Trade Me founder Sam Morgan has started a heated debate on government grants with his tweet “Tech investors love free subsidies, so no one tells the government that the grant programmes are stupid”.

Morgan published a large number of additional tweets strongly criticising corporate handouts and the silly idea that public servants can pick business winners.

He tweeted: “And if anyone in govt had any idea how to pick those winners, I would hire them. Fact is, nobody does, but govt is particularly poor at it.”

Morgan has raised a number of valid questions about government grants and the organisations that administer them, particularly Callaghan Innovation, New Zealand Venture Investment Fund and New Zealand Trade and Enterprise.

The big question is: do taxpayers receive good value for their money from these business grants?

Callaghan Innovation is a standalone Crown Entity established on February 1 last year. It is named after Sir Paul Callaghan, a New Zealand scientist who was a strong advocate of business innovation. The organisation’s mission statement “is to accelerate commercialisation of innovation by firms in New Zealand”.

In its first 17 months, Callaghan Innovation provided $270 million of research and development grants to 541 businesses.

The majority of this money has come from the government.

Morgan took exception to an announcement on October 2 that Callaghan Innovation had awarded $32 million of new research and development growth grants to 22 high-tech companies, including NZX-listed GeoOP and Serko.

GeoOp will receive $1.1 million and Serko $4.2 million over a three-year period.

Morgan tweeted: “GeoOp for example. Share price down 70%. No private investor support. CEO exited. Bleeding customers. Successful grant recipient.”

He made the following comments about Serko: “Good company. Just raised lots of money on NZX. No constraint on raising more capital. Successful grant recipient. Unnecessary.”

A number of other NZX-listed companies have received Callaghan Innovation grants, including Gentrack, Pacific Edge, Fisher & Paykel Healthcare, ikeGPS, Rakon, Scott Technology, Vista Entertainment Solutions, Wynyard and Xero.

Morgan is a Xero director.

NZX-listed Promisia Integrative stated in its recently released interim report that it had received additional Callaghan Innovation funding but a search of the Crown Entity’s website did not bring up Promisia’s name.

The recently released June 2014 year Callaghan Innovation annual report is incredibly upbeat. The organisation has 358 permanent and 41 part-time employees with a total payroll of $37.3 million. On the assumption that the part-time workers are employed on a 50 per cent basis then the average pay at Callaghan Innovation is $98,500 per annum. This is before any employer superannuation or KiwiSaver contributions.

By comparison, NZX-listed Heartland, which has total assets of over $3 billion, has an annual payroll of $35.2 million with 73 staff paid $100,000 or more. Callaghan Innovation has 128 employees paid $100,000 or more.

The problem with the Crown Entity is that it is difficult to determine whether it is successful or not in relation to its main objective “to support science and technology-based innovation and its commercialisation by business”.

How do we measure its performance? Shouldn’t Callaghan Innovation set a specific goal for each supported company and tell taxpayers whether these companies have achieved these goals?

If a high percentage of supported companies achieve their goals – which could be sales, export, profitability, employee number targets – then the grant programme is successful. If only a small proportion of recipient companies achieve their objectives then Callaghan Innovation is a huge wasted opportunity.

New Zealand Venture Investment Fund (NZVIF) was established by the Government in 2002 to help build a vibrant domestic venture capital market.

All of NZVIF’s investments are made through privately managed venture capital funds, or alongside experienced angel investors who invest in New Zealand-based high-growth companies.

NZVIF is a much smaller organisation than Callaghan Innovation with only seven full-time staff and total funds under management of $200 million.

Its investee companies include the NZX-listed companies ikeGPS, Moa, SLI Systems and Xero.

According to NZVIF’s latest annual report, which is for the June 2013 year, it has invested in 146 companies. These companies have gone on to raise total investment capital of just under $800 million and have earned cumulative revenue of $1.5 billion, including export earnings of $1.2 billion.

NZVIF’s co-investing model means its total payroll was only $1.2 million for the June 2013 year but there were $1.9 million of fees paid to the fund managers. This appears to be a far more cost-effective structure than Callaghan Innovation.

In other words, Callaghan Innovation has given grants of $270 million over its first 17 months, on a total payroll of $53.9 million, whereas NZVIF has funds under management of $200 million on a total payroll of less than $10 million since inception in 2002.

The two organisations have different business models but at this stage taxpayers seem to be getting a much better deal from NZVIF than Callaghan Innovation.

New Zealand Trade and Enterprise (NZTE) is the government’s international business development agency. Its main objective “is to grow companies internationally – bigger, better, faster – for the benefit of New Zealanders”.

NZTE is slightly smaller than Callaghan Innovation as it received Crown funding of $172.4 million in the June 2013 year while Callaghan Innovation received $186.4 million in 2013/14 and NZVIF received $2.33 million per annum in each of the past two years.

NZTE’s position regarding grants is not totally clear as it states on its website: “We do not offer any stand-alone grants or funding direct to companies. Sometimes, we offer limited funding as part of our programme of support for companies that we already work with intensively, but we aim to deliver value in other ways first before funding is considered.”

Nevertheless, NZTE operates an International Growth Fund and a Strategic Investment Fund that are available to businesses to fund market development and feasibility studies respectively. NZTE’s June 2013 annual report shows that it distributed grants of $33.2 million for the year compared with a total payroll of $67.3 million.

Thus, NZTE gives more advice and assistance whereas Callaghan Innovation is the big grants distributor.

Total government funding of around $360 million per annum to Callaghan Innovation, NZVIF and NZTE is relatively small compared with the $10.91 billion spend on national superannuation, $1.97 billion on family tax credits and $1.69 billion on unemployment benefits in the June 2014 year.

Nevertheless, it is important that this $360 million is well spent because it represents the total income tax paid by approximately 30,000 workers. These 30,000 taxpayers don’t want their hard earned cash wasted on grants to business that have little chance of success.

It is difficult to know whether Sam Morgan’s criticisms are justified because Callaghan Innovation was established less than two years ago.

However, the Crown Entity’s latest annual report demonstrates that it has to adopt a far more realistic approach as far as the measurement of its successes and failures are concerned.

For example, on page 11 of the annual report it identifies 10 of its successes including: “Assisting a marine navigation company to maintain world market leadership”, and “improving the performance of medical devices for our largest healthcare company”.

These successes are incredibly vague and sharemarket investors will be surprised to hear that Callaghan Innovation has been a major contribution to the success of Fisher & Paykel Healthcare, if that is the healthcare company it was referring to in its annual report.

There is nothing wrong with well directed business grants but the granting agencies have to do a far better job of measuring the effectiveness of these grants and explaining these results to taxpayers.

Brian Gaynor
Portfolio Manager

Disclosure of interests: Milford Asset Management holds shares in Serko, Gentrack, Fisher & Paykel Healthcare, Vista Entertainment Solutions, Wynyard and Xero on behalf of clients.