Initial thoughts on NZ Overseas Investment Review

On Tuesday the Minister of Finance, Dr Michael Cullen announced proposed changes to NZ Foreign Investment law. I included most of the following analysis in a email to friends I sent out on Wednesday. My friend Murray included it verbatim in his press release on the changes and the Green party then asked Murray if they could include it in their JustTrade newsletter (I am not a member BTW). So I admit I am a little amused that my email to a few friends has ended up all over the country.

You can find all the treasury documents on the review here. Here is an updated version of my analysis of the changes I sent out on Wednesday.

A stated public policy objective behind the changes to the OIA is to "ensure the value of sensitive New Zealand property is recognised and enhanced by any overseas owners. This recognises that for some land in New Zealand there is an ‘ownership value’. That is, New Zealanders derive a welfare benefit from knowing that particular pieces of land are owned by New Zealanders. Thus, where the land is owned by an overseas investor, this lack of ownership value is compensated by the imposition of controls" (Cabinet Policy Paper (POL), 20/7/04)

It needs to be asked, as it is not clear in the review, why this very same argument is not applied to businesses, forests and anything else for that matter. Thus it could be just as easily said that New Zealanders derive a welfare benefit from knowing that a particular business or service is owned by New Zealanders, with the tangible benefit of an increased chance of the profits being spent in New Zealand.

At present any overseas entity that wants to purchase more than 25% of a NZ based company worth more than $50 million have to get approval from the Overseas Investment Commission. Under the proposals this threshold will be doubled to $100 million. Nearly all agree that the OIC has been a totally ineffective in its oversight, with some likening it to a monkey with a rubber stamp. Rather disingenuously, the Government implies that no oversight of business takeovers is necessary on the grounds that no application has been rejected since 1984. But given a number of takeovers that have occurred since then that were clearly against the 'national interest, such as the takeover of Telecom, Tranz Rail and all the commercial banks, the lack of rejections is an argument for more controls not less. Ideally we should reduce the threshold to 10m, as this is all we are committed to under current OECD commitments.

Cullen also needs to be asked, perhaps as a Parliamentary question, to spell out the ‘non-optimal foreign investment outcomes’ referred to the POL policy paper, for both land and the sale of NZ business to overseas persons.

Despite the hype, economic factors remain the primary consideration in land sales.

Under the subheading 'Coverage' a Cabinet Paper of 20th October 2003 (Preliminary Thinking On a Potential Review of the Overseas Investment Regime) stated that

"Ministers have expressed concern that the current regime does not adequately protect some critical assets. The current ‘national interest’ criteria only take account of economic factors. Non-economic factors such as environmental and cultural importance are also important, and should be given consideration. "

But the Cabinet minutes of the 5th of July released with the proposals make no real provision for coverage of environmental concerns. Criteria for land approvals are to be expanded to take into account natural heritage; historic heritage; walking access; economic development; and residency of the applicant. Natural heritage is envisaged to include protecting existing areas of indigenous vegetation and fauna though pest control and agreements reached over covenants over the land. Historic heritage is envisaged to be about improved conservation of historic heritage sites, areas or buildings, legal mechanisms such as the Historic Places Act, covenants over the land and agreeing access to heritage sites with relevant community groups as appropriate (such as Maori)

While Cullen in his press release of the 20th of July 2004 heralded that "Overseas buyers wanting to buy sites of special heritage or environmental value will be subjected to a tougher screening and compliance regime" it is clear that the new environmental and cultural protections are far more limited than they appear. Probably due to Treasury influence, it appears that environmental grounds have been stripped back to the bone on the grounds that other regulatory mechanisms such as the RMA will apply equally to foreign and domestic land users.

As it will be up to the relevant ministers to decide which criteria are appropriate to a particular proposed sale, it could easily be decided that the Conservation Department only need to be consulted when the sale affects or adjourns conservation estate.

The fact that Cullen will still treat sale of forestry cutting rights as just another business sale, and thus does not come under land provisions means that there are no additional environmental protections for an industry that can have negative environmental outcomes.

Maori Land

"42. The sale of Maori freehold land is currently exempt from the provisions of the Overseas Investment Act if it has been confirmed by the Maori Land Court under section 152 of the Te Ture Whenua Maori Act 1993. In confirming a sale to an overseas person, the Maori Land Court is required, as far as possible, to act in conformity with the relevant provisions of the Overseas Investment Act and regulations; and must have regard to the matters required to be taken into account by that Act or those regulations. Thus both processes are currently required to be undertaken, but with the Overseas Investment Act process carried out by the Maori Land Court."

It is very interesting there is so much material related to the seabed foreshore issue in the documents, it was not signalled at the start of the review - was Cullen waiting until submissions had closed on the Seabed and Foreshore bill perhaps?

"Crown purchase of foreshore and seabed" (From Cabinet Minutes (04) 22/6)
" - agreed that the Act provide for a right of first refusal in favour of the Crown in respect of any foreshore or seabed land subject to the Act; "(ie that could be sold to a foreign person)
" - directed officials to report to the Minister of Finance by the end of July 2004 on proposals for a right of first refusal in respect of foreshore and seabed land, and the possibility of compulsory acquisition of foreshore strips";

It is to be assumed that compulsory acquisition of S+F land from a foreign investor would involve paying compensation, something that is denied to Maori. There is also an obvious lack of consideration to Maori interests in the recommendations, and what is there only seems to relate to the sale of Maori land to foreign investors and vague examples such as 'access' to tapu sites under heritage provisions. But there are options included in the review to remove jurisdiction of Maori Land Court from sales of Maori land to overseas persons!

Under Treaty Implications in the POL document

"105: The underlying principles that allow foreign investment in private property have not been altered under these proposals, thereby not creating new Treaty risks. This is expected to be the case even if responsibility for applying Overseas Investment Act criteria to Maori freehold land is transferred to the overseas investment regulator. Further work on the proposed right of first refusal will include treaty implications."

There is more evidence that Maori interests are regarded as threats and barriers to FDI in discussion of the disadvantages of the current system governing the sale of Maori land.

"Disadvantages: The regulator’s role is likely to become more difficult, with a wider range of factors (environmental, heritage and walking access being explicitly added to the criteria) being taken into account in deciding applications." (I.e. the regulator is not there to oversee investment but to promote it)

It is concerning that the recommendations do not include requirements to consult with Maori over relevant approvals, especially if Maori land sales were removed from the jurisdiction of the Maori Land Court. One would hope there would be a Supplementary Order Paper to the bill to this effect if there are any changes in this area (such as a requirement to consult with Te Puni Kokiri).