Acting Treasury head defends foreign investment, says restrictions likely won't help address NZ's external liability position

Acting Treasury head defends foreign investment, says restrictions likely won't help address NZ's external liability position

The Acting Secretary to the Treasury has moved to defend foreign investment in New Zealand, saying the economy is highly dependent on foreign capital due to a shortfall in national savings, and that restrictions were unlikely to address New Zealand's high external liability problem.

Gabriel Makhlouf, who is covering for John Whitehead as Treasury Secretary, made the remarks in a speech to the New Zealand Institute of International Affairs. The remarks were the views of the Treasury and not necessarily government policy, Makhlouf said.

Debate over foreign investment in New Zealand has intensified in the last two years after a Chinese company, Natural Dairy, sought to buy the 16 Crafar Farms which were put into receivership in 2009 owing more than NZ$200 million to its lenders Westpac, Rabobank and PGG Wrightson Finance. Natural Dairy's bid was turned down by the Overseas Investment Office, and a proposal from another Chinese bidder, Shanghai Pengxin, is currently being considered.

At the same time, Chinese, American and European investors have launched successful bids to buy New Zealand assets such as farms and milk processing plants, although changes to overseas investment rules from the start of this year give government Ministers more control over whether bids are accepted. Potential foreign buyers are currently eyeing Fonterra's biggest supplier, Dairy Holdings.

The Opposition Labour Party has also announced a strict policy on foreign ownership of New Zealand assets it would implement if it wins power in the November 26 election. In contrast Makhlouf again reiterated that Treasury recommended removing all screening of foreign investment.

Clear benefits from foreign investment

It was clear that considerable benefits flowed from the foreign investment New Zealand attracted, Makhlouf said. A recent study by Treasury estimated that, between 1995 and 2005, foreign investment lifted national income by NZ$5.9 billion.

"That is a formidable amount of money to an economy of this size – equating to a lift in income over that period of around NZ$2,600 per worker," Makhlouf said.

It had become fashionable in some quarters to question the wisdom of liberalising New Zealand's foreign direct investment (FDI) regime, with the most popular counter-arguments relating to the loss of control of land assets and the “exporting” of profits.

"On the loss of control of land assets, the implicit assumption here is that a foreign owner would behave differently from a New Zealand owner, for example whether they use the land productively or protect important social and environmental features such as walking access or heritage value," Makhlouf said.

"If that is the case, then the issue at hand is really how the land is used, rather than who owns the land. There are a number of regulatory mechanisms governing land use in New Zealand. The protections offered by these forms of regulation govern all land owners - irrespective of nationality.

"We consider that the same standard of protection should apply regardless of who owns the land. On that basis, requiring foreign investors to meet higher standards, through the Overseas Investment Act, would not be necessary," he said.

"We also want to ensure that the way that land is used will help improve or at least maintain the overall living standards of New Zealanders. While good economic performance is the principal determinant of living standards, Treasury also recognises that a broad range of other factors also contribute to people’s standard of living. These factors might include, for example, the impact of a land use proposal on freshwater stocks, or fish stocks, or the cultural or recreational values of an area," Makhlouf said.

In Treasury's view, four capital stocks – financial, human, social and natural – made up the national wealth of New Zealand and allowed the incorporation of a broad range of material and non-material factors.

'NZ needs foreign investment as our savings rate is poor'

The argument that FDI into NZ would lead to ‘profits going offshore,’ was a truism.

"I don’t know of an investor who doesn’t expect to earn a return on their capital," Makhlouf said.

"The more important issue to focus on here is the national saving and investment balance. New Zealand requires foreign investment to meet the gap between national savings and national investment. If the idea of foreigners earning a return on New Zealand investment is unpalatable to some, there are two alternatives – lowering national investment or increasing national savings," he said.

Lowering investment would seem counter-productive to New Zealand's growth ambitions.

"A higher rate of national savings would provide New Zealanders with greater scope to own assets that they want to retain control of, and entitle them to any returns on the investment," Makhlouf said.

"New Zealand does have large external liabilities totalling around 82% of GDP, but around 80% of these liabilities relate to debt from borrowing offshore, with equity liabilities totalling only 20%. Restricting foreign investment is unlikely to help to address this position and will only constrain firms from accessing the capital they need to grow," he said.

