A fund for New Zealanders that invests in this country is long overdue and badly needed, says Alasdair Thompson.
Over the past couple of months, several groups have published their views on economic growth and savings, and how those savings are invested.
All agree our future standard of living will be determined by how successful New Zealand business and government agencies become at raising productivity, particularly in the deployment
of capital investment.
Our current account deficit, the second highest in the developed world as a percentage of GDP, provides plenty of evidence that we New Zealanders, as a whole, live constantly beyond our incomes, so much so that our domestic savings fall well short of our borrowings.
We have always relied on foreign investment and too many of the sound and safe assets we once owned are now owned by foreigners. We have used their capital to live beyond our means. Our appetite for debt is so great that the banks source a huge proportion of their funds abroad to lend here.
We have to wind that back, increase our domestic savings and focus our borrowing much more for productive investment rather than chasing inflationary gains.
Capital investment money is increased when savings from incomes and profits are reinvested. This is then leveraged when money is supplied by banks as loans to increase the total capital available.
Saving of itself is not much use. When people save they defer spending, and if the savings are just stored and not recycled into productive investment they can't help the country lift its standard of living.
In fact, if savings were stored they would slow economic growth because no one produces anything unless there's a use for it.
In economics-speak the purpose of all production is ultimately consumption.
The Cullen fund belongs in that category. The money in the fund is of course mostly invested, but it's invested by and large overseas. So it is more akin to having a stockpile of deferred spending, and that was its intention.
But it could be put to better use if it were part of a sovereign New Zealand investment fund whose aim was to invest in growing our living standards. Such a fund could in part be invested in New Zealand infrastructure. The need to do this is dire, since our infrastructure deficit over the next 20 years is estimated at $20 billion. Some of the Cullen fund could also be better invested in productive capital markets and venture capital to help build leading-edge companies, especially those geared to exporting high-value/low-volume products and services.
The same principles apply to KiwiSaver funds. Up to, say, 50 per cent of KiwiSaver savings could be re-routed into local infrastructure investment and high-return local businesses.
This fund could be expanded further. The Capital Markets Taskforce advised that New Zealand savers and investors needed a greater choice of quality companies in which to invest. We have quality companies just like that owned by the Government. The Government should therefore implement the taskforce recommendation and explore a float of 49 per cent of our commercial SOEs.
Again, this money should not be used to repay debt but reinvested in growing the New Zealand economy.
I have identified three major sources of funds to invest in building a better, stronger, more productive New Zealand.
But there's more.
If the Government set up a new SOE, itself part-owned (up to 49 per cent) by private shareholders to hold all these funds, and invest them, private sector investors may also want to contribute their savings to it.
The new SOE's role would be as a sovereign fund to support New Zealand's economic growth. It might be called the New Zealand Investment and Development Fund.
In summary, money for the fund to recycle into growth investment should come from:
- Share capital 51 per cent owned by Government and 49 per cent owned by private shareholders.
- A Government deposit of the proceeds from the Cullen fund.
- A Government deposit from the sale of 49 per cent of its shareholding in commercial SOEs.
- A proportion of KiwiSaver money either directed into it, or from voluntary deposits made by KiwiSaver providers.
- Any depositor (mums and dads) looking for a safe place to put their money to work for themselves and their country.
The majority Crown owner and private shareholders would appoint a board of directors with the company's constitution setting the fund's investment rules. The sorts of investments the fund would be reserved for within New Zealand and might include:
- Central and local government infrastructure bonds.
- New Zealand company shares (with limits), especially those with export product potential and showing a commitment to research, development and innovation.
- Promising new company floats on the NZX.
- Loans to qualifying local companies.
- Venture capital to grow smaller existing and new companies.
It's long overdue that we took a New Zealand Inc approach to becoming more self-sufficient financially.
Setting up a New Zealand Investment and Development Fund would take us a long way towards higher productivity.
* Alasdair Thompson is chief executive of the Employers & Manufacturers Association (Northern).