Category Archives: Economy

Science Funding Fix Obscures ICT Opportunity

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It has taken almost a year, but the government is finally addressing the mechanisms and priorities around the funding of research, science and technology in New Zealand.

The government’s policy approach to funding science research hinges on maximising the economic and social benefits, building international linkages whilst protecting the natural environment. Better utilising the “scientific value chain” seems to be the chief driver behind the funding shake-up. Science leaders have long complained that they spend too much time doing paperwork and competing for funding, when their time is better spent doing actual science.

The draft policy document indicates that sectorial funding priorities will largely be governed by the interests of existing Crown Research Institutes (CRIs). That is not a bad thing, but it underlines what we have suspected for quite some time – ICT is no longer seen as a primary driver of value-added economic growth, despite its obvious importance as an enabler.

ICT is now bundled within “high technology industries”, although it is not clear what proportion of this funding will be dedicated to information technology. In fact “transformational manufacturing” seems rather to be the focus for this area. It seems odd that the government would allocate $1.5 billion to a broadband rollout without a simultaneous commitment to strengthening ICT research and commercialisation in order to capitalise on the opportunity.

You can read about and make submissions on the proposed policy here.

Local VC Laments Science Funding Deficit

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I enjoyed Fiona Rotherham’s recent article in Unlimited magazine featuring the scientist who is inventing red-fleshed apples. But local venture capital investor Stuart McKenzie’s comments in the same article about the lack of science investment are a chilling reminder that New Zealand continues to underperform in terms of raising capital for technology commercialisation.

Hitching our economic success to agriculture is a sensible strategy in some respects, given our natural assets; but it should not be the only strategy. Agriculture alone cannot improve our economic fortunes; especially since the added value component remains tiny. Considering the deleterious effects of pastoral greenhouses gases and waterway pollution from farm run-off; if we are to enrichen New Zealand with more knowledge intensive businesses there simply must be a diversity of approaches.

Even more troubling is that there is a perfect storm brewing. As local VC funds begin to mature it is not entirely clear where the new funds will emerge from. Existing venture capital funded projects are looking for their next funding rounds to take those businesses to the next level. So, in the current economic climate, investors are naturally more inclined to look after the projects already on their books. It is harder than ever to get a true “start-up” company funded.

The government has set an aspirational goal of catching up to Australia by improving economic productivity, but it has confused business productivity with GDP per capita. Productivity is not the problem. The problem is we need to be exporting knowledge not farm commodities. Securing sufficient capital to commercialise and scale up our portfolio of intellectual property is the only way to achieve this.

BB Build Begs Benefits

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It is certainly a relief to finally see some leadership from the government in terms of their expectations around the broadband rollout. But in 5-10 years time when the project is finally complete will we have found a way to leverage this huge investment of public funds?

Industry ginger groups are being politely optimistic about the plan but it remains to be seen for how long the honeymoon lasts. Telecommunications is a highly political arena with many vested interests. Indications that the Crown Fibre Holding company will remain a Crown entity rather than a commercial state owned enterprise are certainly encouraging however; because the last thing we need is the new network being flogged off to an incumbent player or other foreign controlled interests at some point in the future.

But what are we going to use high speed broadband networks for once they are built? One would like to think that there will be more lofty social benefits than facilitating faster access to pornography, violent online games and moronic TV shows. Of course despite all the clamour by telcos and their equipment suppliers for a bite of the apple, we have never yet seen a properly articulated explanation of exactly what the social and economic return will be.

That aside, there is a wonderful window of opportunity for the government here. Surely we now need to provide an innovation challenge to stimulate the development of novel online services? Imagine how many creative new start-up companies could be kick-started. It seems glaringly obvious, but this aspect of the plan appears to have been somewhat overlooked as the government instead heavily promotes cowshit and tourism as our economic saviours.

There is another issue that has been overlooked as well. Until New Zealand gets access to better bandwidth and some decent competition on networks across the Pacific,  improving domestic connectivity is likely to have only a limited overall effect on economic growth.

Govt Aims to Improve Science Dialogue

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The Prime Ministerial advisor on science, Prof. Peter Gluckman is hoping to facilitate a better dialogue both within the science community and between scientists and the New Zealand government. He may have an uphill climb ahead of him.

