Business cracks the whip

SIMON COLLINS reports on the gulf that is again growing between Government and business on the urgency of taking bold economic initiatives.

Business is losing patience with the Labour/Alliance Government.

In the 16 months since Prime Minister Helen Clark invited 100 business leaders to a forum in Auckland, business and Government have made a consistent effort to work together.

But business expected a payoff. Last week's "innovation package" was Clark's opportunity to provide it. To many business minds, she fluffed it. "There is no great sense of urgency," says Business New Zealand chief executive Simon Carlaw.

Dr Alan Jackson, a New Zealander who heads the multinational Boston Consulting Group (BCG) in Australasia, commends the Government for at least commissioning the study which he led on foreign investment, one of three reports that fed into the innovation package.

But he adds: "I do think, however, that the magnitude of the challenge, the urgency of the challenge, the need to communicate this sort of rallying vision, has a lot further to go."

The release of the three business reports at the same time as the Government's statement has uncovered a widening gulf between the two.

In the business reports there is a sense of alarm - the kind conveyed by Auckland Healthcare chief executive Graeme Edmond this week when he said New Zealand's health services were slipping from "First World" to "Second World" standards.

As BCG puts it: "The decline of New Zealand's national wealth has been dramatic. Over the past 50 years, its per capita GDP [gross domestic product] has fallen from third in the OECD to 20th ... The impetus for the review was the growing consensus in New Zealand about the need for radical change."

It says our economic output needs to grow by 5 per cent a year to lift us into the richer half of the 30-nation OECD by 2011.

To achieve this, it says foreign investment in new "greenfield" projects needs to leap from $200 million in 2001 to $4 billion to $5 billion a year by 2011, compared with $3.2 billion invested in Ireland in 1999.

It recommends an investment promotion agency with 150 staff and "incentives expenditure of several hundred million dollars" a year to lure foreign investors.

A report on "talent" by another international group, LEK Consulting, backs a proposal by last year's McLeod tax review to attract new immigrants by giving them a seven-year "tax holiday" before they start paying New Zealand tax on any income they still earn from overseas.

The Science and Innovation Advisory Council (SIAC), also with a largely business membership, recommends more public spending in areas such as the $53 million New Economy Research Fund, asking, "How much more could we achieve by ... doubling the size of the fund?"

In contrast, the Government believes that this apocalyptic approach is simply unrealistic.

Clark's speech was frankly dismissive: "While some still hanker after lower tax rates and further deregulation as the key economic prescription, I believe many more are seeing the strategic focus the Government is adopting and the policy interventions which accompany it as more likely to contribute to sustained growth."

Finance Minister Michael Cullen says economic growth of more than 4 per cent a year is unsustainable, and that the target date for getting into the top half of the OECD by 2011 slipped into the package in "a graph that was never seen by ministers - we did not endorse that".

"New Zealand's size and location means that it is unlikely to attract the type and levels of foreign direct investment that were attracted to Singapore and Ireland," Clark's statement says.

"Realistically this promotional activity [to foreign investors] cannot rely on providing large financial inducements to individual companies."

On tax holidays for new "talent", Cullen says merely: "We are continuing to look at those issues."

Clark's statement does not mention research spending, and Cullen says only: "No doubt the Government will try to increase its R&D [research and development] expenditure as resources allow."

From the Government's perspective, business seems hooked on a kind of "cargo cult" vision of outsiders coming to whisk us into economic heaven - whether it be foreign investors, immigrant or expatriate "talent", free trade with the United States or currency union with Australia.

As former Asia 2000 director Tim Groser put it in a submission to SIAC: "We should have some confidence that if NZ Inc sticks to the task of incremental change, we can now improve very slowly our relative standing.

"The belief in the 'silver bullet' to solve all our problems - so deeply ingrained in our national psyche - is perhaps the most dangerous threat to this process of slow but positive incremental change, simply because there will never be a consensus on what the 'silver bullet' is."

Beneath these contrasting views there is, of course, some common ground. Both sides say they have moved closer together.

After initially refusing to change the tax rules for R&D, Cullen has allowed a full writeoff of R&D spending in the first year.

In her speech last week, Clark promised more funding to attract foreign investment and more work on the best structure to do it with.

As one business leader puts it: "Even making a speech that talked about foreign investment, in the context of where this Government was at two years ago, would have been inconceivable."

Alliance leader Jim Anderton, who has pushed for many of the changes as Minister of Economic Development, points to the irony that business leaders are criticising him for not intervening strongly enough to boost investment.

"I came through a period in New Zealand where the Government was told to do nothing," he says.

Even an economist in the formerly free-market Treasury's new "economic transformation" team, Dr David Skilling, says: "All these things [in the innovation package] are about government getting more involved in the economy."

New Zealand is disadvantaged by being small and distant, he says. But the Government can help local businesses "scale up" to the world's best by promoting exports, foreign investment and R&D.

"I, for one, am talking about perhaps the level playing field being not sufficient," Skilling says.

"We have few explicit barriers to foreign investment. We are open for business. It's just that we don't get too many people knocking on the door.

"Should we have people marketing New Zealand? It's the difference between a passive approach and a more active approach which helps New Zealand firms go offshore or actually brings foreign capital in."

