Q+A: Adrian Orr interviewed by Corin Dann

Q+A: Adrian Orr interviewed by Corin Dann

NZ Super Fund – best in the world – but what does the future hold?

The New Zealand Super Fund is currently worth about $37 billion, delivering returns that are the envy of many international counterparts. It’s headed by Adrian Orr, and in a one-on-one with TVNZ 1’s political editor, Corin Dann, Mr Orr paints a rosy picture for the future of the fund too. “Our fund will continue to be growing very rapidly. We are the best-performing sovereign wealth fund in the world, and we continue to win accolades and note for that,” he said.

When asked about the influence the new government might have on the future direction of the fund, Mr Orr said, “The legislation is very clear around what governments can and can’t do with regard to directing investment.”

Mr Orr is not ruling out future investment in New Zealand companies, but says any company would have to “stack up commercially, regulatory, legal frameworks-wise” before NZ Super Fund would consider it.
Infrastructure is an area of future investment focus, and New Zealand infrastructure projects – maybe even Ports of Auckland – could be considered. “We talk very openly around desires for infrastructure… opportunity of long-term capital… get the diversification we need. And if it’s in New Zealand, that’s fantastic,” said Mr Orr.

Q + A
Episode 38
ADRIAN ORR
Interviewed by Corin Dann

ADRIAN Oh, I very much hope so. We’ve had our shingle out now for a long time saying, ‘Show us good opportunities,’ and we’re being very proactive. We have looked— I mean, timber – our Kaikorai forest has just been a stunning performer for us. We’re early days with Kiwibank. We’ve had Datacom producing very well – and the farming sector. We’re always on the lookout for assets where our money can make a real difference.

CORIN Infrastructure. I mean, I know Auckland Council’s certainly short of some infrastructure money. Is that something you’d look at?

ADRIAN Yeah. The world is—It’s an amazing phenomenon. The world is short of infrastructure – there’s a massive deficit – and the world is awash with global capital. The two can’t meet, and this is just infuriating. I was in the World Bank just recently, and they were talking – ‘Why can’t this happen?’ And the answer is the same across the world – we need to be invited in as third-party capital; we need to have a very clear procurement process and a lineup; and we need to have some confidence around property rights. That doesn’t exist.

CORIN That’s interesting. So are you saying that if the regulators can get it right, that if Auckland Council was to come to you, you would be open to investing in infrastructure to help with, say, building new developments?

ADRIAN Very much so. In fact, we are. At the moment, we’re at Hobsonville. We’re flat-out building out there. We’re looking at lots of other property around the country. We’re continuously looking, and we’re doing that, so the answer is yes. And that would be not just our capital but global capital will come in. Australia and the UK have had more than their fair share of global infrastructure capital because they were open for business. There’s nowhere else. The US…

CORIN Here’s a question. Do we need, as a country, to be calling on foreign capital, or have we got enough here? I mean, a lot has been made of a new government and claims that there’s going to be scare off foreign investors, foreign buyers, bans – these sorts of things that’ll scare off foreign investors. But, actually, do we need it? Or do we have the capital here?

ADRIAN All countries need to have an open capital market, because that allows you to risk-share and diversify across projects. If you’ve got all of your money, all of the council’s money in one asset, for example, and only paid for through debt, i.e. rates and/or bonds, then that’s not a safe place to be. You want to be diversifying. There is local capital that could go in. Likewise, there’s global expertise that can assist.

CORIN So we don’t want to scare off foreign investors?

ADRIAN No, not at all. Not at all. And, you know, I don’t believe we are. The challenge is a generic one around the world at the moment – how can you get institutional capital to flow into infrastructure investment? We’re doing a lot of work in the background. We’ve helped create and worked with iwi to create a collective investment vehicle where they can co-invest beside us. And that’s hopefully up and going by calendar-year end.

CORIN Have you got any big projects lined up?

ADRIAN We will be— I can’t talk about future projects, but no massive infrastructure projects. We’ve got plenty of that we’re thinking about – hard.

CORIN What sort of scale are you talking about with iwi?

ADRIAN For this group, sitting in that fund, will be around… over 100 million for that, but we can also direct invest with the Ngai Tahus and the Tainuis etc. But they can be a co-investment partner with us. And the real challenge there is to say, ‘Can we get access to resource we wouldn’t otherwise? Can we bring the capability in that we between ourselves don’t have and then let the capital flow?’ And so that’s an opportunity to do that. We’re also working very hard across a wide range of direct investment opportunities in New Zealand on a continuous basis. Quite a substantial team at the fund knocking on doors, saying, ‘We’re open for business.’

CORIN Your fund has a had a very good performance – as I said before, $20 billion this year. The long-term is good. Is it frustrating for you that civil— the state sector and the last government criticised you about your salary? Is that frustrating?

ADRIAN At a personal level, it’s very awkward, but that comes with the territory. It’s the board who decide what they need to pay to attract and retain the people they want at the fund, and that’s just how it operates, so I’m very proud that they have--

CORIN Because the board’s been very strong in backing you.

ADRIAN Yeah, well, I think backing the institution on that side. So they’ve done an enormous amount of background work around what are these roles and what--

CORIN Because your salary package – and I’m not going to dwell on this – over a million dollars or so, relative to a fund globally, it’s not out of the ordinary, if not… at all.

ADRIAN It’s very industry-standard for the public sector-type fund that we are.

