A regulatory high tide or deluge?

Commerce Minister Paul Swain will soon produce new car dealers legislation which will be more light-handed than the National government wrote. Last Wednesday he claimed to be responding positively to 90 per cent of his business compliance costs panel’s recommendations.

And, he said in an interview, the “tweaks” the government has been making to competition law has reached high tide. The re-regulation of the economy and social services to correct what the Labour party saw as market failures or inappropriate application of market principles will be completed next year.

Mr Swain is highly sensitive to suggestions the government is regulation-minded. He insists the slogan he recited in opposition still applies: “as much market as possible, as much regulation as necessary”, with, as the guiding principle, the lowest cost to consumers and end-users through competitive markets.

The verdict from business: patchy. “They are admirably light-handed in some areas but in other areas, they are trying to control, arbitrate and direct,” says Business New Zealand chief executive Simon Carlaw. “It is horses for courses, rather than consistency.”

The re-regulation list is long. A selection:

* a tougher Commerce Act;

* for electricity, industry self-regulation, but to the government’s prescription, with heavy backstop powers for the minister, with similar probably to follow for gas, now under review;

* an industry regulator for telecommunications;

* a takeovers code and, to come in two stages, starting in December, tighter insider trading laws, probably including a beefed up enforcement role for the Securities Commission, which has also proposed tougher surveillance of investment advisers;

* tougher workplace relations laws, with more to follow on parental leave, safety, holidays, equal opportunity and safeguards for employees when work is contracted out or the business sold;

* renationalised accident insurance;

* protection for building sub-contractors and a new insolvency law in the wings;

* a tougher Resource Management Act;

* still to come: decisions on the shipping review and the Commerce Commission’s proposals for airport pricing.

And that list does not include the re-regulation in effect of health and education services by recentralising them and reducing private sector involvement.

Yet Mr Swain insists the government “by and large supports the principle of light-handed regulation” in preference to heavy regulation. The changes since 1999 have been “tweaks” in the wake of a “decade of inattention” to market failures and they will be kept constantly under review.

His proof: Energy Minister Pete Hodgson’s resistance to calls for price control during the electricity crisis. Mr Hodgson chose full information and jawboning instead. And, in the wake of a severely sceptical report from the MED, Mr Swain is unlikely to implement Labour election policy for parallel importing bans on CDs, DVDs, software and books, though there will be new laws against piracy which is the real culprit for the ills the policy was intended to counter and the impact of DVDs on provincial movie theatres may be addressed as an item of regional development policy.

Mr Swain insists he is alive to the dangers of regulatory creep — regulatory loopholes or anomalies prompting more regulation, potentially counterproductively.

He is also sympathetic to strong suggestions by business for full consultation before any new law (including upfront statements of costs and benefits), involvement in implementation and monitoring it in practice.

Mr Swain has yet to get full cabinet endorsement for this approach but is aiming to apply it to new legislation — in fact the explanatory notes of some recent bills look like a makeshift dry run and he aims make his motor vehicle dealers bill a model. He has also set up a unit in the Ministry of Economic Development (MED) dedicated to compliance costs.

And on compliance costs Mr Swain insists the government is making progress. Environment Minister Marian Hobbs’ Resource Management Act (RMA) package due next month is said to aim at reducing uncertainties for business in local councils’ administration of the act through best-practice benchmarking. The RMA accounted for one-third of the complaints to Mr Swain’s compliance costs panel. He says only 10 per cent of the panel’s recommendations have been ruled out.

The full response to the panel will not come until December. His political opponents labelled his statement last Wednesday “much ado about nothing” and a “starkers emperor”. Business Roundtable executive director Roger Kerr thinks compliance costs work important but not the main issue, which is to establish a first-principles basis for regulation.

“No one is against regulation,” Mr Kerr says. “Markets can’t work without a set of institutions. The issue is at what point the costs outweigh the benefits.”

On this point nearly everyone seems to agree, Mr Swain and National shadow treasurer Bill English included. But they part company on how to apply it.

Stephen Franks, of ACT, takes as starting point the principles of freedom, liberty of the individual and property rights, interference with which must be only in the national interest and with due compensation. Not operating according to principles, Mr Franks asserts, leads to periodic “Tordon spraying”, after which regulation “springs up from the roots again”.

“No one looked at the takeover code from the point of view of property rights. The code tells consenting adults what do to with their property,” Mr Franks says. He alleges a lack of hard evidence for the Labour party’s justification of the code on foreigners’ pre-election statements of unwillingness to invest because of lax rules.

Even self-regulation with a ministerial backstop upsets Mr Franks. The backstop becomes in effect the first resort as the industry second-guesses what the minister might do, he says.

And giving self-regulatory rules official status, ups the ante, Mr Franks says, instancing the gazetting of stock exchange broker rules which will mean the exchange can act less quickly, because to change the rules, it will need ministerial action to gazette the changes — which, as in Australia, will push up compliance costs.

Mr English commends the government for endorsing competition as desirable. But he worries that it will only bother about competition “when it is forced on them”.

Mr English sees regulation as a “huge intellectual challenge” because of the complexity of issues and constantly changing circumstances, including, increasingly, a need to set the issues in an Australasian, not just a New Zealand, context — and doubts the public service has the intellectual horsepower to meet that challenge. He lays down four yardsticks for introducing or retaining regulation:

* efficient markets;

* simplicity;

* benefits outweighing costs;

* effectiveness.

Mr English also identifies health and education as posing major looming regulatory issues.

The Business Roundtable will soon circulate a discussion paper on “constraining government regulation”, looking at attempts in other jurisdictions to constrain regulation. This develops earlier work it did on a proposal for a regulatory responsibility act. Mr Swain in fact has not ruled out a regulatory responsibility as a last resort.

The problem for the Business Roundtable getting its proposals more widely endorsed is its political unacceptability to the government.

But the government also wants a big lift in the long-term sustainable growth rate and few, if any, economists think that will be achieved on current policies alone, relying on judicious government intervention eschewing regulatory reform.

“Business is pretty elastic about the process and the high standards,” Mr Carlaw says of the RMA, for example. “But it can’t handle being buggered about over long periods and by the sheer cost” of full and protracted hearings and appeals.

That sounds pragmatic enough to fit Mr Swain’s rule: “Is there a problem? If not, leave it alone. If there is, what is the government’s role in fixing it.”

And he declares: “If we see distortions being created by new rules we will revisit them.” That will be his test. Mr Carlaw puts the challenge this way: “Where sound principles and politics conflict, the latter wins.”