Investment debate raises curly questions

BY PATTRICK SMELLIE

OPINION: For the past few weeks, Prime Minister John Key has made a habit of talking about his concern that New Zealanders risk becoming "tenants in our own land".

The reasons for that risk are largely agreed. Among the most obvious: we save too little, our capital markets are bulimic, and foreigners fund both our lifestyles and a lot of our productive investment as a result.

At first, it seemed Mr Key was simply gum-flapping - that his "tenants" line was a political response to the potential sale of the Crafar family farms to Chinese investors.

Then he was evasive about amendments to overseas investment rules, implying that the criteria for foreign investors would be toughened when Finance Minister Bill English was talking up their simplification. It was confusing.

This week, things may have become a little clearer. By thinking aloud on a way out of the national savings conundrum, Mr Key has created the foundation for a national discussion about not just savings, but also investment. It's about time.

We've had a few goes at compulsory savings: the 1975 Roger Douglas scheme that an incoming National government axed in a cynical vote grab; a referendum after the first MMP election in 1996, which became a referendum on its creator, NZ First leader Winston Peters, and was duly lost.

Labour's finance minister, Michael Cullen, created a New Zealand Superannuation Fund, dedicated to socking away a portion of future universal pension entitlements. That was a half-way house that made national, if not personal, retirement savings compulsory, bulked up by the popular, voluntary KiwiSaver scheme.

Now Mr Key is not only advocating a good hard look at compulsory savings because "New Zealand has a savings problem", but is also flagging this as a campaigning issue for the 2011 election.

That raises the intriguing prospect of a compulsory savings scheme being tied to another, far trickier election campaign issue: privatisation.

Think of it this way: a compulsory New Zealand retirement savings scheme is established and is required, as Mr Key put it this week, to take a "home-skewed" approach to its investments.

So far, so good, apart from one thing. What the heck is this home- skewed behemoth going to invest in? Hopefully, it would have a mandate to seek out fast-growing, globally scalable new Kiwi businesses. But that would and should take only a fraction of the funds available.

So what else could it buy into? One obvious answer has to be state-owned assets. But can it be done? After all, it seems almost inevitable that Labour, too, will adopt a compulsory savings policy. In fact, exploratory ruminations on the issue have emanated as much from Labour as from National in recent weeks.

But Labour's position on privatisation is far simpler than National's. It boils down to "no".

National, however, is actually trying to run the place, and is juggling in rather fitful fashion the competing demands on scarce national capital resources. This week's implicit government guarantee for Kiwibank, offered without a dollar figure in sight, indicates just how reluctant, let alone unable, the Crown is to commit significant sums to expand its businesses, given the competing demands to fund health, education, broadband and transport networks, not to mention a shamefully large prison investment programme.

One response to this capital demand has been to raise the importance of public-private partnerships, putting private sector capital and expertise to work in new ways that should help the state build and manage in its expensive infrastructure projects more efficiently.

However, public-private partnerships are still ultimately state-funded. They may spread the available dollars further, but they don't create any more dollars to spread.

In contrast, releasing at least some of the billions of dollars of capital tied up in state-owned power companies, postal services, farming businesses and a host of smaller, non-essential government businesses really would free up funds for a government looking to invest in the future. Some of the ground rules for any such asset sales are clear, thanks to both the recommendations of the Capital Markets Development Taskforce and Mr English's ill-advised post- Budget musings on the possible part-privatisation of Kiwibank.

The most important rule is that any such privatisations would have to enshrine New Zealand control, which has been assumed to mean retaining majority government ownership.

Yet how much more might be achievable if a "home-skewed" compulsory retirement savings fund were the means of entrenching New Zealand ownership? Given the need to raise national savings, the political need to assuage public fears about domination by foreign investors, and National's ideological desire to privatise, it looks very much as if a political opportunity is emerging for Mr Key, if he chooses to take it.

As always, with this pathologically cautious prime minister, the question is: will he? Pattrick Smellie is a co-founder and editor of BusinessDesk.

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