Dairy Industry Restructuring Amendment Bill

I have found this process fascinating; it is the first time I have had an opportunity since becoming a member of this House to follow a bill through its entire process. The Dairy Industry Restructuring Amendment Bill is a very important piece of legislation. It is a very complex piece of legislation, and it takes a considerable amount of understanding, and some comment has been made in the Committee today on the fact that a number of people in the dairy industry took some considerable time to understand it. I think the dairy industry took a lot of time to understand it, and I think in the end it understood it pretty well.

It is actually an exciting piece of legislation for the dairy industry, if there is such a thing, and it will continue to develop Fonterra as a new-generation cooperative. I think it is very important that we note the fact that it is a new-generation cooperative, and if we do not create these new-generation cooperatives, so to speak, cooperatives always run their course. So it is very important that Fonterra has the opportunity through this legislation to reinvent itself.

I am disappointed with what, I guess, can be described only as the scaremongering of the member for Wellington Central. Wellington Central, I reinforce, is a place where a lot of dairy farmers are residing, obviously!

💬 Colin King: They’ve got their lattes.

I guess they do need the latte there. His view was that the Government wants to float Fonterra. I find that extremely disappointing, because this is clearly not the aim, at all. Had he attended the Primary Production Committee, he would have understood that his own members and, indeed, the members of the Government on that select committee questioned this topic at length. I think we were all comfortable that we got to the right position with regard to Fonterra and how it might go forward.

Fonterra has a very large parliament. Dairy farmers have spent years discussing the redemption issue. After at least the last 3 years, they have come to the conclusion that it is satisfactory for the industry and satisfactory for the company. This cooperative and its predecessors have been attacked by experts in an effort to gain a piece of the action. I for one am pleased to see the co-op and the Government, via the Dairy Industry Restructuring Amendment Bill and its amendments, making the running here. Through their initiative they have pre-empted what may have been otherwise manipulated by others.

We have heard the Greens on this topic throughout this debate. They do not support this, and that is no surprise. They have yet to get their heads around progress, and now they want to send the industry back to where it was pre-2001. This would be good for the sheep industry. We would get a little of our own back as we witness a swap-back to the sheep industry. My own intelligence tells me that, contrary to the Greens’ allegation, many of my small dairy farming families support the Trading Among Farmers scheme and support the amendments to the Act. The reason they had difficulty with the Act is that if you go back to 2001, it was legislation put through Parliament in order to establish a modern dairy industry. Many of our farmers had difficulty with that, because it changed the structure and the nature of their cooperative. If we do not change the nature of this cooperative, the cooperative will certainly, in my view, be derailed in the future. So it is most important. The other reason that small farmers look forward to the opportunity to support the bill, and I am sure will vote resoundingly for it at the next opportunity, is that it provides an opportunity for intergenerational transfer and for continuance of strong family-owned farming businesses.

One of the factors that I find really important in the course of this is that we are taking the opportunity to change the legislation slightly to ensure that companies taking a piece of the 5 percent of the milk available to other companies have to do it in a structure and a form that is understood. In other words, they cannot set up subsidiary companies to take a share of that milk. This provision will be well supported by the dairy industry. I am sure that it will give great security to the dairy farmers who currently supply Fonterra.

I will be brief. The last thing I want to say on this topic is that this industry was restructured in order to give Fonterra and the dairy industry an opportunity to grow and to diversify. It is designed to create efficiency around the activities of Fonterra. It is designed to create efficiencies around the activities of any other companies participating in the industry.

I just want to acquaint the Committee with the contents of Part 2. We have had some general comment. This is quite a technical section that deals with repeals, and it is coupled with the schedule, which members might also want to look at. I do not intend to allow the debate to be an extension of the debate on Part 1. Having said that, is any member seeking the call?

I raise a point of order, Mr Chairperson. Can I just say that the buzzer is pathetic and it is actually a little confusing at times. I am a little deaf, and I did just about miss that.

We will probably now have to wait until the dinner adjournment, when the technicians will come running and fix it. I do hope that the member was not implying that I was pathetic when he talked about the buzzer. Rest assured, if I press the buzzer and the member does not notice, I will let them know.

Thank you, Mr Chairman. I do not think for a moment that you do not have the ability to push it hard; it is just what comes out at the end that I am worried about. I will refer to Part 2 of the Dairy Industry Restructuring Amendment Bill, which contains transitional provisions that refer back to new section 109A and other provisions of the bill. The provisions are actually quite far-reaching. I will refer to just one particular point, in new section 109D, which relates to the Order in Council and what the trigger points are for the introduction of Trading Among Farmers or, indeed, if the fund was to be dissolved or cease to operate.

