Accessing finance to develop land in Papua New Guinea is the biggest stumbling block to creating wealth, jobs and an economic base for future generations. In New Zealand, Maori economic development is forging ahead, with the active support of banks and investors. In the second of a two-part series, Kevin McQuillan examines NZ banks’ lending criteria.

Tainui Group Holdings’ Pierre Tohe. Credit: TGH

When it comes to loaning money to Maori organisations wanting to develop their land, banks look at security, cash flow and character, according to Pierre Tohe, currently General Manager-Engagement, at Tainui Group Holdings Ltd.

Between 2011 and 2016, Tohe led the Bank of New Zealand’s Maori Business Team, which involved developing a Maori business strategy for the bank, building relationships with Maori tribes, cultural training, and developing new banking products and services.

Land value

‘What really opened all the NZ banks’ eyes to the potential value of Maori land development came about after a really comprehensive study in 2010 by Business and Economic Research Limited (BERL), which estimated the value of the Maori economy at NZ$37billion (K88 billion),’ Tohe tells Business Advantage PNG.

‘It made the bank realise that we needed to be forming relationships with Maori.’

‘The nature of security is a big issue for all secured lending, but banks are no longer rejecting applications simply because land is collectively owned.’

Some of that wealth came about as a result of recent settlements with the NZ government, that occurred a result of breaches under the 1840 Treaty of Waitangi. Maori were compensated for land confiscations and/or the use of land without compensation.

Since 1989, 54 settlements have been completed, with financial redress (excluding interest and other arrangements) of approximately NZ$1.5 billion.

The government has budgeted another $1.4 billion for the five-year period from 2014 to 2018.

But many Maori groups had either developed their lands or wanted to, irrespective of Treaty settlements, through forestry projects, retirement villages, and agricultural projects.

These initiatives could represent a blueprint for analogous capital raising in PNG.

Some developments have been achieved through joint ventures, leasing arrangements, or accessing venture capital funds.

Collective ownership

The nature of collective land ownership has resulted in banks’ being reluctant to loan to Maori—until now.

All New Zealand’s major banks, which are Australian-owned—along with the People’s Bank (Kiwibank)—now have Maori investment divisions, prepared to loan to Maori entrepreneurs and tribes.

‘Having a legal structure which can interact with the commercial and legal world is of vital importance. Banks are reluctant to lend to some types of structure they don’t understand…’

The nature of security is a big issue for all secured lending, Tohe admits. But banks are no longer rejecting applications simply because land is collectively owned.

Historically, land incorporations that date from the 1880s, such as the Mangatu Incorporation owned by the Ngati Kahungunu largely located in the Hawke Bay, were favoured and successful. But, in the last 30 years, trusts have become the preferred ownership vehicle.

‘Now most tribes have trusts and, under them, incorporated societies, limited partnerships and limited liability companies.’

Most Maori land is known as Maori Freehold Land, meaning the beneficial ownership has been determined by the Maori Land Court. It is the equivalent of customary land ownership in PNG.

Security

Tohe says one of the biggest challenges for a bank taking security over Maori Freehold Land is that, while a bank can on-sell that land to anyone in a forced sale situation, ‘any person who buys that land, when they want to sell, must first offer it back to the previous owners or related parties to that owner.’

‘That can have an impact on the market value of that land. Consequently, cash flow becomes more important.

‘Trumping collateral and cash flow is character. A bank will ask: “Is there anything in the borrowers’ borrowing, operational or governance history that makes you averse to lend to them?”

Tainui Group Holdings and Auckland Airport have begun work on a new 5-star hotel.

‘And so, land ownership via a trust or other appropriate legal entity is key.

‘The advantage with trusts is that it provides more certainty as to who you are dealing with, especially where there is multiple and diverse ownership. You can find out if they have the right to make decisions in respect of the land; you understand what can, and cannot, happen with trusts.

‘Having a legal structure which can interact with the commercial and legal world is of vital importance. Banks are reluctant to lend to some types of structure they don’t understand or where there are other, not well understood, legislative restrictions or obstacles attaching to certain collateral.

‘In terms of successful trusts and tribal organisation, it also really helps if there is a long-term vision, strategy and business plan,’ he says.

‘This helps to avoid decisions which may have a short-term gain but which can damage the long-term viability or goals of the organisation .’

This is the second in a two-part series on the Maori experience of customary land ownership. You can read the first part here.