Tami Louisson: Govt grants vital for would-be exporters

Tami Louisson says SHOTT Beverages' contributions to New Zealand in employment and tax will ultimately cover the cost of government grants it has received.

Entrepreneur Sam Morgan says the government grant programme is stupid.

He attacks "corporate handouts" and says that if anyone in government can pick winners, he would hire them.

Fund manager Brian Gaynor recently examined those comments in his Herald column and looked at the question of whether taxpayers get value for money from these grants.

Morgan was riled that Callaghan Innovation has awarded $32 million in new research and technology grants. He queried why grants had gone to companies whose share price had fallen sharply while others had gone to companies whose price had gone up and therefore could easily raise more capital.

Both Morgan and Gaynor are deeply involved in the game of picking winners - whether its investing the proceeds of Trade Me in Xero or Gaynor using his and Milford Asset Management staff's expertise to pick winners to outperform market indices.

The question is whether the government agencies that issue grants - Callaghan Innovation, New Zealand Venture Capital Fund and New Zealand Trade and Enterprises (NZTE) - should be in the game of risking taxpayers' money at all, and secondly, whether they also can do it successfully using their professional expertise.

The reason these government agencies are in this game is that New Zealand has a long-term structural economic problem - it has always been almost totally reliant on commodities for its exports. Gaynor pointed this out in his previous column - that just over 60 per cent of our exports are raw commodities like milk powder, logs, meat, fruit, wool and vegetables.

There are a number of problems with this:

It makes the economy extremely vulnerable to volatile price moves.

The margins on commodities tend to be poor.

By exporting commodities we are essentially exporting jobs (the processing of the commodity is done where the commodity is exported).

It constrains growth because of physical limits on the amount we can increase production due to the amount of available land and pressure on the environment.

Every expert from Michael Porter of Porter Project fame to Fonterra CEO Theo Spierings understands the problem, as has every government of recent times.

We can either stand back and do nothing, let the market dictate - hope half a dozen more Xeros magically emerge - or wait until commodity prices tank and a crisis forces us to change; or we can try and proactively intervene to steer economic change.

There is broad political consensus across all major parties that the latter action is sensible. The question is whether the various government agencies are capable of picking winners just as Morgan and Gaynor do and whether it will make a difference.

The company I am CEO of, SHOTT Beverages Ltd, is the recipient of two NZTE International Market Development grants. Founded seven years ago, SHOTT makes fruit and coffee syrups and has had a steep rise, twice winning a Deloittes Fast 50 prize, knocking out a foreign manufacturer as the dominant brand in the domestic cafe market, as well as establishing a strong and new niche in retail.

We had dipped our toes in overseas markets, mainly in Australia and South Korea, but exports comprised only around 5 per cent of sales. Although, we had not exhausted the local market, our clear strategy for further growth was exports.

We approached NZTE and applied for a grant. It was an incredibly rigorous and necessarily bureaucratic process - not quite due diligence but close to it. NZTE has to be confident they are supporting worthwhile ventures just as Morgan does when he invests.

The first grant we received, about nine months after applying was to develop Korea. It runs for two years and helps cover such things as trade shows, travel, employing a regional sales manager, employing an export manager, and setting up a Korean distribution company.

The grant is a 50-50 deal - for every dollar NZTE puts in, SHOTT must put in a dollar. This is crucial - no company is going to commit cash to a speculative project. Your own money has to be spent and milestones ticked off.

Our second project was a similar one to develop the UK market.

NZTE's rationale is to help a company develop a market that wound not otherwise be developed and/or to accelerate the development of a market. It cannot be business as usual.

We are around three quarters into our Korean project. All milestones have been ticked off.

In July SHOTT's export sales overtook domestic sales. In September, we shipped our first container to Taiwan. We are now selling in Australia, UK, Singapore, Hong Kong and looking at Malaysia, the UAE and India.

The NZTE grant has done exactly as it was designed. It has sped the development of our export markets. Sure, we may have got there anyway. But developing export markets is no cakewalk. The shipping, distributing, and selling takes longer than at home, putting pressure on cashflow. It's not for the faint-hearted.

There is clearly some validity in the argument that Morgan and others make when they say: "why should taxpayers' money benefit a private company?"

On a narrow perspective, we can say, we have doubled employment in New Zealand and the business and staff have paid more tax, probably to the extent that this has covered the Government's cost of the grants. Certainly it will over the long-term.

Tami Louisson is CEO of SHOTT Beverages.