International Finance Agreements Amendment Bill

Dr WAYNE MAPP (National—North Shore) Link to this

As is well noted, the International Finance Agreements Amendment Bill pretty much had the broad consent of the Foreign Affairs, Defence and Trade Committee. As members will note, new section 1A, to be inserted by clause 5, sets out the purpose of this legislation. It really is part of the international framework of financial and monetary institutions to which New Zealand belongs. The bill ties in effectively with the International Monetary Fund and the International Bank for Reconstruction and Development, as is noted in the proposed new section 1A(1).

The purpose of this particular agreement—which one might loosely say is to complete that framework of agreements—is to assist and promote investment in developing countries where there is significant political risk. That is fundamentally set out in new section 1A(3), which states that the purpose of the bill is to enable the Government of New Zealand to fulfil its obligations as a member of the OECD—and I want to stress that—to provide for the Multilateral Investment Guarantee Agency. We do not have to guarantee investments in Britain, Australia, or the United States. All of these countries, and many other countries, of course, have robust independent legal institutions. Any New Zealander can invest his or her money safely in those countries, or make an investment in those countries, and that person will face only the normal business risks.

However, New Zealand companies may well wish to invest in places in the world where there is substantially serious political risk. It may interest members to know that I did my doctorate in investments in Iran. There was immense political risk there, because of the hostage crisis. A special arbitral procedure had to be set up to effectively protect the United States investments and to compensate for the huge wide-scale expropriations. Members will be interested to know that that particular tribunal drew on a whole body of litigation and arbitral decisions that primarily related to South America and the Middle East, and that were built primarily around investments in oil exploration, investments in steel, and, generally speaking, resource development contracts. Those are the sorts of contracts that investors are primarily entering into with countries that do not have, let us say, robust legal systems and that are lacking in any sort of independence and protection. So in order to give an incentive for developed nations to invest in some of these developing nations, we have to have this guarantee agency.

The purpose of the Multilateral Investment Guarantee Agency, as is clearly set out in the purpose provision in Part 1, is to make it easier for developed nations or investors in developed nations to invest in developing countries in order to lift the wealth of those developing countries. We know that many of those countries have weak institutions. They are not democratic. They do not have a sense of independent judiciary, and the like. Agreements are often made on a person-to-person basis. There are problems around corruption, and so forth. Yet such countries still need the investment. And, to be truthful, developed countries need access to the resources. It is—and I might say this, actually, to the Māori Party—a relationship that benefits both parties; both the developed countries and the developing countries benefit. The developing countries do not have the financial resources to develop those resources, and they need, essentially, external finance. Without that, those resources remain idle and the people remain poor. The countries that have really accepted foreign investment are the ones that have had the fastest levels of development.

I will just briefly finish on this point. This agreement is to assist developing countries to build their prosperity. I say to the Māori Party that after it has considered the bill it should decide to vote for it, because the bill is actually about assisting developing countries in a symbiotic relationship that is beneficial to both parties. That is why National supports this bill. Thank you.

JOHN HAYES (National—Wairarapa) Link to this

I rise in support of this bill, and to speak on Part 1. I particularly want to direct my comments to small businesses, because it is quite interesting to see that the members from our region include Australia, the Federated States of Micronesia, Palau, Papua New Guinea, Samoa, Vanuatu, Fiji, Indonesia, Thailand, and Viet Nam. This legislation can be used by small businesses. Set up under the Multilateral Investment Guarantee Agency is a section that is particularly designed for small to medium sized investors.

In order for small New Zealand businesses, or even medium sized New Zealand businesses, to get access to a guarantee, the reciprocating party, the other country in which the investment is to be based, also has to be a member of the agency. So those member countries that I have named are really quite important. I think that the encouragement of growth in small to medium sized enterprises in the countries we are talking about, in our immediate neighbourhood, is critical to the creation of jobs and economic growth. I think the agency will be useful because it will help investors in New Zealand, especially those that are small or medium sized, to invest in these countries. For example, if we think about Fiji and the failing sugar industry, it ought to be quite possible for a New Zealand company to go in there and encourage the development of an ethanol industry on the back of that sugar industry.

The areas that we will have to be in, to take up the purpose of this legislation, will be those associated with the expansion, modernisation, or financial restructuring of existing projects. Also eligible for New Zealand companies will be acquisitions that involve the privatisation of State-owned assets, and that will be particularly relevant, for example, in Papua New Guinea, where a lot of privatisation is going on. The types of foreign investments that this legislation will provide a guarantee for will include equity, shareholding loans, and other shareholder loan guarantees, provided there is a maturity of 3 years. I am talking only about dealing with the small to medium sized enterprise investment.