In a recent radio interview Gluckman made it clear that his brief was simply to provide advice and to act as a translator to both government and public on science issues, it was not his role to become involved in politics. But when pressed on the subject of why the National government killed both the Fast Forward initiative and the R&D tax incentive scheme, he refused to comment. This suggests that (at least in public) he will be obliged to moderate his tone on some topics.

Professor Gluckman said better scientific literacy was required across the whole of society because we were having to deal with more complex issues such as climate change and the ever increasing impact of technology on our personal lives. He also indicated that it was his view that the science funding system was overly competitive and that this was dampening creativity; perhaps foreshadowing some much needed change in this area.

Prime Minister John Key recently gave a speech on economic direction. It was clearly signalled that, in terms of science research, the government is now primarily interested in supporting the agricultural sector as a bridge to greater economic prosperity. Unfortunately that confines us to a future of increasing pastoral pollution, high carbon output and enslavement to commodity prices that continually devalue in real terms.

But Gluckman agrees with his colleague Paul Callaghan that science must remain “an integral part of the innovation system” and that we need more high tech companies like Navman, Rakon and Weta Digital. If we are to improve economic productivity then science needs to connect with business, both within New Zealand and abroad, he stated. It will be interesting to see if he can similarly persuade the Prime Minister.

There is Snow Recession in New Zealand

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remarkablesRecently I indulged my eight year son with a short holiday down south, including a day on the slopes at the very scenic Remarkables range. He’s already a very competent skier and full of confidence after only one season. In contrast, I spent most of the day sitting on my backside wondering why snow-boards do not have brakes installed – design flaw no doubt. But my son’s lack of fear provided me with some insight into what a difference attitude makes.

The recession may have dulled most travelers’ enthusiasm for spending in the short term; but the southern lakes region actually managed a small increase in visitor overnights in the past year. The “world’s adventure capital” must be one of the few places in which commercial and residential real estate development continues unabated and there remains a steady stream of incoming buses, boats and aircraft overflowing with families and young backpackers. Sure there has been the odd mortgagee sale and some of the trendy apparel retailers were a obviously bit quiet. But the town retains an optimistic feel about it, even in the midst of winter.

My point is that attitude can take you  long way. If other tiny Pacific Island nations can refuse to “participate” in the recession – why can’t we also? If positive-minded, friendly and engaging tourism industry employees and entrepreneurs can keep local economies ticking over – why can’t we apply this mindset to the whole country? And I don’t just mean tourism. Singapore has Biopolis, the U.S. has Silicon Valley and India has Bangalore. Regional resource advantage can be channelled by deliberate agglomeration, especially when there is sufficient access to capital and intellectual talent.

You can write good software code and draw up financial contracts just as easily from a villa overlooking beautiful Lake Wakatipu as you can from an office block in Palo Alto. So instead of polluting our landscape producing commodities that continually drop in price, we should be inviting entrepreneurs from offshore to base themselves here to create new enterprises and wealth whilst enjoying the scenery. The only crisis in well endowed New Zealand is one of lack of confidence.

Cow-shit and Candyfloss Overcomes High Tech

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In an interview for Unlimited Magazine, physicist and technology entrepreneur Paul Callaghan recounts meeting Prime Minister John Key at a business function. The PM had just stepped off the speaker’s podium where he had been talking up agriculture and tourism and expressing scepticism about the value of New Zealand’s technology sector to the economy. If that is the kind of leadership we are faced with, then I fear that the devaluation of our economic potential will continue unabated.

And before I’m accused over being overly harsh, let’s just look at this government’s track record since taking office well over six months ago:

  • Research & development tax credit reduced then cut altogether.
  • Fast Forward programme wiped and replaced with identical project with less funding.
  • I.T. worker redundancies from government agencies.
  • Negligible budget increase to RS&T vote.
  • Major cuts to tertiary education funding.
  • NZ Innovation Centre loses $15M in funding.
  • Reported $100M net loss to market development assistance programmes for exporters.

