Wrightson Ceo Forum
Wellesley Club

27 May 2002

Agriculture, Growth & MAF: Making The Connections

An address by
Murray Sherwin, Director-General, MAF

Just a week ago, I passed my 6 month anniversary as Director-General of MAF. It has been a hugely stimulating and challenging 6 months. It is probably safe to say that I have lost more sleep in the past 6 months than in my previous 25 years as a central banker.

There has been a great deal of learning for me. A very important lesson, and an important source of the stimulation and challenge of the job, arises from the sheer breadth of the MAF portfolio. The range of issues that the organisation is engaged in - as information gatherer, policy advisor, regulator and service provider - is immense.

I've also learned that while vets are a rather different breed than economists, they present many of the same management challenges.

Many of the prior judgements that I brought to the job have been reinforced. Those prior judgements related to:

the continuing significance of agriculture and forestry to the New Zealand economy,
the absolute centrality of the primary sectors to New Zealand's future prospects for growth and prosperity,
the vital place of science in that future,
the need to ensure that urban New Zealanders better comprehend the significance of agriculture and forestry
the need to more effectively present agriculture and forestry as firmly in the "new economy" rather than the old.

What I would like to do this evening is to make some of the connections that I see between our primary sectors, the broader agenda of economic growth and a successful New Zealand economy, and the place of MAF in this agenda as I see it. I will also share a few thoughts and impressions of MAF, the current state of the organisation as I see it and how I see it evolving, since Allan assures me that there will be considerable interest in that subject.

THE STATE OF AGRICULTURE & FORESTRY

New Zealand agriculture has spent the last couple of seasons at the peak of a cycle of prosperity that few current farmers will have experienced previously. Certainly, in my near 30 years of professional life, I can't recall a time when we have enjoyed such a period of reasonably strong market demand and reasonable weather conditions coincident with (and this is the really extraordinary influence) an extended period of the real exchange rate being well below its trend level, with stable and low inflation and moderate (again, below trend) interest rates. One important consequence of this happy situation is that New Zealand, like Australia, has cruised quite serenely through the downturn that has afflicted the US, Europe and Japan over the past couple of years.

Another important consequence is that New Zealand farmers have regained confidence after some tough times. My sense is that there has been a good deal of realism down on the farm about how long the good times might last. Judging the high returns to be temporary, many farmers have been happy to concentrate on rebuilding balance sheets, reinvesting in future productivity and generally getting into better shape to handle the next downturn.

The nation is stronger as a result and can face the future with greater confidence. Michael Cullen's surprising fiscal surpluses owe plenty to this happy situation.

As MAF DG, I enjoy a regular procession of visiting agriculture ministers and agriculture officials through my office. Often, they have made the pilgrimage to New Zealand to see for themselves what agriculture without subsidies looks like.

Generally, they leave impressed. The rest, I suspect, are simply disbelieving. Not many are prepared to envisage their own farmers operating in such an open, market-led and competitive environment.

I make the point to them that every subsidy represents a cost on some other member of society. In New Zealand's case, it is hard to identify the industries that have such abundant competitive advantage that they could be expected to carry the costs of subsidizing agriculture

Another point I make to them repeatedly is that, like any other industry, success in agriculture demands constant change. Unless policy makers are prepared not just to tolerate change but to encourage it, they cannot expect to achieve a self-sustaining and prosperous agricultural sector.

The evidence of a willingness to accept change in New Zealand agriculture is seem most vividly in changing patterns of land use. I doubt that there are many countries that could point to the extent of change we have seen in New Zealand in the past 10 to 15 years - the surge in plantation forestry, dairying, venison, wine and other horticultural production is enormous. And importantly, it is all based on private investors' perceptions of the relative returns to be extracted from the various alternative land use options. Equally importantly, those perceptions of relative returns that are driving investment decisions are derived from market yields, not government dictates, subsidies or other interventions.

The drive to cut costs, maximise efficiency and a strong focus on concentrating investment where it will yield best returns has seen agriculture turn in an impressive productivity performance over the past 15 years. The Diewert & Lawrence study on New Zealand's productivity performance that was funded some years ago by the Treasury & Reserve Bank showed the agricultural sector to be a persistent high performer. There are all manner of measurement and conceptual difficulties with this sort of work. But robust evidence of this performance can be seen in the fact where most would have confidently assumed that agriculture would become a diminishing force in the New Zealand economy, that has clearly not been the case.

Indeed, agriculture has not merely maintained its share of total GDP since the deregulation and removal of subsidies in the mid 1980's, but has actually increased its contribution over that period. Had the rest of the economy matched the productivity growth seen in agriculture, there would be a lot less talk now about how to regain our ranking in the OECD - we would never have lost it.