Before the guarantee office will pick up an investment and protect it for a New Zealand company, it will have to be satisfied the project is financially and economically viable, environmentally sound, and consistent with the labour standards in New Zealand and the licensing agreements that would apply in New Zealand. The eligible investors will include nationals of member countries of the convention—and those will soon include ourselves—and corporations if they are either incorporated or have their principal place in a member country, or if they are majority owned by nationals of member countries. If they are majority-owned New Zealand companies, they will be eligible.

New Zealand companies that wish to invest in the immediate region will be required to meet a few other criteria. First of all, the entity is to have no more than 300 employees. It must have assets of less than US$15 million, so it could conceivably include, for example, some of the tourist infrastructure in Fiji. The total annual sales must not be more than US$15 million. This scheme, which has been specifically designed for small and medium investors, has no restrictions in respect of the size of the investor, but it is specifically designed to assist small and medium sized investors, and most New Zealand companies would fit that arrangement.

The second comment I would like to make while I am on my feet is that this convention was signed up to in Australia back in 1996. It came into force there in 1998. The one thing to think about is that the Labour Government has been in power here for the last 8 years, and what progress has it made? What has it been doing to help our small to medium sized businesses? That Government could have signed up to this convention. [Interruption] I say to the Minister that he could have organised this 8 years ago, and the Government could have been supporting New Zealand industries. The Government could have been supporting small businesses in Papua New Guinea, in Fiji, in Palau, and in the Federated States of Micronesia, and the Minister has not failed to do that.

The CHAIRPERSON (Ann Hartley) Link to this

The debate on this part includes the schedule.

TIM GROSER (National) Link to this

I will take a brief call just to highlight one or two of the articles in the convention in new Schedule 7 of the principal Act that I think are quite interesting in terms of the overriding objective of helping developing countries attract—given the risk premiums involved here—greater flows of funding from the members of this agency. So if we start by looking at article 2, we see the statement very clearly that the objective is indeed to encourage the flow of investments for productive purposes amongst member countries. Later on, in article 2(a), we see a very clear statement that the real objective is to insure against, as is described, non-commercial risks. So it is not intended to cover normal operating insurance needs, but very much the non-commercial risks.

If we turn to article 11, a little more definition is given to the covered risks there. They are obviously, as my colleagues have just pointed out, not the sorts of risks that any New Zealand investing company would expect to meet in Australia, in any OECD country, or, indeed, in many developing countries with reasonably robust institutions, but in certain markets these become possibly a complete disincentive to investment. They are listed in article 11 as, first, “Currency Transfer”, which is defined as “any introduction attributable to the host government of restrictions on the transfer outside the host country of its currency into a freely usable currency”.

One would note in passing that this was a massive problem around the 1930s and right into the early 1950s, when currency convertibility was more or less achieved in a very rapid period of time amongst the then major industrialised countries. It is still a fundamental problem in a few developing countries, so if this were to be reintroduced it is one of the risks that is covered.

The second one is certainly familiar. My colleague Dr Mapp referred to his own doctoral dissertation on the Iranian situation, expropriation, and similar measures. There is a very precise definition in article 11(a)(iii) in relation to breach of contract by the host Government. Finally, article 11(a)(iv) refers to war and civil disturbance. These are risks that any prudent investor would have to take into account in certain developing country situations. This is an agency that will essentially take out those risks, for a fee, and deal with that risk, allowing the private investor to handle only the more traditional insurance risks that would be apparent.

Various other clauses deal with membership and capital. During the examination by the select committee, which as my colleagues have pointed out was non-contentious, we noted that New Zealand’s liability is encompassed in holding 513 shares. From memory, there is a contingent liability of around US$5.5 million and we pay 10 percent upfront in cash. So the opportunity cost of that is not very high from New Zealand’s point of view, and it is playing our part in the overall multilateral economic cooperation process.

As I think I might have said in the first reading, the only surprise to me was to find we were not already members of this agency. Clearly it is important that the guarantees are done in a cooperative way with the host Government. As everyone in this House knows, there are acute issues of sensitivity about sovereignty. One would almost say there is an inverse relationship between the stage of development people have and the sensitivity they feel about sovereignty, so it is important that article 15 makes it clear that this proceeds only with the host country’s approval. There are fairly standard subrogation provisions—and I understand it is a very technical issue—in article 18. The agency is also allowed, through article 21, to offset some of its risks by using in certain circumstances reinsurance facilities to spread the risk.