"In addition, we need to remember that not all the profits of a firm that has investment from abroad are necessarily returned to its overseas investors. Some of those profits go to paying the wages of additional staff employed in New Zealand, to undertaking local R&D, and to continue growing the domestic business. Statistics New Zealand figures show that across the four quarters to December 2010, reinvested earnings from foreign investors into New Zealand totalled over NZ$3.3 billion.

"In addition, the official statistics show just how highly dependent New Zealand is on foreign capital to fund our shortfall in national savings. Foreign direct investment in this country is a critical path to international relationships, expertise, technology and ideas."

How foreign investment has helped

Makhlouf offered two examples of how foreign investment had helped.

The Hamilton-based company BioVittoria was a venture capital-backed firm which was right now demonstrating the benefits of global connections. It recently partnered with the British-based multinational agribusiness Tate & Lyle to market a new calorie-free, fruit-based sweetening product. BioVittoria tried unsuccessfully to list on the local sharemarket in 2009.

"The BioVittoria CEO says the new partnership opens the way for his company to get a foothold in the US$50-billion a year global sweetener market. BioVittoria’s backers are also admitting that it is difficult for expansionary New Zealand technology companies to raise capital in the New Zealand market to support growth into major international markets. Hence the need to look to foreign investors," Makhlouf said.

The other good example was the wine industry.

"New Zealand’s top wines are among the best in the world, and total wine exports now exceed one billion dollars each year, roughly 25 times more than where exports stood only 15 years ago. The stunning development of this country’s wine industry - from a relatively small and family-based sector into a capital intensive and technologically advanced industry with real global connections - has largely happened because of overseas money," Makhlouf said.

Accounting firm Deloitte and New Zealand Winegrowers last annual financial benchmarking survey for the New Zealand wine industry, released in December, noted wineries were continuing to battle steadily declining profitability and rising indebtedness to overseas owned banks, with the industry’s premium international positioning potentially under threat. The report noted it was fair to say the industry in New Zealand was experiencing "a major financial crisis."

Don't score well on openness to investment

"But the reality is that New Zealand does not score well on international measures of openness to foreign direct investment. There are a number of reasons for this, including foreign ownership restrictions in some sectors and investment screening for purchases of significant business assets or sensitive land," Makhlouf said.

"It is Treasury’s view that there are changes that could be put on the table to increase our attractiveness as a destination for foreigners to invest the finance, ideas and skills that we need from them," he said.

"The most obvious one is to improve our domestic policy settings in areas like tax and regulation. Another is to reduce other costs and distortions associated with capital inflows, particularly in relation to tax treatment, which can be advanced through double-tax agreements. If we are to continue to screen foreign investment, and Treasury has consistently recommended removing all screening, it needs to be kept to a minimum and under constant review."

Also see: Selling all our assets makes New Zealanders 'serfs in our own country,' says Brian Gaynor.

And also see Double Shot interview with Gabriel Makhlouf where he warns New Zealand's net public debt will surpass 100% of GDP without changes to policies on pensions or improvements to New Zealand's economic performance.

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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So is he effectively saying that May Wang & Co should have been able to buy the Crafar farms no questions asked?

What exactly is the adverse consequence that you fear would have resulted if they had?

If I can answer that. I understand through reading our history and listening to Len Brown at Waitangi Day of how Auckland City was purchased for a few blankets and other trinkets.

Of-course Len didn't mention that at the time Auckland City had little value to Maori as it had a deep harbor and therefore limited food source.

Look at it now.

Selling land (regardless of terms or treaty), is selling sovereignty.

This is to assume both that New Zealand owners are stupid compared to those clever foreign buyers who are better able to assess the potential value of New Zealand land, and that New Zealand owners are selfless and noble compared to those wicked foreigners who are less likely to to abide by, or exceed, the regulatory requirements which apply to all land in New Zealand, whoever owns it. 

What's your basis for that?

FYI, Ms de Meanour, I've deleted the two other same versions (triple up) of one of your comments that came through. We've had some technical issues this arvo, but hopefully all okay now.

thanks :-)

You assume that I assume your two points.

Really though NZer's are stupid compared to clever foreign buyers I mean lets face it even our largest companies still pay interest on borrowing money.

In America a company is doing the country a favor by borrowing money to - get this - 'stimulate the economy' , so they are able to get interest free loans.

Then because they are generally smarter than the lender they invest in foreign countries instead of at home because they can hedge their bet against the near certainty that the US$ will continue to collapse.

If we take the bet and their worthless fiat money yes we are the loser Ms de Meanour.