One of the requirements put in there is the fund size: $500 million. I would like to take the opportunity to put on record here how that figure was arrived at. Firstly, 2 years ago, when farmers voted on Trading Among Farmers, it was trading among farmers of their own shares, and they supported that in principle because they believed that that was what was going to happen. There were issues of liquidity raised by some of the officials over here, who know competition law, that if all farmers wanted to trade their shares at once, no doubt the price of those would drop. So they came up with a cunning plan, which was to have a unit fund, which was to provide equivalence and fungibility. Fungibility is a word that I had not really made myself familiar with prior to this bill, but I understand it now. The issue of why $500 million was chosen, which equates to about 8 percent of Fonterra’s equity at this point in time, is that it was just a figure plucked out of the sky. It is one that officials estimate will provide enough liquidity to ensure a fair fungibility and, hopefully, some stability in the share price and the unit price. I think they have got it wrong, because the unit owners are just going to want one thing, and that is the price to go up and the dividend streams to flow.

Aside from that, can I go back to the key point of why $500 million was chosen, because some farmers are asking why we do not just go back to the concept of Trading Among Farmers—that is, we trade shares among ourselves as we see fit and need to, and if there is a liquidity issue, then we start off with a smaller fund size. Indeed, the proposition put to me was that farmers themselves could fund a fund; they could buy the units of maybe $100 million or $200 million. In the dairy industry that is not a lot of money. But the insistence of Government officials—the Minister and his officials—was that it should go to a minimum of $500 million, and, indeed, without my amendments, there would be no maximum in legislation. So we have in legislation a minimum fund size of $500 million, regardless of whether it is necessary to have Trading Among Farmers of their shares. So we have forced upon Fonterra, or forced upon the farmers, a fund that is open to outside investors, on the basis that we have to do this to have liquidity. Well, if you buy into that, why not at $200 million? They will always put up the argument in a drought year or in the exception year, etc.

Well, can I put on the record that in one of those exceptional years there is redemption risk still for Fonterra. It has admitted that, and the chairman, Sir Henry van der Heyden, stood up time and time again and said that this was about removing redemption risk once and for all. That was a lie. That was a lie, and he knows that, because it leaves in place redemption risk for Fonterra. Let us be clear about that. It reduces it from a maximum of an estimated $800 million back down to $200 million, but the redemption risk remains in the exceptional event that officials have negotiated and, I guess, calculated for. In that exceptional circumstance, $500 million, $1 billion—who knows—might be required. But the question put to me is why we should be legislating for a minimum fund size when we are not legislating for a maximum.

Well, that supported my Supplementary Order Paper into the House. That is why I brought to this House my Supplementary Order Paper 85 to ensure a maximum fund size, which to some extent counters and balances the argument that officials put up to the Minister for Primary Industries—and he swallowed—that we needed a minimum $500 million unit fund size. These are the transitional provisions in Part 2 and there are many questions flowing on from that that the Fonterra Shareholders’ Council should now start to ask. We will not support this bill, because the Minister and the Government have blocked our ability to have a maximum fund size. Many of the farmers who voted for Trading Among Farmers believed there was going to be one.

There is talk of a vote in November that might reduce the cap from 25 percent to 20 percent. I do not trust the process, quite frankly. I do not trust the process, I do not trust Fonterra, and I do not trust this Government. This Government has embarked upon a process of State-owned enterprise sell-offs and of “strengthening the capital markets of New Zealand”, which was in the explanatory note of this bill. It is determined to get a chunk of Fonterra—as big a chunk as it possibly can—on to the New Zealand Exchange because the chairman of Fonterra, the ex-chief executive of the NZX, and the Prime Minister are good mates. In fact, the chairman of the NZX now has been, and is, involved in investment companies with the chairman of Fonterra.

These things are not widely known by farmers, but they should be. They need to know where this might head. This is our single biggest, most successful, and wholly New Zealand - owned company—Fonterra, a cooperative—and the transitional provisions in Part 2 that we are referring to here may lead to the loss of control and ownership of that, and farmers need to be aware of that. The Fonterra Shareholders’ Council has yet to sign off on Trading Among Farmers. It should be fully aware of what is hidden in this legislation, and ask the question why the Government blocked my Supplementary Order Paper, which would have capped at a reasonable 23 percent of the share value of Fonterra the fund that will trade units that will be able to be purchased by outside investors, because I do not know that it fully understands that.