In terms of looking at the overall risk of the agency as a whole, there is a provision that limits the total amount of contingent liability to 150 percent of the subscribed capital. Elsewhere in the bill—I cannot recall the article, but I remember it from the time of the examination—there is a cap per project of, from memory, $110 million. This is a carefully designed agreement. It has obviously been worked through by technical experts from the World Bank who are well placed to do this. We are very pleased to support the bill at this stage. Thank you.

Dr WAYNE MAPP (National—North Shore) Link to this

I will take just a brief call on this part. It is really the core of the agreement and refers essentially to the principal schedule, new schedule 7, which sets out the agreement, which is the convention itself. It sets out the calls that each country has to make in terms of share capital, and it sets out the membership. The membership is in two lists, if you will—category 1 and category 2. The category 1 nations are essentially what we would call the developed nations, ranging from Australia, Austria, Belgium, etc., right through to the United States. They have a total shareholding of 59,000 shares. New Zealand’s share of that is 513, so it is slightly under 1 percent. It is a very small level of shareholding in this instance, and we have to subscribe to approximately $5 million. But, as Mr Groser has said, we in fact pay only 10 percent of that in any event.

The category 2 States are the developing countries. Clearly, it is a much longer list, and its total share capital is 100,000 shares. So the developing States have almost 60 percent more shareholding than the developed nations, and I suppose to some extent that reflects the allocation of wealth around the world. It is not even, and it is not intended to be even. The developed countries have a weighted voting system, reflecting the fact that they are the major investors. But I want to emphasise this point: it is, nevertheless, a minority.

The reason I emphasise that point is that I am making it to the Māori Party, and I do that quite deliberately. It was the only party that voted against this agreement. It was the only party that raised its voice to vote against Part 1. The Māori Party is always saying that it is there to protect the interests of developing nations. It talks about the importance of various UN conventions that do that. We have to ask ourselves the simple question: why, therefore, would one vote against an agreement that has been put in place to assist developing countries and, moreover, gives the developing countries the majority of the votes by a substantial margin?

Do members know what the Māori Party will do? It will revert to its ideological stance and simply cast a reflexive vote against. I can understand that of a party that has just arrived in this Parliament. I recall seeing the Green Party always operating like that. These days the Green Party takes a somewhat more sophisticated view of things and it does a more careful evaluation of what it will do in terms of its votes. The Greens still vote like a left-wing party; I do not doubt that. But I do say to the Māori Party not to take just a reflexive approach on these things, but to analyse the issue. Surely it is significant that almost every nation in the world—indeed, the vast majority of the Pasifika nations, as was clearly pointed out by Mr John Hayes—is a member of this convention. The Pasifika nations, which I presume the Māori Party has a certain camaraderie with, have said this is an agreement that is good for them, because it will assist them to get development capital. Surely that is a good thing and is the pathway to growth and development.

I say to political parties that when they are elected to this Parliament, one of their responsibilities is to look more broadly. I know that takes a little bit of time, and so forth. I have seen the Green Party go through this evolution. I would hope the Māori Party does not just vote reflexively on this, and takes note that the Pasifika nations have seen the merit in and the value of this agreement. That is clearly indicated in the membership of this convention. Thank you.

HONE HARAWIRA (Māori Party—Te Tai Tokerau) Link to this

The Māori Party is not against development per se, but we are not of a mind to be blindly supportive of international developments that lead to the kind of scenario we had in Bougainville or the kind of scenario where New Zealand supported the Indonesian Government and the Indonesian army to continue to plunder West Papua and other places. Although I hear the kōrero that Pasifika countries have signed up to this agreement, I am not so dumb as to believe that they signed up to it because they love it. Often, they sign a deal because it is the only deal going. It is a bit like the Multilateral Agreement on Investment.

I am prepared, as is the Māori Party, to be convinced of the rightfulness of this, but we will not be voting for it simply on the basis that somebody from the National Party thinks we should. We are independently minded enough about what happens in our country, and we are mindful also of what happens in other countries.

I look again to the Northern Territory. I know, for example, that although John Howard was talking about child abuse, etc., and saying he had a 5-year plan to turn it round, for some strange reason he slipped in a deal to get his hands on land in the Northern Territory for the next 95 years. Why? He did it so that those so-called resource development companies—people who will come in and help all those poor people—can go in there and get access to all the minerals out of that place, so that the other companies that might say nice things about what they will do in the Northern Territory, can actually dump all their nuclear waste from the reactor down in Sydney. No, I say to Mr Mapp.

