What are the chances the vision of the Capital Markets Development Taskforce will be realised?
The taskforce's diagnosis of the deficiencies in our capital markets can broadly be summarised into four categories. First, our capital markets frequently produce poor results for retail investors. They are often supplied with poor quality information, uneven quality of financial advice, uncertain levels of investor protection and a limited range of good-quality product choices.
Second, as an "engine of growth", our capital markets have shortcomings. They lack scale and capability to commercialise early stage businesses. The ability of our SME's to attract risk capital and capability to grow is constrained by regulation.
Private capital markets are not well linked to our public markets. Regulatory uncertainty and constraints reduce the effectiveness of unregistered or exempt exchanges (which sit between public and private markets).
Our stock exchange serves its listed companies well but lacks depth and breadth. The debt market offers a limited range of quality securities and our derivatives market currently fails to provide risk management products for important areas of our economy, such as agricultural commodities and electricity.
Third, regulatory settings for our market lack clear objectives, involve overlapping roles, exhibit shortcomings in enforcement and have uneven application through different parts of our capital markets.
Fourth, tax and regulatory policy settings distort savings and investment choices and constrain the supply of talent and capability to our capital markets.
The Capital Markets Taskforce delivered a mutually reinforcing set of recommendations targeted at addressing these deficiencies, and enabling our capital markets to operate more effectively as a system.
They are targeted at creating a healthy environment for retail investors, making our capital markets a more effective "engine of growth", clarifying the objectives, consolidating the roles of our regulatory agencies and improving enforcement, reducing the tax biases which distort investor choices between different savings and investment options, and pursuing opportunities for New Zealand to specialise in providing capital market products and financial services.
The Government response to our report has been very positive. It has already indicated it proposes to implement most of the 60 recommendations. Others are likely to be, or have been, adopted as part of broader reviews (eg tax policy, the Securities Act) and there is little doubt about the likely outcome of these reviews. The Government response and early initiatives indicate it has accepted the importance of our capital markets to the economy and has adopted the taskforce's framework for transforming them.
Still other recommendations will be addressed in the Government's next term when current policy commitments can be reviewed - such as the partial listings of state-owned enterprises (SOEs).
A huge amount of effort is being directed into the implementation of the taskforce recommendations. Some initiatives have been brought forward, including parts of the Securities Act review, the establishment of the Financial Markets Authority - the "super-regulator" - and improvements to the Kiwisaver rules.
A key insight of the taskforce's analysis was that the failure of central and local Government to enable the large commercial companies they own to participate in capital markets (through public listing), creates large gaps in our sharemarket, significantly reduces the choice of quality investment products available to investors and impacts the size, depth and attractiveness of our sharemarket.
Within the OECD New Zealand is an outlier. Most governments allow or encourage commercial entities to participate in capital markets. Yet partial listing need not compromise government control or a "longterm hold" policy.
In my view this taskforce insight has changed the game in respect of the debate on the partial listing of SOEs. It is now understood that, if we want to improve investor choices and make our capital markets a more effective engine of growth, central and local government must allow SOEs and their commercial enterprises to list. I predict we will see partial listings of SOEs in the next parliamentary term.
In fact there appears to be such a marked shift in attitudes that it is possible that SOEs which require new equity to fund growth initiatives might be allowed to access public capital markets this term.
This would not entail a sell-down of Government ownership but rather the introduction of the public as an investment partner to provide new capital. Such a public-private partnership would seem a logical step in a fiscally constrained world.
Besides the partial listing of SOEs, the taskforce report identified a number of other opportunities to "fill gaps and deepen" in our capital markets. A number of initiatives are under way to do exactly that.
The NZX is hard at work developing a dairy future market which Mark Weldon states could be four or five times the size of our sharemarket. The electricity industry is moving ahead with the development of an energy derivatives market.
Fonterra farmers-suppliers will soon vote on the "capital structure proposal". If approved, it will create a new "private" capital market for farmers where they can trade their Fonterra shares among themselves, a new market for Units that supports a Fonterra Shareholders Fund for the benefit of famers and a unique new-generation co-operative model, controlled and owned by its farmer-suppliers with a secure, permanent capital base. It would enhance our dairy industry's reputation as a world-leading innovator.
Two other initiatives have direct Government involvement: the development of a local government bond bank and the assessment of the opportunity for New Zealand to become a centre for high-value middle and back office services to the fund management industry. Both appear to be making good progress.
The local government bond bank initiative has moved into a detailed development phase for which the Government allocated $5 million in the Budget. The fund management service centre initiative will soon be considered by Cabinet.
None of these initiatives are "slam-dunks". They all involve time and hard work. But each of them would fill a big gap and would significantly enhance the size, depth and quality of our capital markets.
A number of the tax policy changes announced in last week's Budget impact on our capital markets. The changes will improve labour productivity, encourage savings and investment, and reduce the investment bias in favour of property and against financial assets.
They also reduce a number of other tax distortions affecting savings and investment choices. The reduction in the company tax rate ensures the New Zealand business sector is not disadvantaged relative to its Australian counterpart in attracting internationally mobile capital.
The changes are consistent with the analysis and recommendations of the Capital Markets taskforce and the Tax Working Group. They will be good for our economy and positive for our capital markets, improving their attractiveness to savers and their effectiveness in channelling investment to its best uses.
We have an unprecedented opportunity to transform our capital markets and realise the taskforce's ambitious vision. The signs are extremely good. The Government has adopted the taskforce's framework and responded positively to its recommendations.
There is a greater public awareness and acceptance of the need for change in Government policies. A number of major initiatives are already under way that could significantly enhance the size, depth and quality of our capital markets. The tax policy changes announced in the budget are consistent with the analysis and recommendations of the taskforce and Tax Working Group.
My prediction is that within five years we will see big changes in the shape, size and quality of our capital markets. They will be bigger, better and providing significantly improved outcomes for New Zealand savers and businesses.
At the end of 2009 the Capital Markets Development Taskforce delivered its report to the Government. It set out sixty recommendations for transforming our capital markets and provided a vision of our capital markets as a vibrant part of the New Zealand economy if its blueprint was adopted.
The report is available at www.med.govt.nz