It may be because the Prime Minister said that he thinks that Fonterra on the stock exchange would be a great idea. It may be that the original intent, as stated in the bill, to strengthen the capital markets of this country, is the objective of the Minister and his Government, not indeed to grow Fonterra, because actually this does not in itself provide Fonterra with any more capital. It does not, in itself, provide any more incentives to innovate or create more value-added products, and the chair of the Primary Production Committee knows that. What this does is open the door to outside investment in the naive belief that analysts of the New Zealand Exchange will provide the discipline to drive better management of Fonterra. Well, if you have a look around the country at the failed companies and at those that have been sold offshore or that are failing at this moment, and have a look at what analysts have said over the last 10 years of NZX companies, I think you would fire the whole lot of them.

Part 2 of this bill here contains transitional provisions. It enforces and relates to Orders in Council and the ability for the fund to be wound up if these conditions are not met. I think that if we did not reach the $500 million fund, it would be a great outcome. It would actually mean that the farmers of Fonterra had the opportunity to go back and work on a different way of addressing redemption risk, because they are not eliminating it through the passage of this legislation and the setting up of Trading Among Farmers; they are reducing it. There are other options to reduce redemption risk, which we accept are there. The options are there and the redemption risk is there. The simple fact is there has not been enough debate, and robust debate, on those options.

The previous speaker, Mr McKelvie—

Before the member Shane Ardern starts, I say that I did give a caution that this is largely technical. It is about transition matters, and the member who was just speaking did get well outside of that. If members do not want to talk on Part 2, you are inviting the Chair to take an early closure motion. That is how it works.

Mr Chairman, I intend to speak entirely on Part 2, but can I reference, first of all, the comments made by the previous speaker, the Hon Damien O’Connor—the scaremongering, I guess you could say, that is going on around the potential loss of ownership of Fonterra. As I said in Part 1, it is in dairy farmers’ DNA to maintain 100 percent ownership of this industry, and can I just say it is not just a philosophical position—and it is entirely enshrined in Part 2, under “Miscellaneous”—it is a commercially driven position. It is a commercially driven position that is absolutely in the best interests of “New Zealand Inc.”, so let us just talk about how that will be achieved, particularly in regard to the new sections 109A and 109B in Part 2. That is the size and the protection and the ability of the fund, if you like, the fungibility—a new word that we learnt in the Primary Production Committee that most of us had not heard of until we started down this track—in regard to maintaining Trading Among Farmers and the dividend fund.

Can I just say that if the worst fears that were expressed by the previous speaker were to be realised, then the shareholders themselves, through the process of election of directors and chairman of the company, would address that. There is a track record of that over many, many years in this industry—in fact, over 100 years. It is lost, I think, in this debate that in Taranaki alone there were over 100 processing sites and now there is one for the whole of the lower North Island. So decisions will be made—decisions that protect the best interests of the industry.

So let us look at what is in Part 2: transitional provisions for the application under section 73 or 74 of the principal Act. Those provisions and many others that are related and tied in to section 109—well, I am reading it from the bill here, Mr Chairman; I am not sure whether you have got the same one, but I am certainly reading directly from the bill that is tabled in the House today—are themselves a form of protection against some of the assertions that have been made by the Opposition in the previous contribution.

Can we look at the transitional provisions for notice of withdrawal under section 97 of the principal Act, which are also covered in Part 2 before we end up in the schedules, and that is also a built-in protection for some of the issues that have been debated by the previous speaker. Section 77, of course, and new section 77A, is the area where the share price of Fonterra will be set by the Government if Trading Among Farmers does not succeed. That in itself was of great concern to the Primary Production Committee when it was first brought to the select committee, and an enormous amount of work and advice not only from fund managers and valuers but also advisers to the committee, and one of those was independent, thrashed that round and round and round. When I look now at where we have finished up in terms of support in the House, I wonder why, as chair, I let it go round as often as I did, with the, I guess, naive hope at that stage being that we might reach a compromise position where we could achieve bipartisan support for this legislation.

So new section 77A—section 77 is mentioned in Part 2 of the bill—was amended in the select committee.

With those words, I look forward to the passage of this bill through the House. It has been a contentious debate. It has been a thoroughly considered position that the select committee ended up in, and there was sufficient time for all of those who wished to ask questions, and all of those who sought further advice, to have that advice delivered and furnished. I think we finished up in a position where we have a fair compromise.

