Selwyn Pellett - Fresh Ideas for a Productive Economy

Notes for Fabians Seminar "Fresh Ideas for a Productive Economy"
July 2011 - Legislative Chamber, NZ Parliament

Don’t Sell, Invest!

Author, Selwyn Pellett: Productive Economy Council www.pec.org.nz

Presentation Slides

Selwyn Pellett – Productive Economy Council

New Zealand’s economic history is rooted in the success of its agriculture. Abundant and valuable land, in combination with capital and markets provided by the British Empire, and the hard work of a frontier society, made farming a central part of New Zealand’s economic success. New Zealand’s agriculture was, and continues to be, competitive in the global economy because it is able to produce primary goods at a lower cost compared to our competitors. However, the impact of globalization, free trade and technological innovation, has meant that the value of New Zealand exports has remained low and thus failed to keep pace with the value of New Zealand’s imports.

For 40 years New Zealand has focused its efforts on raising the productivity and the yields from farming to grow our economy and to balance our national accounts. Government policy has supported the agricultural sector through tax policy, monetary policy, and access to research and development funds. As a result, agriculture contributes 49% of our exports (Stats NZ) and 15% of our GDP (FedFarmers). Meanwhile, New Zealand’s current account deficit has grown by has swollen from 0.9% of GDP in 1988 to 8.8% of GDP in 2008. Post the global financial crises, this figure has halved to 4% of GDP but is expected to be a temporary

At the same time, New Zealand’s productivity was falling. As Stats NZ reports, from 2006 through 2009 labour productivity was stagnant at 0%. Multifactor productivity had fallen from 2006 through 2009 and had increased by a mere 0.9% on an annual basis from 1978 to 2009. Unemployment reached its height in 1991 at 11.2% and currently sits at 6.6% in 2011. Our Net Foreign Investment is running at 85% percent of GDP and puts New Zealand in very similar company to the economic PIGS of Portugal, Ireland, Greece and Spain. Some economists will argue why we are different to the PIGS based on the difference between Crown and Private sector debt (ie who owns the debt). But the reality is that the interest bill is born by the citizens of New Zealand in both cases, through their taxes, interest payments direct to their banks, or through the cost of goods and service. All these reduce our ability to invest and save.

This is a picture of an economy that has been in steady decline for decades. It isn’t the result of the Global Financial Crisis or even the Christchurch earthquake. It is the end result of an economy that has been fixated with growing our primary industries. We have failed to innovate in order to export higher value goods and services, but have kept borrowing to bridge the gap between what we can pay for with primary exports and what we want.

Successive Governments have failed to realize that agriculture is reaching its natural limits, because of the physical constraints of land and water and, more recently, society’s growing unease with water pollution from farm runoff and methane gas emissions from livestock. These emissions alone account for 1/3 of New Zealand’s greenhouse gas emissions. While intensified farming is absolutely possible, it comes at an ever-increasing cost and such expansion needs to be well thought through as an economic strategy. If New Zealand is to gamble our future economic wellbeing on exporting ever-increasing volumes of primary products, then a foundation of that strategy must surely be the retention of our land, processing capability and global distribution and brand management in New Zealand hands. Strangely, this isn’t part of the current Government’s policy. It should be.

At a minimum, this disconnect of our apparent strategy (food bowl to the world) and land ownership rights (i.e. the ability to sell to anyone), should be a major concern to any New Zealanders who believe farming is our future. However, being a ‘food bowl to the world’ is not a strategy. It is a default ‘business as usual’ outcome that continues in the absence of a strategic economic plan for New Zealand.

However, the Productive Economy Council remains unconvinced that our future prosperity as a sovereign nation lies with farming. We watch our best and brightest, who we have invested in through our education system, leave our shores, seeking meaningful, high wage employment to utilize their skills and training elsewhere. The economic impact of this loss of talent will be felt in generations to come. Without the innovation our best and brightest would bring to the diversification of our exports, we will have no choice but to lower our standard of living, accept that our children and grandchildren will be living overseas and that our economic environment will progressively degrade.

