New Regulatory Framework: Overview
20. On 9 September 1999, the Apple and Pear Industry Restructuring Act 1999 (“APIRA”) and the Kiwifruit Industry Restructuring Act 1999 (“KIRA”) came into force.
21. The APIRA provides for:
· corporatisation of the New Zealand Apple and Pear Marketing Board (“the NZAPMB”) into a limited liability company registered under the Companies Act 1993 (to be known as ENZA Limited); and
· regulations to be made that control the export of apples and pears.
22. The KIRA provides for:
· corporatisation of the New Zealand Kiwifruit Marketing Board (“KNZ”) into a limited liability company registered under the Companies Act 1993 (to be known as Zespri Group Limited); and
· regulations to be made that control the export of kiwifruit.
Corporatisation
23. The corporatisation process requires both the NZAPMB
and KNZ, respectively, to prepare a restructuring plan and to submit that plan for
approval to the Minister by
1 December 1999. The key components of the plan are a share allocation plan and a draft
constitution for the new companies.
24. Following approval by the Minister each restructuring plan is voted on by growers. If 75 percent of those voting approve, the plan will proceed and each producer board will convert into a company on 1 April 2000. If the 75 percent majority is not achieved, the Minister has the power to specify the contents of the restructuring plan following consultation with the industry. Either way, conversion to a company will occur on 1 April 2000.
25. The regulatory framework requires the company constitutions to meet certain minimum corporate governance standards designed to ensure management accountability to shareholders. These requirements must be present before the Minister may approve the restructuring plan. The regulations require that the specified requirements remain part of each new company’s corporate governance for so long as the regulatory controls remain in place.
Regulatory Controls
26. The Apple and Pear Export Regulations 1999 and the Kiwifruit Export Regulations 1999 contain the rules relating to each export monopsony. For the apple and pear industry, the new regime came into force on 1 October 1999. For kiwifruit, the new regime applies from 1 April 2000.
27. The key aspects of the regulatory regime are:
· retention of controls over exporting;
· authorisation of ENZA Limited to export apples and pears, and of Zespri Group Limited to export kiwifruit;
· the creation of industry regulatory bodies (the Apple and Pear Board, and the Kiwifruit Board) to oversee the activities of ENZA Limited and Zespri Group Limited as the authorised exporters;
· the imposition of obligations on ENZA Limited and Zespri Group Limited to mitigate the risk of distortion and anti-competitive conduct arising from each company’s dominant position; and
· the Minister is to approve the enforcement regime.
28. For the apple and pear industry, the regulatory regime also:
· creates an Export Permits Committee to determine applications to export apples and pears from potential exporters other than ENZA Limited; and
· provides for
transitional arrangements to cover the period from 1 October 1999 to
1 April 2000.
29. For the kiwifruit industry, the regulatory regime also provides that decisions on the industry’s existing collaborative marketing arrangements be made by the Kiwifruit Board.
Mitigation Measures
30. The mitigation measures imposed on ENZA Limited and Zespri Group Limited are the most important aspects of the new regimes. The Apple and Pear Board and the Kiwifruit Board are to monitor and enforce these measures against ENZA Limited and Zespri Group Limited, respectively.
31. The mitigation measures are:
(a) Non-Diversification Rule – A requirement on ENZA Limited and Zespri Group Limited to seek grower and shareholder approval for any use of capital (“capital” is widely defined in the regulations) resources in business ventures which are not part of each company’s defined core business3. Where any grower or shareholder does not agree, that person must be insulated effectively from the commercial risks of the proposed venture.
In the case of ENZA Limited, the non-diversification duty does not apply to all ENZA Limited business activity. Certain diversified business activities now being carried on by the NZAPMB have been “grandparented” from the rule. Those activities are specified in Schedule 2 to the Apple and Pear Export Regulations. The activity levels indicated in that Schedule are subject to verification by independent audit. This audit currently is being undertaken;
(b) Non-Discrimination Rule – Under the new regulatory regime, ENZA Limited and Zespri Group Limited will no longer be obliged to purchase all fruit that meets their specified standards. Purchase of fruit will be driven by market demand, not production push. The non-discrimination rule allows each company to discriminate in its contractual arrangements between growers but only if differing contractual arrangements can be shown to be justifiable on commercial grounds. This rule is designed to prevent discrimination on non-commercial grounds; and
(c) Information Disclosure – ENZA Limited and Zespri Group Limited will be required to disclose financial statements in a manner designed to distinguish between core activities and other activities. Each company will also be required to disclose its purchase conditions (and variations). An Information Disclosure Handbook for each industry published by the Director-General of Agriculture and Forestry in November supplements each information disclosure regime.
Further Requirements for Apples and Pears
32. The Apple and Pear Export Regulations require ENZA Limited to meet two further requirements.
FAS
33. Unlike the kiwifruit industry, the NZAPMB currently acquires title to the fruit onshore (at coolstore). From 1 February 2000, the point of acquisition of title is required to move to FAS (free alongside the ship or aircraft on which the apples and pears are exported from New Zealand). This will allow growers choice on domestic transport and other onshore logistical arrangements.
Arms-Length Rules
34. ENZA Limited has been allowed to retain its current onshore logistics activities. However, it is required to operate this business on an arms-length basis from its core monopsony activities. Schedule 1 to the regulations identifies a series of arms-length duties that must be complied with to satisfy the arms-length obligation.
3 For apples and pears, the core business is defined as the purchase of New Zealand grown apples and pears for export. For kiwifruit, the core business is primarily the purchase at FOBS of New Zealand grown kiwifruit for export.
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