The hard indicators of productivity growth are all about us, and most in this audience will be familiar with them. The average dairy herd is now over 250 cows, with the average new dairy conversion running at around 450 cows. Despite sharply decreased sheep numbers, we export more lamb each year because fertility rates are up and carcase weights have increased. And the gains are evident off-farm also. Where most of our meat was exported in carcase form the vast majority, more than 90%, now goes out in cuts or chilled. This tells us that productivity in the meat processing industry has come far enough to make that further processing of carcasses profitable - something simply not seen as possible in the industrial relations climate of 2 decades ago.

I have not spoken much of forestry here - and should do so. Those who believe that the "F" in MAF got lost somewhere along the way when the old Ministry of Forestry was folded into MAF have a habit of leaping to their feet and making that point.

Talk about the imminent "wall of wood" has become almost a cliché. For all of that, I'm convinced that not many New Zealanders yet comprehend the magnitude of the resource now growing towards maturity in our forests. For every logging truck on our roads today, we will, in around 10 to 15 years time, have 3. Even if we got no further investment in large scale wood processing capacity in New Zealand (and it seems likely that we will get some), the investment required to fell, grade, transport and

ship the increased wood production, even in log form would be very significant.

There is every prospect that forest exports will be competing with dairy for the mantle of our largest export category. Sure, some of the maturing trees may well be left to stand in the more remote sites where the economics of harvest may defeat even the most optimistic of Featherston Street investors. But my guess is that most will turn at

least a positive cash flow from harvest, even if the yield over the life of the plantation in some cases is unpalatable. So they will be harvested and the activity associated with that will be substantial. Certainly, we can expect to see pressure on labour markets and infrastructure as the wall descends on us.

GROWTH AMBITIONS

In February of this year, the Government announced its Growth and Innovation Framework (GIF). The stated, but undated, intention is to return New Zealand to the top half of the OECD per capita income stakes. To do that, there is a general presumption that we need to be able to sustain annual GDP growth rates of around 4% rather than the recent 2.5% to 3% averages.

Underlying this new growth and innovation framework are a number of key planks:

The key pillars of New Zealand's macroeconomic framework - eg the Fiscal Responsibility Act and the Reserve Bank Act aimed at price stability - are necessary but not sufficient conditions for sustained superior growth performance.

There should be no return to subsidies, tax breaks, prescriptive regulation etc

But there is a place for a more active role for Government in industry policy
This should take the form of public/private partnerships and catalytic interventions.

More specifically, the GIF strategy aims to:

Enhance the existing innovation framework
Develop skills and talent
Increase global interconnectedness

Three key priority areas that are singled out for special attention and promotion are - information and communications technology (ITC), the creative arts, and biotechnology.

These three priority areas are seen as having a pervasive underpinning or enabling effect that is widespread throughout the economy - the Government has not identified or specific market or industry sectors for attention.

So what is the place of agriculture and forestry in this environment?

Firstly, it should be abundantly clear to all that New Zealand will not achieve sustained high aggregate growth without the full participation of the agriculture and forestry sectors. Agriculture and forestry are simply so large and influential in our economic performance that we cannot afford to have them lagging and withering. In short, the sorts of productivity performances which have distinguished the primary sectors over the past 15 years will have to be sustained and enhanced if we are to succeed in putting New Zealand back in the top half of the OECD.

Secondly, when we look for activities in which New Zealand has achieved, or has some reasonable prospect of achieving, sustainable international competitiveness - industries in which we have world scale, an accumulation of unique and marketable intellectual property, and global branding - the list is pretty short. It is dominated by pastoral agriculture and forestry. Tourism and, perhaps, fishing and education services are probably the only other sectors that might make that list.

Thirdly, there has been a persistent tendency for New Zealanders to think of agriculture and forestry as "old economy" sectors afflicted with persistently weak long-term price prospects. It was that thinking which underlaid the drive to develop a New Zealand manufacturing base in the 1950's, behind a welter of protections. We've heard echoes of it repeatedly over the past decade in the talk of how New Zealand was missing out on the benefits of the "high tech" revolution.

Ironically, as we now look at the price trends for many of those high tech manufactured products, we find that high quality food and even forest products begin to look like pretty attractive markets to be in.

The challenge, then, is to ensure that the central place of agriculture and forestry is well recognised, both by policy makers and by the public more broadly.

In the first instance, we need to ensure that attention and resources directed to biotechnology and ITC activities under the growth and innovation strategy are comprehensively linked to agriculture and forestry to leverage the growth prospects in our core industries.

In that regard, an important issue for MAF is how we ensure that our policy analysts are at the table when broad policy initiatives such as the growth and innovation strategy are being formulated.

We weren't.

My aim is to ensure that we will be in future.

