Circling the Sharks

By Corey Allan, Research Analyst, Motu Economic and Public Policy Research

New Zealand has seen an increase in the number of so-called 'third-tier lenders', such as payday lenders, over the past few years.  Based on where these firms locate, they appear to target low income households.  These lenders offer low value, short term loans to households at often exorbitant interest rates (in the range of 500+% per annum!).  Families can get locked into a vicious cycle of high cost debt, as happened to this Porirua family.

In an attempt to break this vicious cycle, a micro-credit scheme is likely to be introduced in New Zealand.  Micro-credit is the provision of small loans to low income households, who would otherwise not have access to mainstream financial services or reasonably priced credit (known as financial exclusion).  This could be because low income households have little to no collateral or a poor credit history.  Therefore, lower income households may to resort to third-tier lenders.  This makes saving difficult for these households as they must come up with relatively large sums of money in a short time to repay these loans.

An Australian micro-credit scheme, Good Shepherd Microfinance, has achieved remarkable success with its no interest and low interest loan schemes*.  These loans have fairly strict criteria, including what the loans can be used for.  Repayments are made fortnightly with a repayment period between 12 and 18 months.  In addition, Good Shepherd, in collaboration with National Bank of Australia, offer a matched savings scheme.  Savings of $500 are matched dollar for dollar, with no restrictions on access or use.  Clients can access these savings accounts after they have paid off a no-interest or low interest loan,  providing a financial incentive to repay and getting people into a regular savings habit.

Two questions immediately come to mind - why don't mainstream financial service providers offer these products to lower income households?  And does this mean there is a role for some government intervention?  Either as a direct provider or as a backer through some public-private partnership, as in Australia?  We would expect mainstream providers to offer these services if they proved profitable.  A report into Good Shepherd's StepUp low interest loans shows that each loan costs the provider over A$1000*.  Therefore, it may not be profitable for a firm to provide these loans, despite the high repayment rates that many micro-credit schemes enjoy.  This may force low income households to use third-tier lenders to purchase essential household items or pay unexpected expenses.  From a societal viewpoint, it may be beneficial for government or a non-profit organisation to step in and provide these micro-loans.

Does New Zealand need such a scheme?  There are options available to low income households to assist with essential household items and unexpected expenses.  Work and Income offer grants and loans for essential expenses, subject to their eligibility criteria.  For savings, ASB offer the Save the Change scheme, where customers choose an amount to round up each electronic transaction, with the balance being deposited into a savings account.  I think this is a great commitment mechanism to get people into the habit of regularly putting money aside.

The availability of loans for essential expenses suggests that New Zealand may not need a micro-credit scheme like that in Australia.  The government may be better placed providing information on the schemes already running.  However, unlike Australia, New Zealand does not have good data on the extent of financial exclusion.  People may be resorting to third-tier lenders because they are not eligible for the Work and Income schemes.  If this is true, a case could be made for the introduction of a complimentary scheme, with the aim of providing finance to improve peoples' quality of life.


* Good Shepherd claims a write-off rate of only 1%!
* This report also details the social and economic impacts of the scheme, including a reduction in the use of payday lenders.

Off of site, out of mind

By Carl Romanos, Stanford Energy and Environment Policy Analysis Center Fellowship Intern, Motu Economic and Public Policy Research

A recent news article says that off-site course-based learning has been an ineffective way to approach staff training for Kiwi small businesses. While this approach may generate some human capital, it requires much employer follow-up in order to relate some of these generic courses to the unique needs of a small business. And by unique needs, I am referring to the jack-of-all-trades mentality that many employees at smaller firms must take. Without the specialized departments you see in bigger firms, employees at smaller firms be versatile and take a generalist approach. 

Regardless of firm size, staff development is a key part of maximizing both profits and productivity. The cost of a generic course may be low, but the actual returns to productivity can be limited when the learning does not directly translate to the firm’s workflow. While larger-scale corporations may see benefits from this off-site approach, smaller firms should consider other methods of training their employees. A more hands-on approach to staff training by supervisors in the firm would be more ideal. A caveat is that supervisors in these small firms may have less spare time or may not have enough expertise in order to effectively train their employees in meaningful ways onsite.

Staff development is definitely a key part of small businesses because it helps promote a culture of loyalty in the staff. Investing in employees, especially younger ones can help reduce turnover. At the same time, business owners are motivated to ensure that employees gain firm-specific human capital that cannot be easily transferred to another job, in an effort to minimize the employees taking their increased skill set elsewhere. A more involved on-site approach to dealing with staff training could promote loyalty and tight bonds within the firm and also increase productivity by increasing firm-specific human capital at the same time.

My solution would be for the "boarding school" mentality to be reversed- perhaps it is the bosses themselves that need to be more proactive in the developmental area. I argue that these bosses should take the time to look into problem areas in their business and find quality courses that teach the skills that can help cover those gaps. By investing time and money in being able to train their staffs effectively and efficiently, they will see the benefits of constant on-site staff development as well as a reduced loss when highly trained employees jump ship.

(Dam)aged Care?

By Sean Hyland, Research Anlayst, Motu Economic and Public Policy Research

The quality of aged care in New Zealand is again in focus after the sad story of a Wellington retiree last week. That case (whilst not isolated) leads me to wonder how the Government weighs the quality of aged care relative to the binary existence of such facilities. When faced with trade-offs over the public purse are we blindly favouring low-cost providers?

Recent deregulation in the industry has promoted cost-cutting. A 2012 joint NZNO-FSWU submission to the Health Select Committee describes a disintegration of staffing regulatory standards, which began when minimum staffing requirements were ignored in the Health and Disabilities (Safety) Act 2001. Unsurprisingly, profit maximising firms have adjusted the composition of skills employed away from best practice standards, which compromises the care of residents.* 

Industry traits (left unchecked) further reduce the business case for higher quality care. It is currently difficult to differentiate facilities by the quality of care provided before Grandma enters, whilst significant exit costs and deteriorating health reduces the ability to move her between facilities. As a result, profit-maximising firms will act to reduce costs. A publicly available national framework for comparing the dimensions of care (note, not outcomes) across providers could alleviate this risk, whilst the extent to which exit costs are anti-competitive is an empirical question.

Ironically, cost-cutting can actually lead to taxpayers paying twice for services. The Government currently subsidises private residential and hospital level aged care; however, the public health system has to step in when things go wrong. As a result, preventable public hospital admissions can arise. Is it  time to attach ambitious goals to funding?

Whilst I cannot comment on Government objectives, I would suggest the current regulatory framework encourages little more than the existence of aged care providers; better regulatory standards are required if we truly care about the quality of our aged care.


*In a response to the recent story the NZNO describes a case where one nurse was responsible for more than 200 residents and patients!