Taxpayer tech support must come with strings if business sold

I have grave misgivings over corporate welfare, especially in the tech sector.
Written by Darren Greenwood, Contributor

In the United States, corporate welfare has led to huge wastes of taxpayer funds in business failure, as well as highlighting the issue of crony capitalism, a government giving kickbacks to its supporters.

In New Zealand, however, we have a different problem — that of success.

Last year, following the sale of "Kiwi" tech firm Right Hemisphere to a German company, I noted how tech bosses felt obligated to take taxpayer support, just because it was there.

When times are tough, and cuts are being made elsewhere, it just did not seem right, I recalled, for government to feather the nests of rich business people.

Such a debate has been raised again following the sale of yet another NZ technology business to overseas interests.

Late last week, it was announced that network security company Endace was subject to a NZ$156 million offer from Emulex of California.

Fuelling the controversy of yet another successful New Zealand enterprise being bought out by foreigners came news that Endace had twice received taxpayer cash, worth more than NZ$10 million in total.

No wonder company co-founder, Selwyn Pellett seemed a little embarrassed. He told the New Zealand Herald that the taxpayer should be able to recoup some of the money. In a twitter exchange with senior government Minister Steven Joyce, Mr Pellett was told that there was nothing stopping him from giving some money back to the government so that it could help support other needy tech firms.

Considering that there have been many similar stories in recent years of New Zealand tech firms benefiting from taxpayer support, and then finally being bought out by foreign investors, it is amazing that no mechanism exists for the government to recoup its investment when this happens.

While government appears to get some guarantees with its grants that some research will remain in New Zealand, Mr Pellett has a worthwhile and viable idea. This is, that the capital invested by government is turned into "convertible notes."

This means that if a business is sold, the government gets a share of the equity and a return for the taxpayer.

This will avoid situations where the taxpayer loses by forking out for businesses that are eventually sold to foreigners, and it means that money is returned for investment in other companies.

I can understand the New Zealand government wanting to keep a hands-off approach and believing business knows best. But times are tough, and it must ensure that taxpayers are getting the best value from the taxes they pay, especially as taxpayers and other government departments are having it tough, too.

Mr Joyce has wisely said that he is reviewing the technology grants scheme, possibly looking at changing the amount of grant the government offers tech firms. The repeated cases we have seen regarding foreign takeovers following taxpayer support suggests that something far more radical is needed, and Mr Pellett has provided a sound suggestion for all.

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