Valuing foreign investment

New Zealand has significant pools of capital but wonders whether the capital is going to the right places

Foreign investment into New Zealand remains a hot topic and a significant amount of today’s focus is, rightly enough, on our property market. However, the importance of foreign direct investment (FDI) on our tradeable sector cannot be ignored. How we attract it, and on what basis, are both issues worthy of debate, as is how to support New Zealand business looking to invest offshore to capture greater economic rents for our capital providers.

Like it or not, we are reliant on offshore capital to fund a domestic savings shortfall. While we have certainly improved, for many years we have made a conscious decision to spend for today rather than invest for tomorrow.

That has played out in a high stock of overseas investment in New Zealand. Out of a total investment into New Zealand of $397 billion, FDI stands at $111 billion.

FDI is a vital source of capital for business to help open up new markets, drive greater productivity and provide critical technological innovation. Unless we see a miraculous uplift in national savings, a failure to import foreign capital would see lower investment and growth. Imagine where we would be without the $111 billion invested to date.

Surprisingly to some, China has not been as dominant in New Zealand as is often made out.

It is responsible for a lot of our export growth after the 2008 Free Trade Agreement. However, the majority of our FDI originates from the United States, Canada, Europe and Australia.

Our FDI is also broad based. Agribusiness, energy and power as well as the financial services sector remain leading areas. So while we have done well to date in attracting $111 billion of other countries savings to fund our growth, there is plenty more to do.

We are in catch-up mode with infrastructure and the growing list of investment projects to alleviate bottlenecks associated with a growing population means that our challenge to attract capital remains.

For example, Tourism Industry Aotearoa recently released a report outlining infrastructure gaps that need addressing to support growth. This includes significant investment needed to build more visitor accommodation and capacity of our airports.

A funding gap remains despite our domestic savings performance slowly changing. Domestically we now have significant pools of capital available to help fund our future – whether it be KiwiSaver, Sovereign Wealth, infrastructure funds, or Iwi.

With significant capital pools locally, is it time to challenge our current investment settings? Are the settings right to ensure capital is being funnelled into the right parts of our economy to drive productivity and income growth (not household credit), and at the same time allow New Zealand capital to capture some of the rents associated with productivity improvements?

Part of the challenge of attracting capital is connecting providers of capital with investment opportunities – addressing the supply side of the equation. New Zealand Trade and Enterprise plays a role abroad but rightly has been focused more on trade flows.

Advisors and intermediaries, like ANZ, also have an important role in connecting parties. It is vital that we all take a NZ Inc approach offshore, but also at home, making sure the value of foreign capital is well understood.

Investors have a choice where to invest so we are lucky to live in a country with a safe and stable political and legal environment, and a relative ease of doing business.

The bigger challenge for investors is identifying businesses or investment opportunities of sufficient scale given our relatively small size. It is great to see Finance Minister Steven Joyce announce $11 billion of infrastructure investment. However it is estimated only $1 billion will be investible for the private sector.

To support the supply side challenge, is it time to see the National Infrastructure Unit expanded into a central procurement agency to assist in unlocking the capital markets and ensuring consistency in approach from the public sector – both local and central?

Is there an opportunity for us to learn from models employed by other markets, including Canada and the United Kingdom, where central procurement teams procure all major public projects engaging with domestic and global partners and suppliers - with outcomes being more private investment, lower cost projects and higher performing solutions?

In relation to FDI, the Overseas Investment Office (OIO) process re- mains a challenge. Progress is being made but timelines can range from three to six months based on complexity, albeit the OIO targets 50 days for most applications.

There is a balance needed between attracting overseas investors and protecting New Zealand’s interests. The feedback we get from our clients is a more timely process would be welcomed.

What is more thought provoking is whether our current investment criteria for foreign capital remain valid. Though New Zealand has liberal foreign investment rules, the OIO has stringent tests.

Purchasers must demonstrate financial commitment, business acumen, be of good character and show investment benefits to New Zealand. At face value that seems fine, but is it really delivering the outcomes we desire judged by today’s societal expectations?

With the amount of capital available locally, is there a way to ensure foreign capital is attracted to drive productivity but in a way that allows domestic capital to participate and enjoy some of the fruits of that additional capital being applied to our productive assets?

Is it time to drive partnership or coinvestment models to require domestic capital to partner alongside foreign capital?

With domestic capital struggling to find the right opportunities to invest in at home, KiwiSaver funds (expected by the NZ Treasury to amount to $20 billion by 2020) are flowing into passive funds offshore.

Though this is good for New Zealand, in that we gain exposure to a diversified range of economies, the ability to support the tradeable sector at home is adversely impacted.

What sort of structural support can be provided to local funds that face liquidity restrictions to allow investment in local businesses?

The other side of the coin is offshore direct investment relative to the $111 billion we have attracted from offshore. Our savings record has meant that we have only invested roughly a third of that amount offshore, $35 billion.

This part of our contribution to global capital flows is too often ignored. This is partly because there are not many great examples of New Zealand companies going offshore and adding value. Frequently it has been a recipe for how to shrink your balance sheet.

As a consequence, our returns on foreign investment have tended to be less than what foreigners get on their New Zealand investments.

If New Zealand offshore direct investment returns had matched those that foreign (direct) investors had seen in New Zealand between 2000 and 2016 we’d be $29.5 billion richer. That’s an eye-watering difference we need to look at addressing, both in relation to inbound and outbound capital.

Access to capital is fundamental to our long term prosperity. It is just as important an imperative as trade flows, but with a longer term impact. We need to attract capital to our productive businesses from both local sources and from offshore, perhaps in a way where both local and foreign providers of capital can benefit from ownership.

At the same time we must find ways to improve our offshore investment returns. As with inward investment, the opportunity around partnering or co-investing to de-risk global markets may be a sensible way to achieve this.

Paul Goodwin is Managing Director Institutional, ANZ