Government backstop for companies

14-06-2010 | Bob Edlin

Meat Industry Association chairman Bill Falconer proposes greater government investment in the country's biggest agricultural and horticultural companies, if that's what's needed to make them bigger but keep them in New Zealand ownership.

Overseas companies stepped in to pick up NZ companies only because the small size of the economy meant we could not accumulate "the kind of wealth that enables us to continue to thrive in the bigger enterprises that we grow".

More recently foreigners had been stepping in to take stakes in some of our agricultural operations. "That's what goes with being a small economy - it's the tyranny of scale," Falconer said.

New Zealand was not uniquely small, but the financial effects of smallness were frustrating. New Zealand didn't have to simply live with this tyranny.

With regard particularly to agricultural investments, some other models should be considered.

One model Falconer thought was worth careful consideration is the Air NZ model - a publicly listed company in which taxpayers may choose to have a major investment, simply to ensure the enterprise remains in New Zealand.

The over-riding need was for much greater participation of the NZ investing public, but to provide the necessary scale "we may have to have the taxpayer there as an investor as well."

Most primary sector businesses suffered from a shortage of capital, Falconer said. "You see this even at Fonterra - our largest company is seeking capital. You see it in the fruit industry, the meat industry, aquaculture.

"All of these would be candidates for this kind of investment support if we wanted to introduce additional funding, to help them achieve their objectives."

Farmers Weekly talked with Falconer after he had referred to the "tyranny of scale" at the New Zealand Agricultural and Horticultural Outlook Summit in Wellington.

He had been commenting on a presentation by MAF director-general Murray Sherwin, who said a big challenge for the primary sector was pumping more money into its co-operatives.

These co-operatives were among our biggest companies, but Sherwin likened them to "a supercharged V8 locked on idle" because it didn't have the equity to run to its full potential.

Sherwin was not surprised NZ had ended up with a business sector dominated by either SOEs or co-operatives.

When conventional companies tried to expand but got caught short by a downturn, the exchange rate or whatever, they would end up waiting for a white knight to step in.

Within a few years, the company would be overseas-owned because insufficient investment money was available in NZ, a country which lived off the savings of overseas people.

In contrast, for all of their faults, co operatives were very effective risk-spreading devices - "they have got the balance sheets of around 10,000 dairy farmers in Fonterra's case to spread the ups and down through".

Because there was no competition for ownership, they remained in NZ hands.But if they were to take full advantage of their potential, they needed more equity.

Elaborating afterwards to Farmers Weekly, Sherwin said "therein lies the challenge".

Farmers tended to regard their primary asset as their farm (all they wanted from the co-op was ensuring it was adding value to their farms). Hence it was much less likely they would want to pour a pile of capital into the co-operative.

Fonterra had gone some way down that track with its requirements and linkages between supply and equity. This was not so with the meat companies and fertiliser companies.

"But for these things to grow, they are going to need equity, and it's going to have to come from farmers, because farmers don't want anyone else in there. That's a big ask."

When the government wanted to grow the economy but the sector with a big comparative advantage had equity constraints, "that's an issue".

Balance sheet strength would become more important, too, to deal with the implications of growing sovereign debt issues around the world - "competition for savings is getting pretty intense."

This was putting a premium on strong balance sheets back here in NZ.

NZ's was a small economy, "and you see what happens when risk aversion begins to crank up - people will back away from lending here as quick as a flash".

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