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."
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.