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Opinion: Bernard Hickey argues NZ Inc needs more investments like Refining NZ's new CCR plan, rather than yet more housing

Posted in Opinion

By Bernard Hickey

New Zealand has in the past struggled to save enough to invest in technology and equipment that makes our workers more productive and therefore allows us to pay higher wages.

That appears to be changing and there's no better example right now than Refining NZ's proposal to invest NZ365 million to replace an ageing part of its Marsden Point plant with a new more efficient (Continuous Catalytic Regeneration platformer) CCR plant.

Five years ago New Zealand as a nation would not have been able to make that investment from its own savings. The banks who would have lent the money to Marsden Point back in 2007 would have in turn gone into international capital markets to borrow from foreign investors.

New Zealanders were spending almost NZ$1.10 for every NZ$1 they earned, often using the fast rising values of their houses as the excuse. Banks borrowed heavily overseas to make that happen. Even 30 years ago when Rob Muldoon was campaigning for his controversial 'Think Big' expansion of Marsden Point his government had to borrow overseas to do it. Not any more.

The latest proposed expansion of Marsden Point's capacity, if approved by shareholders on April 27, will be funded by bank borrowings. But this time theses banks will in turn be funded by deposits and bonds from local KiwiSaver funds and local individual investors.

In the last 10 days alone, three banks managed to raise more than NZ$1.2 billion from local investors, even though interest rates offered for up to 7 years were at historically low levels of 6% or lower. See more here from Gareth Vaughan on our site.

A wave of cash is now flooding into bank accounts and KiwiSaver funds in a way New Zealand hasn't seen for decades. New Zealanders are spending less consuming things and are instead saving for the future, either out of fear about what might blow up next in the Global Financial Crisis, or out of hope that it might be used to repay our foreign debts and invest in better jobs for their kids.

It is allowing our banks to fund what little lending growth there is from local funds. Now the crucial task is to invest it wisely in a way that makes New Zealand more productive and allows us to pay higher wages. There are some signs some of it is being poured into the bottomless pit of ever rising prices of existing homes in Auckland, but we have yet to see it spread wholesale to the rest of New Zealand.

So it's great to see at least one investment decision that ticks all the boxes from a New Zealand Inc point of view. Refining NZ wants to expand its petrol refining capacity to 65% of New Zealand's needs from 55% and do it in a way that uses 15% less energy, produces less greenhouse gases and has internal rate of return of over 17% per annum.

The project will generate an extra NZ$60 million of operating earnings each year for shareholders and be able to repay the debt within four years. Dividends would increase. Building the CCR project will create hundreds of extra jobs in the struggling Northland region while it is being built, and will save billions in foreign currency over the 50 plus year life of the plant because extra refining capacity here means fewer imports.

That money will flow round and around New Zealand, rather than some other refinery in Australia or Asia.

This is how our savings should be invested, creating high quality jobs that help us pay our way in the world. Better that than another deck for another barbecue.

See the full CCR proposal on Refining NZ's website here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

That's a little narrow

That's a little narrow minded.
Regardless of the price of oil or even the profit margin at BP it's still a good thing that we invest in our own country instead of expecting foreigners to stump up the cash for us.
And then moan about foreign investment levels ...

The latest proposed expansion

The latest proposed expansion of Marsden Point's capacity, if approved by shareholders on April 27, will be funded by bank borrowings. But this time theses banks will in turn be funded by deposits and bonds from local KiwiSaver funds and local individual investors.
 
Bernard, it's a big leap to consider that the top six shareholder's, controlling 85.81%, of Refining NZ will or need to secure New Zealander's savings to carry out plant upgrades. 
 
BP's international financial dealing room alone has a reputation that would allow it finance the whole of NZ's infrastructure needs at a price more competitively than any local agency. 
 
What's more locally sourced  deposits hardly cover a sizeable fraction of the local banks total assets.

"What's more locally

"What's more locally sourced  deposits hardly cover a sizeable fraction of the local banks total assets."
That's not really true.. They would cover over 50%, more in some cases.
Still, the fly in Bernard's ointment is this....
"Approximately half of the project cost will be denominated in foreign currency"
...that's not your local Kiwisaver investors.

surely the best investment

surely the best investment would be to short Bernards expectations
President of Property

I've certainly done well

I've certainly done well using this strategy.

But who are these

But who are these shareholders in Marsden Point? Are they overseas investors using cheap NZ funds, making a killing from the Marsden Point profits and taking that profit overseas?

In general all shareholders

In general all shareholders are the ones who were disciplined enough to save their money and invest it in something useful.  Who they are, or where they live, is somewhat irrelevant.
The way to displace foreign investors (if you have some prejudice against them) is to buy their investments off them, not legislate against them.