I am happy to say the Māori Party is open-minded to development but we are not about to be dragged into development that is not consistent with the needs of indigenous people. We are more than happy to take it up with representatives of some of those Pacific countries—and we will—to see whether, in fact, this is the kind of deal that is beneficial to them, on their terms, or beneficial to them because that is the only deal they can possibly get.

TIM GROSER (National) Link to this

I want to take a brief call just to give a view about what I think is the bigger picture here, because my first mokopuna was born about 16 weeks ago, and she has moved already in 16 weeks from living in London to living in Hong Kong. That is the world she will grow up in, but I hope, obviously, that she will become a New Zealander and will make a contribution here, somewhere 20 years down the track. But the world that she and our other grandchildren—or, for the younger members of the House, our kids who are growing up and in primary schools now—will be living in is going to be fundamentally different from the world that I as a child grew up in, some decades ago. This world will be different for a number of reasons, but one of its absolute, marked features is the rise in the importance of developing countries, and this bill is ultimately related to that broader purpose.

People of my generation have lived in a world that has been culturally and economically dominated by developed countries. The world in which my grandchild will be living will be totally different. It will not be dominated by developing countries, because many of the countries that I have in mind when I make this point will no longer be considered then to be developing countries, in any real sense of the word. It will be a much more diverse world, and it will be a world, I believe fundamentally, that will be fairer, that will involve far less poverty, and that is already coming into view. It will be a world in which much will shift in favour of what we today call developing countries.

In trade, that is obvious; in emissions, if we are looking at the future of a post-2012 Kyoto convention, we see that at the moment around 60 percent of all emissions comes from developed countries. By 2040 that will change around, almost exactly, to the other side of the coin, to where two-thirds of emissions, according to the UN framework convention, will be likely to come from what are called today developing countries. So this is part of a process. This clause, which is designed to promote the development of these countries, is a small piece of that puzzle.

I believe that an enormous majority of New Zealanders have great sympathy for people in developing countries. Personally, I am hugely discomfited by their problems of acute poverty and their lack of access to adequate food, nutrition, and education. But we obviously have differences of view in our community, from that shared base, about how best to address those issues. The differences are less acute now than 30 or 40 years ago, when I look back on the debates I was involved in then, but they are still replicated in this House, in academic discussions, and in media articles.

They are basically the same two views, and this bill puts them into that context. One view is that the global economy out there is a problem for developing country folk, and that they must assert their control more clearly. They must try to keep out investment and keep out imports. That is the old import substitution model. In respect of this particular bill—the International Finance Agreements Amendment Bill—that model puts heavy restrictions on inward foreign investment. The other view—I will not labour the point—is obvious: it is growth as a non - zero-sum game. If developing countries open their economies to the ideas technology—and in this case investment flows—and join in international, multilateral, co-operative agreements such as this agency we are debating has, this bill will work in their favour. Obviously I subscribe to that view, and this is why National is supporting this bill.

If members reflect on the empirical evidence over the last 30 or 40 years, I believe that they will see that that view is unmistakably correct. We are now seeing a world in which, far from the rich getting richer and the poor getting poorer, developing countries as a group—without exception, including those countries that are going backwards, usually in Sub-Saharan Africa but also those other countries where there are massive problems—have been growing, cumulatively, about twice as fast over the last 20 years as the sum of all developed countries. Massive shifts are taking place in favour of developing countries, in terms of world trade flows. In 1986, at the beginning of the launch of the previous multilateral trade round, a mere 24 percent of developing country exports went from those developing countries to each other. In other words, it was fair, perhaps 25 years ago, to see this as a north-south conflictual situation. When the Doha round was launched in 2000—24 years on—nearly 50 percent of developing country exports went from developing countries to each other.

We are now seeing the rise of the two giant developing countries, India and China, which literally represent half of humanity. They have linked into the global economy and turned back from the earlier economic and political models of rigid control, total obsession with their sovereignty, and resistance to agencies exactly such as this. They have embraced inward foreign investment and outside ideas, and have lifted hundreds of millions of people from poverty.

So this bill—highly technical as it is—fits into what I think is one of the big stories of the world that my own grandchildren and younger members’ children will be living in. It is a world that will be very, very different, and it is a world awash with opportunities—both for New Zealand and for the individuals who have the skills and equipment to actually participate in it. Thank you.

