Address to Private Capital Markets Forum: "Venture Capital in NZ"

Good Evening,

Thank you for the invitation to speak to the New Zealand Venture Capital Association.

I wish to start by paying tribute to efforts made by Colin McKinnon, the association's executive director

And also to Franceska Banga for her introduction and the work she undertakes on behalf of the Venture Investment Fund.

This government's overall goal is one of growing the New Zealand economy to deliver greater prosperity, security and opportunities to all New Zealanders. 

We set ourselves the aspiration of raising exports from there current level of 30 per cent of GDP to 40 per cent and income parity with Australia by 2025. 

To generate the higher rate of growth required we need to rapidly alter New Zealand's mix of goods and services towards those that provide higher value and higher returns - products which differentiate on the basis of quality and innovation rather than price.

As a small open economy located far from markets, we face some barriers. The global economic crisis has made our task that much harder still. 

However, other small, open, advanced economies with similar characteristics, such as the Scandinavian countries, have been successful in leveraging their natural resources into higher value products. 

There is no reason why New Zealand cannot enjoy the same level of success.

The National-led Government came to power with a clear agenda designed to help New Zealand businesses through the crisis but to also ensure that they are well placed to take advantage of opportunities in the long term. 

As a government we want to make it clear what actions we will take to support New Zealand businesses. 

This is why we are in the process of developing an economic growth agenda with a clear path forward which makes it easier for businesses, unions and the public to understand what we want to achieve and to add their support to the cause.

 We envisage that this will lead to a package of measures focussed on building our competitive strengths and raising productivity.

In February this year I wrote to the Prime Minister, outlining my three priorities as Minister of Economic Development.  Specifically these are to:

• Improve business support programmes;
• Develop areas of competitive strength; and
• Bring an economic development perspective to major government decisions such as the Rugby World Cup.

One of the first steps towards improved business support programmes is a new grants scheme called the International Growth Fund which was launched on 1 July by New Zealand Trade and Enterprise. 

This Fund will be focused on supporting those firms most likely to operate successfully internationally and who will deliver the greatest benefit to the New Zealand economy as a whole.

NZTE has also restructured the delivery of the new grants programme in order to better assess and meet business need.

As a result, there will be more targeted engagement with business which will enable better, more relevant solutions. 

We have also been reviewing existing government business assistance programmes with a focus on improving the efficiency and effectiveness of these.

New Zealand also needs to increase its share of existing markets as well as develop new markets, products and services around areas of competitive strength - our primary products.

 To ensure we have an export lead recovery we are investing in some key initiatives.  They include:

• Ensuring public research and science institutions are more responsive to business needs and better support business opportunities in our areas of competitive strength. 

• Assessing the merits of proposals to create a network of food research development and commercialisation centres.  Good progress is being made in this area and I expect to be providing advice to my Cabinet colleagues on ways forward in the very near future.

• We have also replaced "Fast Forward" with initiatives that more effectively link research, development and commercial activities in the primary sectors and address impediments to economic growth.  I plan on working closely with the Ministers of Agriculture, Forestry and Fisheries on specific initiatives over the course of this year.  Can I add aquaculture is an example an area where we can develop new food products and develop new markets.

But to achieve success requires several things, not least of which is deeper and more sophisticated capital markets. 

Efficient financial markets are fundamental to economic development because they attract capital and channel it to entrepreneurs and growing businesses. 

And successful financial markets are often more than the sum of their parts. 

The breadth and sophistication of an economy's financial infrastructure is important.

 At a minimum we need exchanges where equity can be readily traded, and people willing and able to help match investment opportunities with suitable funding.  Also crucial are early-stage capital markets.

I accept it is not easy to establish a venture capital industry here and acknowledge it takes time to grow, but the growth so far has been encouraging.

This government recognises and appreciates the value of the work that both the NZVCA and NZVIF have done in catalysing the development of venture capital and early stage markets in New Zealand so far. 

The New Zealand Venture Investment Fund was established in June 2002 and has now made $110 million in capital commitments to six Venture Capital Funds.

Investments of both private sector capital and VIF capital combined are $232 million into 48 companies as at June 30th this year.

