Key backs off financial services 'hub'

MATT NIPPERT
Last updated 05:00 13/05/2012
 Lloyd Blankfein

CANCELLED: John Key was to meet Goldman Sachs CEO Lloyd Blankfein in New York.

John Key
BACKING OFF: Prime Minister John Key.

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John Key's plan for a financial services hub in New Zealand would require years of taxpayer support and risks transferring wealth offshore, Treasury has warned the Government.

The Government's lead economic and financial policy agency advised that plans to pay international banks to move here represent "a wealth transfer from New Zealand taxpayers to overseas financial institutions".

Further, the touted benefits were highly uncertain.

Following queries from the Sunday Star-Times last week, Key distanced the government from the controversial aspects of the plan.

"The more costly aspects of the [hub] plan were not seen as an effective use of taxpayer money," a spokesman said.

The financial services hub proposal emerged after banker Craig Stobo told the Government's 2009 Jobs Summit an economic boost would result if the Government created a zero tax rating for foreign investors who invested in international funds based here.

In March 2010, Stobo was appointed chairman of an advisory group whose tasks specifically included determining what incentives were required by financial firms to implement the financial hub proposal by then Economic Development Minister Gerry Brownlee.

Cabinet papers from the time note $500,000 was allocated to fund Stobo's group. Brownlee awarded group members fees he characterised as "top of the range" of up to $655 a day.

Stobo's appointment came after the Government's Capital Markets Taskforce expanded the initial zero-tax idea into an ambitious plan to compete directly with tax havens Luxembourg, the Cayman Islands and Ireland to host international funds investing in the Asia-Pacific region.

However, Treasury comment on a draft version of Stobo's report in July 2010 said it did "not present a convincing case that the funds domicile industry could be effectively developed in New Zealand and that it would provide net economic benefits to New Zealand".

Confidential research by Oliver Wynam, conducted for the Capital Markets Taskforce which was charged with reviving New Zealand's capital markets after the finance company crash and recession, were withheld from the Sunday Star-Times.

However, summaries of the research seen by this paper estimate New Zealand could secure 17 per cent of the Asia-Pacific market for fund domiciles, generating annual revenues of $1 billion by 2015 and providing up to 5000 high-quality jobs.

Official advice later poured cold water on these numbers. A February 2010 Treasury report noted: "The benefits appear overstated, including the estimate of the number of sustainable jobs."

But the Wyman report went global, and plans were drawn up for Key to discuss the proposal with senior international bankers when he visited New York in September 2009.

That was the trip when the prime minister made headlines with a turn on The Late Show with David Letterman, but Treasury documents show during this visit he was briefed for proposed meetings with the chief executives of Goldman Sachs and Citibank where the hub was to be discussed.

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In December 2010 Key said that a major international bank offered to shift business to New Zealand if tax policy changes were forthcoming.

The prime minister told the New Zealand Herald the CEO of a global bank had said if NZ zero-rated foreign funds that are not invested in New Zealand, he would move $2.5b in funds here as NZ would be 50 per cent cheaper than Australia.

Workings by the Stobo report suggest the back-office and administration work in New Zealand for hosting a fund of this size could amount to a dozen new jobs.

Meanwhile, concerns within Inland Revenue and Treasury were crystallising over several aspects of the financial hubs proposal. Officials advised the PIE zero tax proposal be deferred indefinitely soon after the Jobs Summit as it concluded it would cost $10m a year in lost revenue for negligible benefits, possibly breach international tax treaties and open up tax-dodging loopholes.

By November 2010, Treasury had dropped their objection to the PIE changes but were calling for the wider hub proposal to be taken off the agenda. "It has considerable appeal as an idea. However, the practical aspects of putting it into place and the outline of the business case indicate considerable upfront costs with any potential benefits coming on-stream only after a long period of taxpayer support," a Treasury report said.

Key's frustration with officials who recommended the proposal be canned boiled over the following month when he reportedly told the audience at the International Business Forum that official advice criticising the hub was "absolute rubbish".

Criticism from Treasury and the MED over the hub proposal centred on the controversial plans to provide incentives to financial firms.

Stobo's group's blueprint for the hub, tabled in Cabinet, said these deals should be contractually locked in to prevent a change of government torpedoing the deals, and the details of payments should be made "commercial in confidence" and not be available for public scrutiny.

"Assistance of this type is standard practice elsewhere in the world and is a reality if New Zealand expects to attract first movers of global scale," the report said.

Stobo told the Sunday Star-Times such payments were common elsewhere in the world, but conceded the contractual and "commercial in confidence" nature of the proposals were a novelty for New Zealand.

"That's an issue for public finances and whether the Government's got the appetite for that. [Offering subsidies] is not unfamiliar at all, just the way we're describing it may be relatively new for the public," he said.

Treasury analysts also noted potential hub competitors Ireland and Luxembourg were being forced to change their financial hub regimes after an OECD crackdown on tax havens.

- Sunday Star Times

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