Well, they were turned down on 'good character' grounds and are under investigation by the SFO -

Would that not have happened if they'd been the same people but with New Zealand passports? 

I think we're on different tangents here. All I'm saying is we need screening of foreign investors whereas the Treasury chap appears to be suggesting open slather for any overseras entity/person wanting to buy stuff in NZ.

I don't see any basis to think that he is suggesting that it should be made easier for foreigners to buy New Zealand assets than it is for New Zealanders.   He is saying that it should not be any more difficult for foreigners than it is for New Zealanders.  Why should they have to go through screening to prove that they are worthy to own property in New Zealand, if New Zealanders don't? 

Because we know, or can easy, find out about potential NZ asset buyers but generally have less information at our fingertips about foreign ones.

Who is "we" above - and what sort of information do you have in mind?

We may not be very far apart here, if you are simply saying that the Government should have as much control and as much information about a potential foreign buyer as it has about a potential New Zealand buyer - so the same questions are asked, and the same criteria are applied in determining whether and under what conditions to allow a sale.    

If you're going to insist on a foreigner proving himself good and worthy before he can be allowed to own New Zealand land, a New Zealander should have to do the same - the effects on the land will be just as bad whether it's mistreated by a bad, unworthy foreigner or a bad, unworthy New Zealander.

I guess the "we" is the OIO or some govt equivalent. I'm not just thinking of land here, I'm talking about businesses as well. For example, we (as NZers) shouldn't want a Russian mafia, a triad or drug cartel linked organisation or individual to be able to buy a NZ company and use it for money laundering. Extreme example I know, but stranger things have happened.

And I don't necessarily disagree with your suggestion that if a foreigner has to prove him/herself good and worthy before being allowed to buy New Zealand land, a New Zealander should have to do the same. I guess we're talking about a significant volume of land or farms rather than just a suburbian house for the locals though.

Basically I accept that as a small country NZ does need foreign investment. And I like seeing NZ companies make acquisitions overseas so I can't be too hypocritical. But I think we need to be pragmatic about it. Rather than let any overseas interests buy anything, I think it's fair to ask what will they bring that will benefit NZ?

As Brian Gaynor noted recently - - with much of the forestry sector sold to foreign interests (and local private equity operator Graeme Hart) there hasn't been a lot of investment in the sector with locals generally more likely to reinvest. And the sale of Telecom, effectively an unregulated monopoly, to American interests didn't serve the national interest well.

Then there's the comparison with Australia. Four pillars banking policy and them controlling more than 90% of our banking assets.  And  there was John Howard's govt blocking the sale of Woodside Petroleum around the same time Fletcher Energy was sold.

I don't think a good dose of nationalism now and again has done the Aussies too much harm.

So our Government borrows money due to a shortfall of savings yet the only way to address the situation is to sell our assets - and an asset is almost by definition a saving.

I guess a banker would call it realizing the cost of saving.

Gabriel is moronic in his logic for if you sell something like electricity generation which a natural monopoly and has been paid for by the public purse and returns 7% to the public and exchange it for it's value and then invest that money in something which returns less than 4% you are indeed a fool as is John Key with the National party.

Even to sell these assets to New Zealanders is moronic locking the dividends into the top 20% of Kiwi's who are - you guessed it baby boomers, at the cost to everybody else including future generations.

On the other hand if you were Treasury or the Government and you had a cosy relationship with bank managers and other people who aim to steal the wealth of our country well then it makes perfect sense.

Before we lose our sovereignty read up on Greece - they're about to have the IMF collecting there peoples taxes.

Roadhouse  --I think in this debate the different "forms" of foreign investment are getting thrown in together and therefore making the debate more complicated than it needs to be.

 Firstly there is the issue of land ownership. In my view if Kiwis are allowed to buy land in say Australia , Brazil , USA , UK etc etc we cannot really object to individuals from those countries owning. But countries like China which don't allow foreign ownership of their land should not expect their citizens to own in NZ.

Secondly , we have foreign investment in our companies such as those mentioned in the piece above. This type of investment has been going on for years and will continue in the future --it must !! Put simply if a NZ company cannot raise capital here what are they meant to do -- close up shop?? From a business perspective having a foreign investor as a shareholder can have huge advantages if you are exporting.

  Thirdly there is the issue of selling Govt. owned assets. Obviously a highly political matter but it is separate to the first two above.

  I think the Treasury guy is talking mainly about the second category given his examples. 