New Zealand can continue to borrow and to hope that our primary industries can grow to two or three times their current value, or, as any responsible society would do, we can start working on Plan B.

Plan B: The Productive Economy Council’s Vision for New Zealand

New Zealand will be the exemplar among small economies, by cohesively building a sustainable, high-wage, high growth, hi-tech economy that benefits all its citizens, while fiercely protecting its economic sovereignty and ensuring we create new strategic options for the next generation.

Put simply, we must innovate and diversify our exports, broaden employment options, own our wealth generation capability (farms and businesses) and leave our children with investment opportunities, not a debt burden.

To achieve this, New Zealand will need to become an entrepreneurial society, where risk-taking becomes part of the national psyche and successful entrepreneurs become national heroes. We will need to develop and implement strategies to create and retain investable hi-tech and elaborately transformed companies, and to deliver well trained entrepreneurs and internationally capable managers to lead them.

By way of example of the potential impact this could have, I will draw on my own experience. Ten years ago I co-founded two companies, Prolificx (later to become Imarda Ltd) and Endace Ltd, with a total investment capital of $360K. In their respective current 12 month trading periods, these two companies will export circa $68 million NZD (normalized exchange rate, functional currency is USD). They employ circa 180 people (1/3 off shore) with average incomes of over $100,000 per annum and not a cow in sight! In sharp contrast, a farm holding hires, on average, 1.8 people with an average salary of $45,410 (BERL), while the average New Zealandwage is $47,900 (Stats NZ).

If New Zealand could scale up these achievements to create just 100 such examples then, with a modest investment of $36 million, in ten years time it could create nearly $7 billion in additional export earnings per annum, 18,000 new jobs at double the national average wage, and contribute between $500 million and a billion in new tax revenue per year. Is it possible to create 100 new entrepreneurial businesses that replicate this success? Without significant changes to our underlying macroeconomic environment the answer would be a resounding NO! However, we do have the opportunity to change that environment and strategically align our limited resources to achieve this outcome.

To do this (in no particular order) we need to:

• Control the volatility of the New Zealand dollar (Solutions largely contained in initiatives below)


• Expand the scope of the Reserve Bank Act to encompass jobs and exports instead of just a narrow focus on inflation (this will force the development of additional tools so exporters are not used as the hand brake to control non tradable inflation)


• Invest in innovation (R&D tax credits etc)


• Improve savings (compulsory superannuation)


• Tax capital to remove distortions in the investment profile (CGT)


• Reduce Foreign Debt (reduce demand for privately sourced foreign debt to inflate house and farm prices, spend less on imports, earn more from exports)


• Balance the fiscal budget (all income is taxed regardless of source, lift super age, remove interest free student loans etc)


• Invest in ourselves to gain economic leverage (Government procurement policies and Super Fund investment criteria, NZX).


• Manage immigration carefully (to avoid stimulating housing inflation and excessive investment in new low yielding infrastructure)

As New Zealand now has two political parties looking at these problems and developing policies to deal with them, I will park these issues and pretend they are dealt with. So what else is needed? Instead of macroeconomic changes, I will focus on a second order imperative – selecting, growing and mentoring entrepreneurial talent, without which all of the above would still not deliver the desired economic returns.

It is our belief that entrepreneurs are born not trained. Students can lose their innate capability through bad experiences, but it is difficult, if not impossible to train it into someone with the wrong profile and skills. So courses training a normal sample of students at university will have very limited success. This means that as a nation we need to screen for entrepreneurial profiles early in the education cycle and help students to develop the required additional tool kit to allow them to embark early on an entrepreneurial career.

The sort of attributes that are essential include a suitable risk profile, an abundance of self belief, (ideally supported by a history of achievement to date), superior intellect, hunger for learning and self improvement, and the ability to inspire, communicate and make a difference. Sam Morgan, Rod Drury, Sir Peter Maire and the late Sir Angus Tait are all excellent examples of this sort of profile.

Having screened for these traits, we need to provide supplementary courses at secondary school, largely as teasers for a very specialized university degree that provides a significant portion of field active work. The scope of this course needs to be developed with a broad range of successful entrepreneurs and then put into a limited number of universities.