JOHN HAYES (National—Wairarapa) Link to this

I am quite astonished by my colleagues from the Green Party, because they were full participants in the Foreign Affairs, Defence and Trade Committee, which considered the International Finance Agreements Amendment Bill. At no point did they raise concerns about the bill, put in a dissenting voice, or vote against the bill. So it is quite astonishing to come to the floor of this Chamber and find them voting against it.

I say to my colleague from the Māori Party Hone Harawira that I am sure he knows quite a number of Māori who own dairy farms and corporations that are raising money and investing in the future of their mokopuna by generating income from exporting dairy products. I will tell him that in 1994, when I was Ambassador to Iran, we faced a situation where the Iranian Government defaulted on $100 million of letters of credit that had gone through the Iranian banking system. That money was owed to 14 New Zealand companies. Members may recall that Mr Cosgrove’s erstwhile colleagues Roger Douglas, Mike Moore, and, I suppose, David Lange got rid of the Export Guarantee Office. We used to have a State agency in this country that guaranteed the exports of New Zealand companies. The Export Guarantee Office had gone down the gurgler by 1993-94, and we were in a situation where those New Zealand companies—there were 14 of them—had potentially lost $100 million of their money. They were carrying the loss—not the State, as used to be the situation.

So I say to my colleague in the Māori Party that it is in the interest of his people who are engaged in dairying or logging, for example, to support this legislation. I will repeat to him that we are in a situation whereby this legislation and the risks that are covered by it—as set out in the convention in new schedule 7 of the principal Act—are about issues of currency transfer. That means that in a situation like that which occurred recently in the Solomon Islands, were it a member—unfortunately it is not—when it hit the wall and could not provide enough foreign currency to meet its bills, then this insurance scheme would have come into play. It would have come into play in Iran, because Iran is a member, were we members back then—when Australia was, unlike this Government.

If we think about a second area of new schedule 7, we realise article 11(a)(ii) of the convention will allow the covering of business risk where any legislative action, administrative action, or omission attributable to the host Government has the effect of depriving the holder of a guarantee of its ownership or control—in other words, situations where the host Government takes something off the holder, as could easily happen in Fiji, where we have martial law at the moment.

The bill also provides under article 11(a)(iii) of the convention in new schedule 7 for breach of contract. That is something that happens regularly in Papua New Guinea. This scheme is used, for example, to cover the Lihir goldmine. What is the Lihir goldmine about? It is about providing an export income to Papua New Guinea. It is about providing jobs to Papua New Guinean people. It is about using the money gained from the extraction and export of that gold, from a very highly sophisticated goldmine, in order to educate children. The money from that goldmine allows the Government to fund its anti-AIDS programme. AIDS is a huge problem in Papua New Guinea. That money can also be used to engage in roadmaking and to pay for heavy machinery imports—all sorts of things that, ultimately, are of benefit to the people of Papua New Guinea. I ask my colleagues in the Māori Party not to keep their heads in the sand.

We also have to look at events in the Pacific area, because under new schedule 7, article 11(a)(iv) of the convention also enables New Zealand companies—and particularly small to medium sized companies—to cover losses attributed to any military action or civil disturbance. I think there of Tonga. Do members recall that Tonga’s capital burnt down very recently? I think of the Solomon Islands. The capital there was burnt down too. I am still with article 11(a)(iv) of the convention in new schedule 7, where we have cover for civil disturbance. Those things are a reality in the Pacific. I know that the Government is burying its head in the sand and pretending we can use a megaphone to beat the heck out of the military regime in Fiji, for example. That is to the detriment of New Zealand companies that are trying to do business there—for example, running hotels, exporting food, and those sorts of things. Belonging to this insurance convention will insulate New Zealand companies, particularly small to medium sized ones, from the risks this Government is imposing upon them.

It is also really important that we ask the Government to engage in encouraging those Pacific countries that are not yet members of the convention—for example, Tonga, and the Solomon Islands— to join it. When that happens, their companies will be able to benefit from that membership.

If I could move on a little, I notice that in article 32 of the convention in new schedule 7 there is a structure for appointing a board of directors. I would simply like to point out, particularly to my Labour colleagues in the select committee—to our chair, Dianne Yates, to Paul Swain, and to Jill Pettis—who will be leaving this House over the next few months, or if not then, certainly next year, that there is a possibility of work after they leave this Parliament by finding themselves a slot as a director of the agency. That is really encouraging, and it may be a way to help those people to move on.

We warmly support the bill.