I look forward to the Hon Shane Jones, who knows that the debate on clauses 1 and 2 is the time for the summary of the debate, and this is about the miscellaneous and transitional provisions.

From the far north to the deep south, I greet you, sir. Having returned from Waitangi and other such far-flung places and never having enjoyed the opportunity during the Committee stage to visit a modest level of oratory on the Committee, I will take on board what you had to say.

I would like to start off, however, by saying that in order for that Shane Ardern’s words to come to pass, there has to be a bit of compromise on both sides. But I want to direct our attention back and follow on from Damien O’Connor, taking on board the admonition of the Chair. It is not unreasonable in this stage for us to challenge the efficacy or the adequacy not so much of the transitional provisions etc. but of the safeguards for what is proposed—beyond all the parliamentary brouhaha, because that will have come and gone. This will be well down the track, this will be back into the innards of Fonterra, this will be back not even necessarily at the table of the Minister for Primary Industries; it will be with the stable of bureaucratic advisers. During the course of the select committee process they had a task that they needed to acquit themselves of, and, in fairness, what they are paid to do they, by and large, delivered for their Minister. But the point remains at a deeper level that it is not unreasonable for members on this side of the Chamber to continue to raise the concerns and to question whether, for example, if the trading scheme does not come to pass, with the alternative process we can be confident that the key stakeholders in the farming community will be listened to, or will it be that those who enjoy the corporate leadership of Fonterra will be the ones whose voices are amplified—whose voices carry the day?

As parliamentarians during the select committee process, time and time we were warned that once the large rhetorical battle is over, it then moves into almost a regulatory phase, and a subsidiary level of legislation, and we have got every right to put it on the record here and have it entered into the Journals of the House of Representatives that we fought this until the final point. Why? Because it is not unreasonable for us to remind you, it is not unreasonable for us to remind ourselves, that once this fund is set up without a legislative cap or without a legislative safeguard, we do depend on the constitutional processes within Fonterra. At one level, as has been said, it is its business. But Fonterra itself is a creation of this House, so that makes it the business of legislators, and for those reasons, at every opportunity, this side of the Chamber will continue to remind our friends on the Primary Production Committee, and indeed key stakeholders within the farming community, because once it leaves here another dynamic takes over.

I do not want to inquire as to whether it is dumb capital that will fill the $500 million order book, or whether a smaller amount will actually step up to the plate. But we need to be absolutely sure that these transitional provisions, the regulatory-making power, actually allows for a threshold of safety and reassurance, because as day follows night, if it does not work out, this is where they will come back to. First, to the advisers after the litigation, which will be driven—rather humorously, I might observe—by both sides that comprise my DNA, the Dalmatian and the Māori, rest assured they will definitely litigate going forward and we will see an example of what Telecom put us through.

💬 Hon Damien O’Connor: Too much money.

Yes, well, I am sure the Dalmatians have got too much money; for fear of losing what slender Māori votes I still attract, I will not say that about my own people, Mr O’Connor. But I would remind the Minister in the chair, the Minister for Primary Industries, that, of course, on this side of the Chamber we are champions for the industry, but in the absence of compromise, Minister, you know as well as I do what they told us recently in that great talkfest to do with cooperatives. The great cooperatives of Manitoba and that part of Canada have all disappeared as a consequence of people being asleep at the wheel and allowing privatisation to sneak in and ruin the core foundations of their cooperatives. We remind you that you must not, under your watch, allow such a thing to—

I move, That the question be now put.

Motion agreed to.

The question was put that the amendment set out on Supplementary Order Paper 72 in the name of the Hon David Carter to add new clause 20 be agreed to.

A party vote was called for on the question that the amendment be agreed to.

I raise a point of order, Mr Chairperson.

I think I understand. The member has a point of order relating to a previous vote. We will deal with that immediately after this vote.

I raise a point of order, Mr Chairperson. I seek leave to amend the vote for Mana for the Minister’s Supplementary Order Paper on Part 1. Mana voted 1 opposed and I inadvertently voted in favour for Mana.

The CHAIRPERSON (Eric Roy): So that is to the Minister’s amendments that were set out on Supplementary Order Papers 72, 73, and 82. The member is seeking leave to change from Mana’s No vote to an Aye vote.

The other way round.

The other way round. Leave is sought for that purpose. Is there anyone opposed to that course of action? There appears not. Leave is granted. The record will be amended. It is corrected by leave.

Schedule agreed to.

Clauses 1 to 3