Ross, thank you for your comments.

I don't have a problem with foreigners investing in NZ companies as per your second point what I do take issue to is them owning either natural monopolies which we cannot export like electricity generation or land which is the base of country.

I'll take land as the example because you assert that it's not about Govt owned assets.

It's all very well saying but this time it's different but we both know the truth that with the idea of selling our land to overseas interests comes the realization that the reason why this can be considered favorable is because it increases the value of  all assets in the class.

Therefore if somebody moves here from Ireland or China you may think this is a good thing if they drive the property price higher and especially if you are a baby boomer and are in the majority class of people who actually own property.

Hence if your neighbors house sells above market value you benefit with a corresponding book value profit. Money pours from the banks as people are able to refinance and borrow against the capital gain and the economy appears to grow as more money is in circulation.

Look at America, look at Ireland, look at England look at almost every first world country to see that this business model only works for bankers as eventually money has to be paid from the working income or production of the young.

Prove me wrong Ross but this increased income is not there for our young and this is why I point out that John Key and National are raping our country to service their own needs at the expense of their own children.

I stand by my comments about land --if NZers can buy in another country we cannot expect to block citizens from that country buying here.  ( I am not a land owner except what is under our house)

I think the issue you raise about houses and the increasing values etc is more to do with the banks than the Govt. The banks have relaxed their lending requirements so much in the last 15 odd years and have basically thrown money at people.That has been the main problem . ( I would like to see the banks take a "hair cut" but I'm not holding my breath) This has happened under both National and Labour led governments so you cannot just point the finger at the present Govt.


Now we have always assumed that Treasury is well endowed with brainpower, haven't we?

Have we?

Oh well, I do wonder why they have not addressed the question :

"Why are we not saving enough?"

It seems that if we put our collective minds to it enough we could rearrange the Economy to save plenty. We seem to have directed much of it to residential housing but with the addition of some borrowed cash from our friendly Belgian dentist friends.

So, Treasury put your minds to it!

New Zealander's do save Basel Brush III, its just not in the form that the corporate establishment  would prefer. They want to get their sticky fingers on your cash, but the Stock Market crash of 1989 shows how that turns out. New Zealander's save by investing in housing, sure its not as liquid as other securities, especially in a falling market, but it manifests far less volatility than stocks and is far less vulnerable to the manipulations of self-interested parties. Whats it to do with the pointy heads at Treasury as to how Kiwis save?

Anarkist, No way am I suggesting Treasury be put in charge of anything since their role is advisory. However that should not restrict them in trying to offer part of the solution.

i went through the 1987 debacle virtually unscathed but much of my investment was not in either property or the local sharemarket.  It is interesting that only now in 2011 are we putting in place any protective rules on financial services. There is very little difference between a Bridgecorp and a JBL.

Right now most of the major businesses in NZ are overseas owned or controlled and that could have been much different if successive governments had tackled the 'direction' of our investment savings.

But Anarkist doesn't want to own major businesses in NZ.  He states a preference for housing.

He does not appear in the mood to listen to successive government direction. 

According to this Makhlouf is a British civil servant who appeared on these shores a mere 15 months ago:

He worked in the UK Treasury, Inland Revenue and Customs.

Given the calamitous state of the UK finances/financial system (it will in due course sink in a sea of intractable debt) perhaps someone can tell me why we should listen to the musings of someone who was until recently embedded in organizations which have had a significant hand in them getting that way?

The UK economic model is a house price bubble/debt machine blown up by a massively obese financial service sector - which has an enormous trade deficit (because their manufacturing industry has been allowed to shrink to 12% of GDP (oh the benefits of open markets!!) and their primary sector (ie oil/coal production) is in terminal decline). They are doomed.

So we have imported a UK 'expert' to tells us how to do things?

Your kidding right?

Interesting point...

"Mr Makhlouf is a UK civil servant whose career has been in HM Inland Revenue, HM Treasury and HM Revenue & Customs.  He has chaired the tax rule-making body at the OECD, was Principal Private Secretary to former Chancellor of the Exchequer Gordon Brown, and led one of HMRC’s biggest operational directorates"

Not shy is he....

Andy, well spotted.

If the government is so keen to cut public servants, how about cutting The Treasury? in a big way.

Get rid of every single one of them, they are the biggest waste of money we have.

I suspect TSY would face tough competition for "the biggest waste of money we have" from our government's public relations staff. And it is not simply a case of being a waste of money - more important is the damage they do.