To be fair, we all knew that the Budget needed to be tough – even if Key and English can’t agree exactly why. Certainly borrowing to fund superannuation and tax cuts doesn’t make good fiscal sense; but neither does knee-capping your research, science and technology capability. To its credit, the government did provide additional resources to the Marsden Fund and a one-off operational grant to REANNZ the high speed research network. In the latter case, they obviously could not be seen to allow the research network to fail, whilst at the same time pouring billions into digging trenches for a brand new domestic network for which a proper economic business case has yet to be made.

Investing in and commercialising research will never be cheaper than today and you can be sure that our competitors in America and Europe are continuing to do it. I’ve said it before – when I look around town, it is the businesses that have invested in developing new technology that are still growing. It seems like the government is signalling it wishes to play less of a role in this arena. Dairy commodity prices are dropping again, so too are visitor numbers. The PM’s support for agriculture and tourism is no doubt uplifting for the cow-shit and candyfloss brigades, but it does little to bolster our GDP per capita output in the long term.

Wool to Weta by Paul Callaghan is available at all good bookstores and explains why research, science and technology is important to the New Zealand economy and why a unified vision is needed.

Where’s the Vision?

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If there is a change of organisational leadership within a business, one of the first tasks of the new leader is to review what values the organisation stands for. New ventures must also begin with a vision as a foundational building block. So when a new government comes to power you would think that this would be a project of some urgency for politicians. But neither the National government nor its predecessor have ever made any attempt to articulate exactly what we stand for as a nation.

The net result of this lack of leadership has been that policy-making is driven by subjective advice at departmental level, but without any central overriding objective in mind. This environment is a fertile breeding ground for politically correct personal agendas and is the basis for much of what is wrong about our public service. And whilst it may be the case that public agencies retain the specialist expertise needed by Cabinet to make decisions, it is not their role to set aspirational goals for the nation as a whole. That is the role of our leadership in consultation with the wider community.

In a country such as ours endowed with considerable natural beauty and a rich diversity of culture it seems almost irresponsible not to have a clear vision on the way forward. Instead we are continually burdened by short term decision-making neccessitated by petty politics and regional self interest. The media circus in Mt. Albert and the lack of due process around the “super city” debate spring immediately to mind. In stark contrast, Pres. Obama seems to have taken the bull by the horns in terms of re-stating what America stands for in a global context. I hope Mr Key accepted some advice on the matter during their phone exchange last week.

What is your vision for New Zealand?

Seismic Survey Data Decision Rocks

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In what amounts to the first substantial new investment by the government in economic development since last year’s election Minister Gerry Brownlee has announced a spend up of $20 million on the acquisition of geophysical data in New Zealand’s offshore petroleum bearing ocean basins.

With a government services spending drought firmly in place one has to admire whatever MED mandarin it was that managed to make the business case for the project. National are claiming it as an election promise delivered, but the reality is that it needed to happen no matter which government was in power and here’s why. In 2006 Crown Minerals went to Court to force petro-giant Exxon Mobil to hand over data that had been generated by the company and its partners but not exploited. About the same time the government began undertaking its own surveys. In 2007 there was another tender round for fresh exploration blocks but the response from major players was muted.

Notwithstanding that legal action by the Crown raises questions about ownership rights and foreign investment; by owning the survey data, the Crown has far greater influence over how it is used. It also mitigates the risk of any further expensive and wasteful Court actions by multi-nationals keen to defend their patch. Exploration companies build survey estimates into their financial reporting data, but will quite happily sit on this information until it suits them to act on it, possibly for decades. The Great South Basin is by far the most promising of New Zealand’s licence areas, but is also the most treacherous. At $55 per barrel small players could not possibly justify the several hundred million dollar invest required to bring a deep water well into production.

Offshore oil exploration is a dirty business and Exxon-Mobil in particular have an appalling environmental track record for which they make few apologies. So the government needs to be careful about how it spreads the financial and environmental risk associated with this game. On the upside, making the survey data available could potentially lead to a multi billion dollar exploration and production investment once the oil price rises again (which it no doubt will). Unfortunately because of the development timeframes involved, it is unlikely to contribute to the economic recovery in the short term.

Innovation, Property Rights and the Political Economy

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In recent months I have noticed an elevated volume of commentary relating to the overlap between economic development and the political expression of property ownership rights. Part of this debate has been driven by sea changes on the political landscape and new analysis of the role previous governments have played through intervening in markets. Last week’s OECD report card on New Zealand fanned the flames of this debate to a new level.

