Brian Fallow 's Opinion

The Economics Editor of the NZ Herald

Brian Fallow: Attention on boosting services sector

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Productivity Commission picks three areas for work including, not surprisingly, the use of information technology

Companies often computerise their processes, but computerise old, paper-based processes rather than thinking about their business models and how to do things differently. Photo / Getty Images
Companies often computerise their processes, but computerise old, paper-based processes rather than thinking about their business models and how to do things differently. Photo / Getty Images

The Productivity Commission has turned its attention to the services sector and how its productivity might be boosted.

It is a pretty important question when services represent more than 70 per cent of economic output and New Zealand's record on productivity levels and growth rates is unimpressive, as the income gap between us and most other developed countries attests.

The pervasive importance of services, even in the primary and goods-producing sectors, is one clear message from the commission's recently released first interim report on the subject.

Take a raw log at the wharf, for example. More than half the value lies in the embedded services of logging and transport, rather than a return to the grower.

The commission found that the primary and goods-producing sectors spend nearly 40 per cent more on market-provided services than they do on wages and salaries.

Being small and remote doesn't help.

"It's always the conundrum we face: How to achieve both scale and competition in a small market," says commission chairman Murray Sherwin.

Because many services are delivered face to face, New Zealand's small population and low population density make it hard to achieve economies of scale or the benefits of competition, which is also an important driver of productivity.

There is a very wide range in productivity of firms in the same service industry, the commission says, which may be a sign of weaker competitive pressure in those industries.

Achieving scale would often mean exporting, but apart from tourism and education, services exports are small, as is the level of outward direct investment.

Firms which directly export services typically need deeper connections and better networks in, and more information about, their markets than goods exporters do, which often follow a "make it, pack it, ship it" model, the commission says.

This is likely to be more challenging for New Zealand firms given their small scale and distant location.

Coming up with the innovation that would give them something to sell often involves high fixed costs and if the costs of establishing a presence in distant markets have to be incurred at the same time, the barrier can be daunting.

But if the commission's report were merely an elegant analysis of why it is all so difficult, it would be of little interest. The issue is what can usefully be done.

So it has identified three areas for further work and potential policy recommendations, and it is seeking from the next round of submissions guidance on which two to concentrate on.

One is, unsurprisingly, the barriers to firms extracting the full benefit from information and communication technologies (ICTs).

The problem seems to be not a lack of investment in ICTs but a lack of the skills (not least among management) or systems to make the most of them.

Anecdotes abound, Sherwin says, of companies which computerise their processes, but computerise old, paper-based processes rather than thinking about their business models and how to do things differently.

He cites Air New Zealand's move to automated check-in as an example of a company looking not only to take costs out but to improve the customer experience, and doing so successfully.

By contrast two sectors which are productivity laggards here - retailing and wholesale trade - have achieved serious gains in the United States and Australia respectively from the harnessing of ICTs.

The commission also sees an important role for ICTs in a second area it is zeroing in on: bolstering the role consumers can play in enforcing the disciplines of the market.

Consumers are commonly at an information disadvantage when dealing with service providers.

"Acquiring the knowledge necessary to make an informed decision about which provider offers the services that best meet their needs can be costly for consumers," the commission says.

But things such as the Electricity Authority's "What's my number?" campaign to facilitate comparison shopping among electricity retailers can address that.

Something similar may become possible for KiwiSaver providers now that the Government is requiring them to produce performance measures in a standardised form.

ICTs can also reduce the transaction costs of switching, when the relevant forms can be filled in online.

And prospective house buyers or tenants can now easily access multiple online listings, enabling them to search a much wider range of properties than if they had to visit each property in person.

So the commission is seeking feedback on whether there is a role for government, business or non-government organisations in stimulating greater competition by reducing search and switching costs in services markets.

The third area in the commission's sights is occupational licensing.

The intended benefit of occupational licensing is consumer protection, by specifying minimum qualifications people must have to work in an occupation, specifying the types of services a licensed provider can engage in, and setting and enforcing codes of conduct.

But that consumer protection has to be weighed against the cost of reduced competition and not infrequently delays in being able to access the services involved.

Although medical services fall outside the scope of the commission's inquiry, Business New Zealand in its submission pointed to the medical profession as one that was still heavily protected, for example by exclusion from the Transtasman Mutual Recognition Arrangement.

The commission has identified about 80 occupational licensing regimes. It cites work the OECD has done on regulatory constraints on lawyers, accountants, architects and engineers.

The OECD found that (in 2008 at least) New Zealand regulations were less restrictive across those four professions than the average for 34 OECD countries but more restrictive than in Australia, Britain or the United States.

That suggests to the commission there may be scope to stimulate greater competition or other efficiency gains within the services sector though changes to the ways occupations are licensed.

As an example it mentions the Real Estate Agents Act 2008 which debars anyone without an appropriate licence from carrying out "real estate agency work".

"This might restrict the ability for licensed agents to use unlicensed employees to perform some tasks such as hosting open homes," it says.

Submissions on the report are open until August 23. A second interim report on the two areas the commission chooses to drill down into is due in the new year, ahead of a final report to the Government next April.

- NZ Herald

Brian Fallow

The Economics Editor of the NZ Herald

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