How about a compulsory tour for Treasury mandarins thru places like Porirua or the Manawatu River, to give them some food for thought?

I think I can improve on that with a tour of remote farms in limestone country all with many deep tomos.

Something is seriuosly wrong. Please explain. How can an import, a blow-in, a foreigner, without any apparent get-your-hands-dirty, coal-face-experience, get to be acting head of the Treasury Department, and start making lofty theoretical statements, without offering up any practical examples to back up his assertions. A good question would be how did the public service apparatus allow this to happen? All within 15 months.

Follow the money.

Indeed - a man who for a period was right hand man to that nemesis of the UK economy, one Gordon Brown.

I don't know what planet these idiots at Treasury are on but it's not this one.

If Bush Sr could describe Reaganomics as 'voodoo economics', then here's a perfect term for the thinking of Dr Makhlouf and the current lot in power...

John Frum economics.

THis is great Stuff. Now we know the kind of folishness we are up against. The UK is a perfect example of what not to do in so many areas it is not funny. Hiring one of them is a brilliant move.

This is the sort of person who thinks it is a good idea to flog off our Power Stations. The Uk flogged off everything it could. What a mess.

This is ideology over reason. They want us to sell of everything for money and have what at the end of it exactly.

Right now we are importing inflation at a ate we simply do not understand. The foreign investment that people like Harvard University is trying to make is not really an investment at all for us at any rate. They do not want to build a University here or teach people or undertake research. In fact that would laugh at such an idea. No all they want to do is to park some of there fast devaluaing cash here as quickly as they can.  In the process inflating asset prices, out bidding the locals who find it impossible to compete on price.


Finally somebody who reads world news. I couldn't agree more with you - swapping fiat US$ for real assets.

Look at our current acct deficit....   Much of it is invisibles...  Those invisibles are mainly repatriated earnings on foreign investment.

I don't think it matters whether it is foreign capital of borrwed money from offshore.... the end result is the same...

A little bit like a vampire taking its fill from the host...

BUT .... if that foreign Capital actually came here to create something "NEW"...  "innovative".... created "new employment"....  then it would be different.

The treasury man said :

" highly dependent on foreign capital due to a shortfall in national savings ""

This can be used against his view....   ie..  because we are not a rich country we should be wary of foreign investment because it can outbid us on anything and everything..... in terms of existing assets.

Generally the cost of Capital to these foreign investors is much , much less than to NZers'....  SO...  it is just not a level playing field.

Trinkets for land is a great metaphor.....   Kind of shows that swapping good quality assets for money...  ( and the world is awash with fiat money).....   really is a mugs game.. Future generations will laugh at us.

cheers  Roelof



" highly dependent on foreign capital due to a shortfall in national savings "" 

This just epitomizes the degree of ignorance about how the capital markets work by someone they are under the purview of. The belief that investment comes from savings is such a logical fallacy. The inverse is in fact true. Where does the "savings" come from to be invested? The very nature of the word assumes it is a portion has been kept from something that was already in existence and not used for some other purpose. Perhaps that is what has held New Zealand from development, using the excuse of lack of "savings" hogtying development.

And it's a bit rich of any policy wonk to criticise NZers generally for their poor savings record, when it was indeed their lax regulatory regime which wiped out masses of savings only recently; 


Too many people believe that savings are a waste of money. Just wait and see how many people respond to this post with gripes about how low interest makes saving not worthwhile.

Everyone wants to borrow and buy. Shiny things are the order of the day, even now. They still want the biggest house, the flashest car, the fastest boat, the his-and-her jetskis, and all the other validations of their standing within society.

It's one thing for people to complain about their personal debt burden, but quite another to say it's not their own damn  fault.

Keeping up with the Jonese has become the middle-class version of 'whaddarya'. Materialism can't be outlawed, and it's probably gotten to the point where only an Icelandic meltdown in NZ will put a stop to it.

What a prannet. Typical English Civil Servant, a master at stuffing things up in very sophisticated ways. Or, How to Destroy a Nation while Looking Very Clever Indeed.

Of course some foreign investment is good. That is obfuscation. The problem is there has been too much of it. Exactly the same amount as the current account deficit. The excess capital inflow destroys profitability of exporting firms. It also inflates the price of low productivity housing. This is double entry bookkeeping. Duh.

Can't see the wood for the trees. English civil servants should be banned.

I disagree Roger......All Civil Servants should be banned.

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