MAF: CAPABILITY AND FUTURE DIRECTIONS

When I was appointed to this job, there were few firm instructions from Ministers or my employer, Michael Wintringham at SSC, about what was expected of me. (Of course, there is an enormous purchase contract that specifies in excruciating detail what is expected of me, but that is another story for another time about the mind-numbing complexity of public service management).

But one of the messages that did come through repeatedly was that MAF had slipped off the top table. It was no longer the essential and highly influential agency in the public policy process that it once was. It should be restored to the top table.

So what have I found at MAF?

Firstly, some brief history. MAF at its peak had some 7,500 employees. It has been endlessly restructured over the past 15 years. At its trough, in terms of staff numbers, it was down to 900 people. It is currently back to around 1,200. The biggest business group in MAF, the Operations group, has some 800 or more people working in the Quarantine Service, Verification Agency and the Labs (NCDI, NPPRL etc). The Operations group was established in 1998. As a holding pen for these activities before they too were spun off or privatised. That now looks unlikely to happen, raising questions about how best to structure and manage those activities in the future.

Another significant part of MAF, the MAF Food Agency, is about to be merged with a small contingent of Ministry of Health staff to form a "semi-autonomous agency attached to MAF" under the label of the New Zealand Food Safety Authority (NZFSA). NZFSA will project an independent "brand", be based in separate premises, report to a separate Minister and operate under a dedicated Food Safety Vote. But its employees will be MAF employees, and while I will be expected to delegate day-to-day operating authority to the NZFSA Executive

Director, I will also retain ultimate responsibility and accountability for the performance of the NZFSA.

The on-going change does not stop there. The Biosecurity Authority is currently awaiting the outcome of a significant review of biosecurity strategy which has the potential to shape both what it does, how it does it and the governance arrangements under which it operates.

In short, MAF has been undergoing, and continues to undergo, enormous change. It is hardly surprising that the organisation has found it difficult to maintain its coherence and drive through all of this. Nor is it surprising that our stakeholders struggle to understand what it is that MAF is about these days. When we speak with farmers about MAF, many still wonder why they haven't seen our farm advisory team for a while, oblivious to the fact that those services were sold to Wrightson about 7 years ago.

The current MAF consists of 4 basic activities:

Food safety
Biosecurity
Policy, including trade access/trade negotiations
Forest management

There are some important subcategories to those basic activities. In particular, activities carried out under the headings:

Rural affairs
Animal welfare
Environmental sustainability/biodiversity

When we look for the "umbrella" that ties all of these activities together - the "glue" that makes it sensible to group these activities into one organisation rather than distributing them around, for instance, MED, DOC, Health etc - it is the external trade focus and the biological production basis of our agriculture and forestry activities that provides the uniting focus.

Because these activities are based natural processes using land, water and genestocks and because better than 90% of our agricultural produce is exported, New Zealand has an enormous stake in the framework and rules governing international agricultural trade (the WTO Agriculture and SPS Agreements in particular). The work of the MAF Food group, soon to become NZFSA, in certifying New Zealand food exports as fit for purpose, is bound in its judgements by the WTO's SPS framework. Likewise, the Biosecurity Authority, in making its risk assessments around imported products, is bound by the process and evidential requirements of the SPS framework. In essence, the standards that we set for products entering New Zealand must be consistent with the standards that others impose on our exports to them. Our interests are served by the consistent application of good science and good process in international trade. It is important that our food and biosecurity groups are interacting closely and have shared understandings of the implications of their various decisions for each other.

The MAF Policy group is also tightly tied in to thr WTO Agriculture and SPS framework. MAF Policy provides a significant part of the technical expertise behind the MFAT trade negotiations team and works very closely with MFAT on the broader multilateral stage (eg, Doha Round negotiations) and in bilateral and trade access issues.

So what state is the Ministry in?

As already noted, it has been restructured to death, and there seems little doubt that this constant turmoil has got in the way of its coherence and effectiveness.

It has the feel of an organisation that has spent too long in a centrifuge. The substance has all migrated to the outer edges, leaving a relative vacuum at the centre. Outsiders recognise this phenomenon in the silos that have developed.

Effectively, as the restructuring has gone on, the individual business groups have got on with life and protected their own functionality by building up the walls and becoming more or less independent. Some parts are primarily funded by industry rather than by the Crown. Those parts have found funding easier to come by, so capability and activity that might otherwise have remained in the corporate centre has migrated to where the cash is in order to enable the business units to function effectively.

The corporate centre has been left weak. Information flows between groups have become weak. The organisation's capacity to project itself

cohesively has suffered - communications emerge from the business groups with little reference to any overall corporate strategy. Corporate strategic planning consists primarily of an aggregation of business unit plans rather than the business unit planning around an agreed set of corporate priorities (which must, themselves, reflect Government policy).

