Christopher Niesche: Bribing businesses to stay put in NZ

Roll up, roll up, roll up: the Government's giving free money to businesses.

Why bother taking out a bank loan or issuing equity to grow your company when you can get interest-free money instead?

Of course, you'll have to be in the information, communications and technology sector which the Government hopes will deliver the "economic transformation" it is awaiting. And you'll need to make the Government believe you're at risk of relocating overseas.

Use the phrase "world class" a lot as well - that's always a winner.

Bad luck if you're in farming, logging or fishing, or some other unfashionable industry. You'll just have to do things the old-fashioned way and convince the bank or potential investors that you've got a good business case before they'll throw money at you.

It is indeed hard not to get the impression that the Government is giving away money willy-nilly after the announcement last week that it would provide a three-year interest-free US$8 million ($12.13 million) loan to 3D graphics company Right Hemisphere. Prime Minister Helen Clark said the Government would lend the money - at a cost of US$3 million a year - in order to keep most of the company in New Zealand.

But amid all the hoopla of the announcement, the central question got lost: Why does the Government have to bribe businesses to stay in New Zealand?

Clark and Economic Development Minister Trevor Mallard should ask themselves: What's wrong with the business environment in New Zealand that private investors aren't prepared to put their own money up? And how can they fix that?

It's hardly surprising that Right Hemisphere, and Sutter Hill Ventures and Sequoia - the two US venture capital firms which are backing it - decided to keep part of the firm in New Zealand. The fact that the loan is costed at $3 million a year implies Right Hemisphere would have to pay around 25 per cent interest. Free money would have been too hard to pass up.

What the Government has done is stepped in to correct a market failure. Investors weren't prepared to take the usual risks associated with putting money into a software development company - at least not in New Zealand - so Clark and Mallard made investing more attractive for them.

The Government should be asking why there was backing available for Right Hemisphere if it were to move overseas, but not if it were to stay in New Zealand. The business community would gladly come up with some answers.

This is not to denigrate Right Hemisphere, by all accounts it is a leader in 3D graphics. Nor is it to denigrate Sutter Hill and Sequoia - which say that between them they have backed companies such as Apple, Google, Yahoo and Quantum.

Presumably the Government made a special case of Right Hemisphere for the "positive spin offs" Clark said would arise from the deal.

But what are these spin-offs? In its briefing to the Government on the proposal, Mallard's Ministry of Economic Development said: "Treasury considers the proposed loan has a low probability of resulting in net benefit to NZ."

What the Government gets for its $3 million a year is a commitment from Right Hemisphere that it will start a three-year research programme with New Zealand's universities, that it will sell cheap software to universities, and that it will establish "a virtual cluster" of graphics firms.

Sutter Hill and Sequoia also have agreed to "review" at least five local business plans a year for three years and to visit New Zealand "to discuss US funding and business growth strategies with Government agencies, local business and entrepreneurs".

(The agreement didn't specify whether this visit was to be made in the ski season or the fly fishing season - presumably the US venture capitalists can choose.)

What all this amounts to is a whole lot of nothing.

Treasury told the Government as much, although in the more anodyne language of the bureaucrat.

"The proposed commitments in the draft term of the loan fall short of what would be required to ensure there are significant net benefits," the Treasury said. "The substantive commitments in the proposal are either peripheral [i.e. commitment to provide discounted software] or time-limited."

By making a special case of Right Hemisphere, the Government has essentially opened itself up to blackmail. What's to stop another high-tech business threatening to go overseas in the hope that it can wring free money out of the Government?

Others have already asked - quite rightly - what's so special about Right Hemisphere? Why them and not us?

* Christopher Niesche is business editor of the New Zealand Herald.