No nation is an island

New Zealand needs to start playing follow the leaders - Ireland and Singapore - in economic turnaround. The only problem is our Government isn't keen to put in the initial bucks. By SIMON COLLINS

Whatever Treasurer Michael Cullen delivers in his May 23 Budget, it is bound to fall short of what was recommended by the business leaders' group on attracting foreign direct investment.

The business leaders, convened by Deutsche Bank's Scott Perkins, endorsed a Boston Consulting Group report which recommended an Irish-style investment promotion agency with an operating budget of $50 million and a staff of 150 by 2006.

It said the Government should spend "several hundred million dollars" a year in incentive packages to attract foreign direct investment (FDI) of $4 to $5 billion a year by 2011.

Both proposals are simply way outside the fiscal limits of what the Labour Alliance Government is prepared to spend.

The May 23 Budget may provide a lower corporate tax rate for new foreign investment - a move which was not proposed by the Boston report or its business backers, who are mostly New Zealand rather than foreign investors.

But its tone will be set by the Government's February 12 "innovation statement", which said: "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."

The difference between business and Government views reflects a basic choice between the development path of countries such as Ireland and Singapore, which have gone all-out for stellar economic growth, and the alternative social-democratic model of countries such as Denmark, which have tried to balance growth with social and environmental aims.

The Boston report beats the drum of urgency.

"The decline of New Zealand's national wealth has been dramatic," is its opening line.

"The imperative for action is clear."

It says New Zealand's economy must grow by 5 per cent a year for the next 10 years to see the country in the top half of the Western World by 2011.

Cullen, in contrast, says the country will be lucky to reach 4 per cent growth within five years. He has explicitly disowned the target of reaching the richer half of developed countries by 2011.

Perkins believes there is no reason why New Zealand should not attract even more foreign investment than Ireland or Singapore, even though those countries sit right on the edges of Europe and Asia.

"Distance is a factor and Boston Consulting Group has taken it into account in their recommendations," he says.

"That is one reason they proposed targeting areas that were less sensitive to the distance issue. The relevance of distance on the biotech, ICT, creative industries and environmental technologies areas is not material.

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

He says New Zealand starts "in much better shape" than Singapore was when it started pursuing foreign investment in the late 1960s, or than Ireland a decade later.

"Our regulatory, political and educational infrastructure, while not perfect, is considerably better than most countries," he says.

"Foreign direct investment is only part of the answer. Boston Consulting Group recognised that.

"[But] if we are to reach the Government's OECD target in the 10-year timeframe, then it is hard to see how we get there without a more successful FDI strategy."

From this perspective, Ireland is the classic model. It has given foreign investors huge cash grants, ready-made sites in industrial parks and a low 10 per cent tax rate - and reaped the reward of the rich world's fastest economic growth rate.

In New Zealand, such blatant self-promotion has always seemed somehow "dirty". Apart from a handful of occasions when we allowed ourselves to be fondled by the likes of Comalco and Mobil/Synfuels, we have kept ourselves pure.

Since 1984, the purity of the "level playing field" has been virtually the state religion.

That is changing, modestly. In 1998, Trade NZ cautiously allocated $1.3 million, spread over two years, for a pilot "special investor programme" to bring potential investors to New Zealand, and created a new division, Investment NZ, to manage it. By late 1999, it had a manager, Gary Langford, and four staff.

Investment NZ now has 15 staff and a budget of $4 million. The May Budget is expected to allow it to double its staff and open new offices in Singapore, Hong Kong and on the US west coast to add to its sole existing offshore outpost in New York.

On a world scale this is still minuscule. Ireland, with the same population as New Zealand, spent the equivalent of NZ$64 million just on administration and promotion by its Industrial Development Agency (IDA) last year, plus $322 million on grants and $310 million in capital spending on industrial parks and high-speed broadband phone lines.

Western Australia spent $25 million to induce Motorola to locate its 200-job software engineering centre in Perth instead of Christchurch. Victoria gave $75 million to secure a Holden engine plant.

The Government is spending an extra $9 million in the next two years on spin-off events around Peter Jackson's Lord of the Rings movies, featuring heavily at the Academy Awards today, and the 2003 defence of the America's Cup. Langford says the Cabinet is considering proposals to streamline access to the major investment fund, which requires approval from several layers of officials plus a cabinet committee.

Industry NZ's general manager of industry development, Neil Maxwell, says the Government is also considering consolidating the various agencies that investors deal with.

But the February innovation package said Investment NZ could expect further funding increases after this year only if and when the spending pays off in terms of inward investment flows.

At this stage it is still unclear whether the Budget will also include a tax break for investors.

Last year's tax review led by accountant Rob McLeod recommended a cut in the 33 per cent company tax rate for foreign investors because it saw increased investment as "essential if a real attempt is to be made to increase significantly GDP per capita".

It put forward two options:

* A cut in the company tax rate to 18 per cent on all foreign investment "to the extent a New Zealand company is owned by non-residents". That would cost $460 million a year, or about 10 per cent of total company tax revenue of $4.8 billion.

* A cut to 18 per cent limited to investment by non-residents in "new" activities, with a fiscal cost of just $50 million.

McLeod argued that multinational companies could shift profits to low-tax countries so New Zealand would not actually lose any revenue, and might even gain some, by cutting its tax rate on such companies.

Cullen said at the time that $460 million was not affordable but $50 million was. It would have the clear political attraction of neutralising any National Party talk of tax cuts in election year.

The New Zealand agent for Irish investors Thomas McDonogh and Sons, Thomas Lawlor, says he expects the Government to cut the rate this year, and says this will "make a significant difference to investors from Europe and the US".

"They will sit back and look at every project that is on the table differently."

But any tax break would also carry a real fiscal risk in a country where - on figures for the year 2000 - foreigners owned 57 per cent of listed shares and companies that were at least a quarter foreign-owned earned 39 per cent of all business profits. Open any loophole for such a huge part of the economy and you can be sure that many will walk through it.

That is precisely why our governments since 1984 have systematically eliminated almost all specific tax breaks, reinforcing our reputation for fiscal virginity.

Whatever the reality of what foreign businesses pay, the appearance of lower tax rates for foreigners than for local businesses is bound to be unpopular in an election year.

Any move is bound to be hemmed in with conditions.

If the Government does have $50 million available which it could spend on the tax break for foreigners, Cullen may well consider that it could be better spent on fostering home-grown businesses through more aid to exporters to attend trade fairs and the like.

Of course that money and more could be found for foreign investors if the Government really bought into the business group's agenda. But it's a pretty sure bet that any steps it takes will be much more diffident - and cheaper.

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