The report suggests that previous governments have consistently failed to address historically poor levels of productivity and innovation. In the face of a global economic emergency there is a strong call for urgent action to reconfigure policy on this front.

“New Zealand’s living standards remain well below the OECD average. This is entirely attributable to persistently low labour productivity, which in turn is related to economic geography as well as structural policy factors. The small size and remoteness of the economy diminish its access to world markets, the scale and efficiency of domestic businesses, the level of competition and proximity to the world’s technology frontier. This points to the need for a “New Zealand policy advantage”, that is, a set of structural policies attractive and welcoming enough to overcome the geographic handicap and attract the drivers of prosperity – investment, skills and ideas – to New Zealand.”

Innovation, property rights and the political economy are intertwined. For example without a robust framework for the protection of intellectual property there is little incentive to innovate and generate economic returns from new ideas. But implicit in the OECD calls for macroeconomic restructuring is the suggestion that Crown assets be sold to address fiscal debt. This remarkably unoriginal idea seems to mysteriously surface every time a National government is elected.

Some have argued that New Zealand’s historically interventionist approach has discouraged investment in innovation and critical infrastructure. However, hurried or ill considered sales of State assets (originally funded by taxpayers) in some respects seems contradictory to ongoing academic arguments that favour less intervention, more consistency and the protection of unalienable rights to property. How do we reconcile these positions? Should we be doing so? As was once proposed, would it not be better to leverage the capital invested in State owned enterprises to create new, high value spin-off ventures?

Of course the situation is complicated in New Zealand by the fact that Maori have strong views in terms of property rights, securing favourable State regulation and the connection this makes with their own economic development aspirations. But can we promote a free and unfettered market with strongly protected property rights on the one hand whilst at the same time contemplating separate justice and electoral systems and the wholesale transfers of property assets based on race? External investors no doubt also weigh these risks when considering New Zealand as a destination.

Rural Towns Left to Wither

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I had occasion to head home to the provinces for a family visit last weekend. What always strikes me is the character of the little towns along the way. Some of them have been dying off for years, only kept alive of late by the fact that the surrounding rural economy has been booming. But with commodity prices plunging, the underlying support from dairy (and oil) is falling away.

If city dwellers are feeling the pinch now, spare a thought for the rural towns. For some, almost nothing has changed since the 1950s. Their central business districts generally comprise a petrol station, convenience store and a public bar. Now with falling trade even some of the pubs and petrol stations have passed on. Weeds creep insidiously through gaping holes in ramshackle corrugated iron fences that surround overflowing car wrecking yards and the odd farm machinery repair workshop. It’s not rustic or charming, it’s decay; and it’s a testament to how decades of questionable government economic policy has left such towns unimproved.

The one beacon of hope amongst this desolation is the local school. Tidy, manicured grounds surround the elderly buildings, replete in yet another coat of standard issue Ministry paint. The school is the last remaining focus point for the community. But even the school is at risk as roll numbers dwindle and the same Ministry casts its bureaucratic ruler over the books. Not even community pride in the school can prevent the young people from leaving town as soon as they are able – there is nothing to hold them.

Some of the troubles faced by rural towns are simply geographical. No amount of government intervention can compensate for poor soil, challenging climate or remoteness. For those towns that do not have viticulture or glaciers or fishing quota, the future looks rather bleak. On a broader front, the withering of our small towns is related to the fact that New Zealand in general continues to lag behind in GDP per capita. There is simply not enough cash to go around, largely because we have underinvested in innovation as a nation. Our small provincial towns are a metaphor for the wider economy.

I mentioned that education is a beacon of hope, there was also another glimmer of light on the horizon last week. McKinsey run an annual exercise involving mapping global innovation. Auckland was the only New Zealand city that was polled, but it showed up in the top left corner of the data as a “hot spring” of innovation. In other words we are registering more technology patents each year, but only in a small number of areas. Now, it turns out that bubbling hot springs generally host a thriving microcosm of life. On that basis investing in science and technology innovation as a means to generate economic wealth seems like a good idea. So why is the government heading in the opposite direction?