The Seed Co-Investment Fund has 9 approved investment partner networks and $20.9 million combined crown and private sector capital committed to 26 companies.

This government also recognises that developing a self-sustaining early stage capital market is a long game.

 We recognise that some aspects of our capital markets are underdeveloped and that the task has been made doubly difficult with the current economic downturn. 

So what direction and attitude is the new government taking towards protecting and encouraging venture capital.

The first step is recognising that for venture capital to succeed the underlying business settings have to be put into place. 

I am pleased to say in a short period of time we are making good progress,

And I think this first year of the new government will be judged as a foundational year for steering the economy back on track.

For example there are a number of programmes in place.

We have established a Tax Working Group which is taking a medium term look at taxation issues. This working group is chaired by Professor Bob Buckle and will report back by the end of the year. 

It's been asked to give advice on how we can have a competitive tax system and means it will also be watching carefully developments in Australia with its tax review.

In recent week the government has also announced the 2025 Productivity Taskforce chaired by Dr Don Brash.   

This will identify policy setting and changes to deliver productivity growth and it has a tight time frame of having to release an initial prescription by October this year.

You will be aware the Regulation Review led by Rodney Hide is well underway and will no doubt lead to a significant reduction in business red tape.

Just this week, my colleague the Immigration Minister Jonathan Coleman, and I released a new Business Migrant scheme

Developed on the back of the Job Summit and after consultation with industry leaders this new package is designed to attract high value investor migrants.

In other words it's a way to attract more equity into the country.

You may be aware the Finance Minister is leading a rewrite of the foreign investment rules to attract further balanced investment

So you can see there is no shortage of ideas on how to create the best business settings.

More specifically there is also some fresh thinking being applied to the issues of capital investment markets.

Many of you will be aware we have the Capital Markets Development Taskforce underway.

It is designed to address a range of various tax and regulatory issues on behalf of the industry.

This Taskforce is in effect an acknowledgement by the government that efficient financial markets are a key part of an environment in which the private sector can thrive.

And for those of you who have contributed and made submissions so far I would like to express the government's appreciation.

It is too early for me to say what results we will receive from the Capital Markets Development Taskforce but I can say that my colleagues and I will be keen to implement any recommendations that are beneficial for the growth of our economy.

You may also be aware my officials with the Ministry of Economic Development are conducting a review of the Venture Investment Fund.

I am not due to receive the results until September but can I signal now that I am persuaded by the work of the fund so far, and see no value in undermining or dismantling the important progress in developing venture capital funds.

In recent weeks I have met with Sir John Anderson and Fransceka Banga to discuss venture investment.

It was pleasing to hear about some of the businesses and their products assisted by venture capital investments.

Of course one step the VIF board considered necessary to help cope with the challenging economic climate is the creation of the annex fund.

It seems to me to have been a logical move to help businesses feel confident about the availability of follow-up funding at a time when the sources of capital are drying up.

I have also had the opportunity to meet with Jenny Morel from Number 8 Ventures, she is, as many of you are aware, a strong advocate for venture investment.

It was an interesting meeting. Jenny argued strongly about the ratios behind the government investment.  She argues there is a greater need for the Crown to offer more one to one ratio's for venture investment.

While I am not going to rush to judgement on this, I do want to say I may have some sympathy for the argument, and simply note it as a matter worthy for further consideration.

I say this because I think it's important to signal the government still retains an open mind on developing venture capital initiatives.

So can I start to conclude by saying good progress is being made toward fixing the underlying business fundamentals in the New Zealand economy.

Get that right and the prospects for venture capital gets better.

And can I leave you with this thought.   The economic climate is beginning to change.   Just this week the share market was back up to the 3 thousand points marks.

The language of the economic commentators is beginning to subtly change - less talk about the bottom falling out of the economy and more talk about how long it will take to recover. 

So I think its time to embrace a more positive tone.  

Less  worry about how we can protect ourselves - and  more thinking about what opportunity exists .

And the government will continue with its clear and consistent goal to get our economy back on the road to recovery.

I wish you the very best of luck for the New Zealand Venture Capital Association's annual general meeting....and look forward to meeting and talking to some of you later in the evening.