The key role of an entrepreneur is to identify what assets and capabilities they have or have access to (money, networks, engineering / marketing talent / distributions channels / media etc) and marry that with a market opportunity that has yet to be exploited or could be exploited differently. Again, all of the above entrepreneurs did exactly that. This capability is a mixture of analytical and creative skills, and young entrepreneurs need to get access to older more seasoned entrepreneurs to refine that skill in relative safety.

There is now the potential to have apprentice entrepreneurs, but this would require the buy-in of currently very busy and capable people, willing to invest their time in the next generation of entrepreneurs. Having seen the investment many are already making to help in this regard, we believe there should be capacity to have at least 10 to 20 entrepreneurial apprentices (or possibly even 50 to 100 in a well structured national program) going through such a program each year. The program would have the apprentice spending 3-6 month stints with 4 different entrepreneurs in different technologies or industries. The unique benefit of such a program is that apprentices gain a global insight (i.e. they travel with the entrepreneurs) to see how things are done, and they also create their own network of potential seed funders for their own business while in the programme.

As previously stated, there is much to be done to create a viable Plan B but it is possible and it is essential. To gamble the future of the next generation on policies and behaviors that have failed us for decades is patently irresponsible. Farming is literally our cash cow but, as any businessperson knows, you use your cash cows to fund new opportunities with greater growth potential to ensure longevity of your businesses’ success. Every business or economy eventually has commodity characteristics unless you continually invest. Previous generations of New Zealanders invested in this country to create exceptional income per capita and now it’s our turn.

Selwyn Pellett has redefined the term 'serial entrepreneur' for New Zealanders. He is currently directly involved with five companies and is indirectly mentoring a number of others with no inclination to put the brakes on just yet.
He returned from Singapore in 2001 to become a New Zealand based hi-tech entrepreneur having run major technology companies in New Zealand, Australasia and Singapore that ranged from twenty million turnover to just under a billion. It was a point at which he felt suitably qualified in management, international sales, marketing, and strategic planning to have a unique perspective on building New Zealand based companies and expanding them into international markets.
Since 2001 Selwyn has founded and co-founded a number of technology start-ups initially focusing on network security solutions for telecommunications, financial services and government customers and telematics solutions for use in large vehicle fleets. As the co-founder, former CEO, Chair and now director of Endace Ltd he was instrumental in the company becoming the first New Zealand registered company to list on the UK's AIM stock market in June 2005. Endace has operating entities in New Zealand, Singapore, America, China and the England and in 2009 has a market capitalisation of $154 million.
In July 2007 Selwyn stood down as CEO of Endace to re-focus on acquisitions and the commercialisation of Imarda a Telematics (in-vehicle electronics) business. Imarda currently has operations in New Zealand, Singapore, Australia, USA and UK and has recently secured multi-million deals in the US and Australia. Selwyn has personally supervised the market entry of Endace and Imarda into America, Canada, UK, Ireland, Germany, Demark, Israel, UAE, Switzerland, Finland and almost every country in Asia Pac including China and Japan. He has also established multiple physical operating companies in Australia, Singapore, China, Malaysia, UK and America. Collectively Endace and Imarda now enjoy significant global commercial relationships with Tier 1 and Fortune 500 companies a few as well as significant relationships with many western intelligence gathering services.
His other current business interests include being a director of high-end audio distributor, Storm Distribution, an Australian based trucking company, North Star, and non-executive director of technology marketing and communications company, Swaytech.
Selwyn is passionate about helping New Zealand to develop a high-wage, high-growth, elaborately transformed and sustainable economy. He has consulted with government ministers and advisors on industry and economic policy, and been involved in numerous initiatives aimed at building and retaining skills and expertise to support economic growth in New Zealand. These include being a founding member of the NZ Intellectual Capital Foundation (NZInc), being a Trustee of the NZ HiGrowth Project and more recently the founder and driving force behind the NZ Productive Economy Council. He was also instrumental in establishing the first Hi-Tech Awards and has remained involved ever since.

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