We are behind the play with our IT platform and capability, under invested in business continuity/planning and risk management, underinvested in corporate policy development and maintenance, under done on capacity such as internal audit, planning and budgeting. Oh, and for good measure, we need to try harder in our personnel management, especially in performance assessment, performance management, and skills assessment and development.

None of this is insoluble.

The Policy group will inevitably be at the heart of a future successful MAF. It is a substantial group, numbering close on 100 people - one of the largest policy groups in Wellington. But it is tightly stretched over very broad territory. It has been attempting to cope with a funding freeze for more than 10 years by progressively reducing headcount to prevent remuneration scales from becoming too uncompetitive. On the presumption that one good person is better (and cheaper) than 2 average people, we've been attempting to substitute quality for quantity. That's a useful discipline, but again, there are limits to how far we can push that.

Overall, my sense is that we are consuming our human capital - although that is hardly unique to MAF in the public sector. The average age of the males in our policy group is around 48 years.

Experience and maturity is great - I'm a big fan of some grey hair (indeed any hair could be regarded as a bonus) - but we also need to be able to attract a flow of new blood, new ideas and to fill some of the holes in our skill base with top quality, mid-career analysts. We need to grow the next generation of opinion shapers and policy entrepreneurs.

There are some areas, and I would identify the international group - the trade negotiations team - in particular, where the returns to additional resource are likely to be overwhelmingly positive. I would love to be able to capture some additional funding for that work. Note, though that our key team members in that group are products of an era when we had agricultural attaches in overseas posts, developing

networks and learning their trade. We rely on a very small group of experienced people for this work. We can no longer meet the huge expenses of placing agricultural attaches abroad - one veterinarian in Brussels only - which means that we will struggle to grow the next generation of our expert agricultural trade negotiators. Again, I will be looking hard for ways to remedy that.

Our regional policy teams have been reduced over the years as priorities have dictated greater concentration of effort in Wellington. That is not a trend I wish to see continued. I believe that our regional presence is an important part of what distinguishes MAF from other public agencies. Used effectively, the regional teams can add a great deal to the identification and, particularly to the interpretation of, trends in agricultural data.

And speaking of data, in conjunction with Statistics NZ we will shortly conduct a new agricultural census. Government dropped these several years ago - not smart prioritisation in my view - and I'm delighted to see that again being funded.

Lest this be seen as an unbroken plea for additional resources, let me say that I see scope for chasing increased efficiency within existing funding allocations. Better planning and budgeting mechanisms now being developed will help us do that.

An important part of finding efficiencies lies in being very clear about priorities. That remains a problem area. As I told a gathering of our management team in March, we need to get greater clarity about the boundaries of our work. We need to engage in a conversation internally, and externally with the politicians and the public, in order to shape expectations about what MAF should, and should not, be held accountable for, what we should and should not be funded for. Without that MAF will constantly find itself on the defence - accused of failures in territory we were never funded to operate in. Worse still, accused of failures in our core territory, because we allowed our effort and our inevitably limited resources to be diverted elsewhere.

That is a particular issue for biosecurity. From its roots primarily as a mechanism to counter and manage the risk of foot and mouth disease, the biosecurity mandate has evolved to include the full raft of pests and diseases.

It has moved from a preoccupation with protecting the commercial activities of agriculture, horticulture and forestry to protecting against a much broader range of threats to indigenous biodiversity as well.

With that broader range of concerns comes more "stakeholders", a much wider range of interests to be satisfied on any issue, more complex and therefore more time-consuming consultation and decision-making processes, much more complex and cumbersome governance arrangements, diffused prioritisation and stretched resourcing.

The forthcoming biosecurity strategy review is an important vehicle for assessing and dealing with these concerns.

CONCLUSIONS

Agriculture and forestry have a central part to play in New Zealand's future prosperity. We won't achieve our growth ambitions without the full and vigorous participation of our most significant sectors. In any event, the growth potential from both sectors is immense.

There is no reason why agriculture and forestry cannot be part of the "new economy" - an integral part of a high skilled, high technology future New Zealand delivering living standards that are the envy of other countries.

At MAF we describe our role as being to create opportunity and manage risk with respect to agriculture and forestry. We are advocates for national wellbeing through agriculture and forestry, rather than being advocates for agriculture and forestry per se. But there should be little tension in that distinction on most occasions.

Expect to see MAF advocating vigorously for the infrastructure, the institutions and the organisational structures that will enable agriculture and forestry to realise that pre-eminent place in a successful future New Zealand economy.

Contact for Enquiries

Director-General
Ministry of Agriculture and Forestry
PO Box 2526
Wellington

Tel: +64 4 894 0100
Fax: +64 4 894 0720
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