The Government has accepted BCG's advice to target a few key sectors for both foreign investment and research. It picked three of BCG's four suggestions: biotechnology, information and communications technology (ICT) and "creative industries". (Only environmental technology was dropped).

It has accepted LEK's ideas for serviced offices or "Kiwi clubhouses" in foreign markets, a "Jobs NZ" website for expatriates and potential immigrants, encouraging good foreign students to stay here and creating a new "brand" for New Zealand, perhaps as a "land of opportunity".

It has endorsed SIAC proposals for business mentoring schemes, cluster networks and help for businesses to link into the latest global technologies - in effect re-creating business advisory services along the lines of the old farm advisers and regional development offices that were axed in the 1980s.

But it is decidedly lukewarm on BCG's proposals to transform Trade NZ's 14-person foreign investment team into a much larger agency on the scale of Australia (132 people) or Britain (160), and to offer cash incentives of 10 to 20 per cent of the value of the investments attracted.

Clark's statement says New Zealand is "unlikely to win a bidding war", and should increase spending substantially only "when the economy has undergone sufficient transformation to ensure that foreign direct investment can be well integrated, as an accelerant, into vibrant domestic sectors".

Cullen is considering a McLeod tax review proposal to cut the company tax rate for foreign investors from the current standard 33 per cent to 18 per cent on the basis that foreigners won't pay more than that anyway. But he is wary of it.

"NZ-based businesses argue that they should get the same rate. That is not fiscally possible," he says.

Christchurch industrialist Sir Angus Tait says: "Yes, we've got to encourage foreign investors. We need both their money and their technology. But then as a taxpayer, if this guy is going to come here and do these things, and I have been doing these things for 30 years, why should he pay less tax than me?"

Politicians of both right and left agree.

National Party finance spokesman David Carter says National would bring in a substantially lower general company tax rate and remove "roadblocks" to investment such as the two-year ban on releasing genetically modified organisms and the new health and safety law.

If these "fundamentals" could be put right, special incentives for foreign investment would be "unnecessary".

Anderton says it is better for the Government to facilitate long-term investments, as it did by working with Waitakere City to clear planning consents for Sovereign Yachts' new factory at Hobsonville, or with the Japanese forestry company Juken Nissho to improve road and rail services and boost training schemes.

"Bill Lloyd [Sovereign Yachts] never asked us for a cent," he says. "What he wanted was the ability to come here and get through the red tape. If you multiply that out by dozens and hundreds, that is what we're trying to do."

The Government's allies, the Greens, are even less convinced of the need to offer incentives.

"Already too much of our economy is owned offshore, so we are becoming serfs and servants in our own land," says Green co-leader Rod Donald.

He questions the relevance of GDP as a measure of living standards.

"All the money spent on the Jody F. Millennium is adding to our GDP, but it's an environmental disaster.

"The truth is that it's the intangibles that attract people here - it's the quality of life," he says.

"It's the fact that you can walk down the street and feel safe that you are not going to get mugged, and that you know there is a health service available for you without you having to have health insurance."

But to business eyes, this is no longer enough.

Scott Perkins, Deutsche Bank's Australasian head of corporate finance who led the business group that prompted the Government to order the BCG report, and BCG's Alan Jackson, both work in Sydney as well as Auckland and can see the factors that determine where investors put their money.

Their report says a survey of investors' location decisions yielded 15 crucial factors: intergovernmental agreements; the ability to repatriate dividends and capital; foreign exchange convertibility; infrastructure; political stability; market size; economic stability; foreign investment restrictions; research and development capacity; market growth; trade protection; networks/suppliers; labour skills; labour availability; and wages.

On most of these, New Zealand already scores highly, or can't do anything about it in the short-term.

But BCG suggests that we could do more on:

* Intergovernmental agreements: trade pacts and R&D partnerships.

* Infrastructure: including specialised facilities for target industries such as Singapore's biomedical science park "Biopolis" or Victoria's investment in a $375 million synchroton, also for use by biotech companies.

* R&D capacity: Increase funding for research consortiums involving universities, research institutes and industry, including centres of research excellence in the key target sectors.

* Networks/suppliers: grants to industry associations to encourage networking and for joint research or marketing.

* Labour skills and availability: joint planning by business, government and educational institutions to meet skill needs.

Tax incentives and grants come further down the list of crucial factors, at 17th out of 26. BCG rejects tax incentives as too generalised. But it advocates grants targeted to attract specific investments in the key sectors.

"Attracting these things doesn't come for free. We say we should aim for a 10:1 payback," says Jackson.

Perkins says foreign investment can only be part of a strategy for lifting New Zealand living standards. But in an increasingly borderless world, where even domestic investors are free to invest their money anywhere, New Zealand has to compete.

"If you look at the countries that have really differentiated themselves in peer growth, if you look at foreign investment flows into the Netherlands and Scandinavian countries, even into France, they are pretty closely correlated with super GDP performance," he says.

And despite our size and location, he sees no reason why we should not attract Irish-level investments in biotech, ICT and creativity.

"It does not cost a lot to ship software, ideas, pharmaceuticals or actors."