle and fixed New Zealand’s capital allocation problem, which most people in this room know needs to be fixed.

We should remove the advantage we give to speculation. This would drive billions towards the productive sectors including yours.

Bank lending to the housing market has increased $44 billion dollars since the GFC. The vast majority of that has been to fund the sale of existing houses to each other at ever higher prices.  Changing who owns what already exists does little to add to NZ’s output.

Lending to investment housing has boomed – it is the flip side of the sad truth that home ownership rates have dropped to the lowest rate since the early 1950s. 

Farm lending has increased $11 billion and commercial property lending is up too – by about $5 billion. 

That’s a total of around $60 billion extra lending into property assets.

The extra lending to the business sector over the same period is a small fraction – a fifth or less – probably less than $10 billion.

There is absolutely no doubt that a major contributor to this is our tax system, which encourages investment in tax free speculation in land based assets. 

No wonder our exports have fallen to under 30% of GDP. Yes, that’s right – fallen. 

This is one of the reasons per capita economic growth over the last year has been close to zero, even with the massive stimulus provided by the Canterbury rebuild.

Some of those billions sloshing into the Auckland housing market should and would have been invested in growth companies if our tax system was better and fairer.

Fixing this – which only government can do - would direct far, far more money into the development of ICT companies than all of the government’s R&D incentives. It would also reduce the cost of capital to your sector.

Never in our history has this been more important to fix this than now. The race to capitalise on the current opportunities is unparalleled. The current government’s deliberate refusal to fix the misallocation of capital is costing New Zealand billions and billions in foregone wealth.

I want to touch on two regulatory issues – securities law and copper pricing.

The first is easy to fix – that is the overregulation of ordinary raising capital.

There is no doubt the FMA is doing good work, and our capital markets are more sound as a result.

But the compliance costs and prospectus risks faced by companies and directors for ordinary capital raising are now excessive.

There has been an overreaction by Parliament caused by finance company losses on debt securities, where high risk second ranked securities masqueraded as low risk.

Ordinary capital raising has been overregulated in the law changes which followed. Our laws now go much further than requiring proper disclosure of risk.

Prospectus costs and audit costs have gone mad. Directors’ risks are now excessive.

Experienced directors able to help companies grow cannot protect themselves against these risks, and so are more reluctant to help.

Small companies can sometimes crowd source. Very large companies can at an excessive cost still access public markets, though even they increasingly choose not to.

But the middle is squeezed. These are the mid-sized companies we need to capitalise and grow.

Securities law fails to meet its purpose when it creates such high costs that it drives behaviour away from public capital raising into private placements.

Capital constraints and costs are both higher than they should be, and ordinary New Zealanders are locked out of the opportunity to invest. 

The second regulatory issue I will canvass is copper pricing.

The history of the recently concluded copper price revision does not reflect well on some of the players. Their actions leave a stain on the final outcome, which has undermined public confidence in our institutional framework for the control of monopolies.

I hope we can all agree that privately owned monopolies should have their prices controlled. Just about all sellers try to maximise prices. Competition constrains prices, but not for monopolies. Monopolies do as only monopolies can. They are inclined to overcharge.

Conversely, those setting price controls on infrastructure monopolies must be careful to avoid over-pruning, because underinvestment has adverse economy wide effects. Our regulators know this. It is competition policy 101.

I look at the copper process and decisions and am left perplexed.

The outcome relative to the initial price proposed is unusual. Three times on the merry go round: First round prices 10% down. Second round 5%, then finally 1%.

I am not saying the commission handled this perfectly, but that is not my criticism.

The then Chair of the directors of Chorus went around the Commerce Commission and complained to the Prime Minister and other Ministers.

The Prime Minister and a bevy of other Ministers made loud noises in support - not of the Commerce Commission, which is charged with the public good and has in-built in checks and balances - but in support of the interests of the monopoly. Surely it could be foreseen this would undermine the Regulator.

Some of the shareholders heard the exaggerated and gloomy predictions and sold low. Through no fault of their own, they suffered losses.

The panic in the markets which ensued saw the Chorus share price tumbling from $3 to $1.40. The market capitalisation of Chorus dropped to about $680 million.

It was left to others to try to defend the Commission, including industry participants via the Axe the Copper Tax campaign - only needed because others behaved badly.

Two years later and share price has just about tripled, nudging 4 dollars. Dividends have resumed in the midst of the huge and capital intensive UFB programme.

I know retailers have not appealed the final outcome, saying it is within the bounds of a reasonable decision, but they are right when they also say a lower price would have been too.  Copper consumers are paying any extra.

No one should be surprised many believe the Commission caved, even if they didn’t.

We have a long history of both monopoly and Ricardian rents being extracted in New Zealand – in my view from water, electricity and in the telco space.

Remember the Baumol Willig rule used by Telecom to justify its anticompetitive pricing?

We are not a banana republic. We should be shame faced about this latest saga.  Brinkmanship from powerful interests again usurped due process.

Having criticised some actions around over copper pricing, can I say good on Chorus for the UFB roll out. 

Keeping with the positive, I would like to thank your industry bodies for their contribution to important policy debates.

For example, the ideas from Internet NZ to reform NZ copyright laws – for example to include the more permissive USA rules about fair use. Their deregulatory recommendations could be achieved in the same Bill which will increase the term of some copyright from 50 to 70 years pursuant to the TPP.

I want to see our economy soar.

The revolution we are witnessing will mean more income and more wealth.

Now is the time for politicians, private enterprise and academics to work together to make us a wealthier country - where the rising tide lifts all boats, not just the super yachts, which brings me to my last topic.

In the 1990s – before I was a politician – I just about finished writing a book about the future of work. Its underlying thesis was that increased efficiency born of automation would decrease the demand for labour.

Paid work is the main way the fruits of our economy are distributed. I was concerned that unless paid work was fairly distributed amongst those wanting to work, gaps in society would get ever larger, with those unable to get enough work suffering constrained lives.

I was interested in the possibility of government using a financial instrument to encourage the sharing of work - avoidable penal rates for salaried or waged hours over, say, 36 hours per week. Not the failed French idea of being paid the same for working less, rather, my idea was to encourage the spread of work - employing 10 people for 36 hours each, instead of 9 at 40, to do 360 hours of work.

Having spent a great deal of time on the project, I pulled the plug because I concluded two demographic shifts would act as a foil to the decrease in demand for labour and blow the theory.

Firstly, the rising proportion of young people studying after finishing school would delay their entry into the workforce. Secondly, the trend towards an older population would see a greater proportion of our population retired and out of the workforce.

I’m now pretty convinced I was wrong to drop that project, though my solution may have been the wrong one. Technological change is now outpacing those demographic shifts. Economic output is set to decouple from hours worked. The historic trend of new jobs, especially in services, replacing the old is in my view not a predictor of the future.

The Labour Party has a serious work programme under way around the future of work, led by Grant Robertson. It predated Davos, and considers a wide range of challenges and opportunities. Labour is hosting a conference in just a few weeks’ time, which includes contributions from many interested experts from NZ and overseas.

Speakers include former US secretary of labour Robert Reich, English economist Guy Standing and Scandinavian behavioural economist Gooran Roos.

We have already had valuable input from some of you. We welcome all of your insights and contributions to this important work, which has implications not just for our economy but also for education, employment, tax and welfare.

The future, as always, rests in our hands and in our minds.              

There are so many leaders in this room who are taking New Zealand to the world, or enabling others to do so.

I conclude by congratulating you for your passion, vision and hard work, and wish you all well for the balance of your conference.