CORIN So I guess the follow-up question is – is there an argument that the Super Fund may be ACC as well, given it’s also managing a portfolio of a similar size – $35 billion-odd, like yours – should be separate from the state sector? You know, in terms of how it’s perceived in salaries.

ADRIAN I’m not an expert in that side. I do know that the state-owned enterprises are quite separate in the way in which— you know, now with the mixed-ownership models, quite separate in the way that the pay is done. They are very market-driven. I think our funds have grown from something very small and not really noticed to now something very important over the last 10 years, and we’re just at that stage now. Our fund will continue to be growing very rapidly. We are the best-performing sovereign wealth fund in the world, and we continue to win accolades and note for that, so…

CORIN You talk about growing; this current government has signalled it will put money back in, restart contributions which were froze by the last government. How important is that – that they follow through on that promise?

ADRIAN I think for the fund and for the purpose of the act, one, it’s a legal necessity; it is in the act. So either step up and act within the law or change the law. And so it’s as simple as that, and I’ve spoken very publicly about that, because it just sits in our legislation. There is a funding formula that is there to be met to smooth the future tax burden, and if we don’t smooth that future tax burden, it’s going to be harder to attract and retain people to work here, because tax rates will be incredibly high.

CORIN So they’re starting with half a billion as the first commitment, and then it goes up steadily. Would you like to see it get back to where it was supposed to be, which is at 2 billion?

ADRIAN I would just like to see the legislation properly acknowledged for what it is or changed, because the legislation operates on a 40-year forward-looking formula. That generally backs out to around $2 billion a year that comes into the fund. An important part of that is when it’s working, whatever tax we’ve paid in that year actually gets put back into the fund, so it becomes a notional entry rather than a tax drain, and just see the legislation works as it is. If we have funding that is cyclically driven, i.e. when we feel we can afford it, we’ll always be getting funded at the peak of markets, by definition.

CORIN So, yeah, it’s interesting, because in your speech you gave recently, you talked about how one of the successes of your fund was that, basically, governments hadn’t meddled, that you hadn’t tried to take money when they needed it off you or anything. How important is that – that you can just operate separately?

ADRIAN Absolutely critical. You would not have the team that you have there if we didn’t have that certainty around our operational independence, because you can’t commit capital for five, 10, 20-plus years if you’re unsure that it’s going to be called.

CORIN Are you worried that a new government that wants to see more investment in New Zealand might push you a bit too far into investments that you’re not that comfortable with?

ADRIAN Again, not at all. I mean, the legislation is very clear around what governments can and can’t do with regard to directing investment, and I’ve got no reason to believe anything would change there. A government can talk about an overall level of risk they are prepared to accept, but they can’t talk about where to invest. We did get one from the National government when it was first elected. That’s the only directive we received, which turned out to be to actively seek and consider investments in New Zealand subject to best practice, you know, global portfolio. So it was a subject to--

CORIN And you’d be comfortable with a similar sort of thing this time round?

ADRIAN I mean, I can’t see why they would need to remove that or alter it. We report very clearly on how we’ve—

CORIN What about the Kiwibank model, though? I mean… It’s a very, sort of, convenient mechanism to keep that in New Zealand ownership for a company that, you know, had structural issues. Has that worked for you?

ADRIAN Well, absolutely. And it wasn’t a political deal; it was a commercial deal from our side.

CORIN And you drove a pretty hard bargain, by the sounds of it.

ADRIAN Yeah. Well, it had to stand on its own feet. And I think it was great. The original owners just didn’t have the capital base to properly capitalise it. We did. And because of the unique ownership structure of it, we’re one of the few people – us and ACC—

CORIN Are there any other government assets that you’re looking at that could be potentially in that same…?

ADRIAN Nothing on the horizon at the moment, because we’ve had no communication around what it is. But we talk very openly around desires for infrastructure, ports – you know, opportunity off long-term capital – get the diversification we need. And if it’s in New Zealand, that’s fantastic.

CORIN Ports is interesting, isn’t it, because there’s a lot of debate about Auckland port and all ports, really. But that’s another mechanism—The benefit is that it keeps it in New Zealand ownership, right?

ADRIAN Yeah, that’s right.

CORIN So are you saying that you’d be open to those sorts of deals with ports if it was stacked up?

ADRIAN I think you have to— They have to stack up commercially, regulatory, legal frameworks-wise, and why wouldn’t we have a look at investments that we think suit our portfolio well?

CORIN Port of Auckland?

ADRIAN Why not? Can we do it? I think, given the ownership structures of a lot of these assets, whether it’s the red-meat industry, the port industry, the fishing industry – we’re working with them all – the ownership structures are very complex; you have to come in with almost an end-to-end investment solution.

CORIN I’ve got to ask – who are you looking at with the red-meat industry?

ADRIAN No, I won’t comment. Yeah.

CORIN Fair enough. One more question.

ADRIAN This is desktop work.

CORIN Fair enough. One more question. Being down in Wellington, in political circles, your name is often mentioned as someone who could be a potential Reserve Bank Governor in the future.

ADRIAN Oh, that’s very kind of them.

CORIN Is that a role that you would be open to?

ADRIAN I don’t comment on personal issues. You’ve taken me into the salary. I’m not an elected official, so I’m sorry, I just don’t comment.

CORIN That’s fine. We’ll leave it there. Adrian Orr, thank you very much for your time. We appreciate it.

ADRIAN Yeah, thank you. Cheers.

CORIN Cheers.

ENDS

Please find attached the full transcript and the link to the interview

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