Economy

Politicians grab full control of foreign investment brake

A new “national interest” test for foreign investment will overturn a decades-old practice of leaving the decisions to bureaucrats. Now politicians will clearly have the power to accept or reject deals, whether they want it or not.

A broad "national interest" criterion could add political considerations into the mix on foreign asset decisions, according to Mark Forman, a mergers and acquisitions specialist at law firm MinterEllisonRuddWatt. 

“It certainly does introduce a political element to these business transactions, which is a bit of a poisoned chalice for MPs.” 

Associate Minister of Finance David Parker, the man shepherding the changes through Parliament, said proposed changes to the Overseas Investment Act (OIA) would give government the power to prevent infrastructure monopolies falling into the hands of foreign players.

“In a capital-constrained country do you really think it’s in New Zealand’s long-term interests to sell some of those monopoly infrastructure assets overseas?”

It would take the acquisition of certain infrastructure assets by foreign entities off the table completely, but the answer would not always be no, Parker said. 

“On some occasions no matter what they did, they wouldn’t [meet the test].”

The major changes

Parker announced two major changes to the OIA on Tuesday. 

The first would add a “national interest” test to the kind of transactions already regulated by the act.

These are transactions where there might be overseas ownership of more than 25 percent in a company worth more than $100 million, an overseas investment of more than $100m, an investment in “sensitive land” where the foreign owner acquires a quarter of it, or an investment in a fishing quota of 25 percent or more. 

The second change would encompass a range of foreign investment transactions not currently regulated by the OIA. 

“You would expect on all of these issues that you would have input from your intelligence and security agencies but I’m not going to single them out in particular.”

It would put an obligation on all “critical direct suppliers” of military or “dual use” technology to seek clearance from defence or security services. 

If they didn’t the transaction could be “wound back”. 

Parker’s office confirmed there was no time-limit on when this wind-back mechanism could be exercised - it could be enforced years after a transaction took place.

“Call-in”

Asked who had called for the provisions Parker said security agencies had been among those wanting it.

“You would expect on all of these issues that you would have input from your intelligence and security agencies but I’m not going to single them out in particular.”

Forman said the broad “call-in” power described seemed to be a “recipe for uncertainty” if strict criteria weren’t attached. 

The military was a large institution and a lot of goods were critical to its success. That could put a wide range of companies within Parker’s definition, Forman said.

“It’s in the interests of an open democracy that sometimes should be able to control whether its media is controlled by overseas entities or New Zealand entities.”

But he also noted that uncertainty could be negated by the ability to proactively seek a seal of approval from the Government before such sales took place.

Assets and industries

Among the industries Parker listed as critical or strategically important were: ports, airports, electricity generation and distribution businesses, water infrastructure, telecommunications infrastructure, and media entities. 

“It’s in the interests of an open democracy that sometimes should be able to control whether its media is controlled by overseas entities or New Zealand entities.”

Overseas investments in all of those industries could be subject to either the national interest test or the “call-in” provisions depending on the circumstances.

A ministerial directive around the purchase of rural land will become law. Photo: Lynn Grieveson

Deregulating the "niggly stuff”

The Government had also answered some long-expressed complaints with the Act: the “niggly stuff” as Parker called it. 

“We do need high quality investments in the New Zealand economy and we think some of the rules around that are overly picky.”

Top of the list, New Zealand-controlled companies like Air New Zealand that were “New Zealand-controlled” but had foreign shareholders who owned a stake of over 25 percent would no longer be regulated by the OIA, Parker said. 

Forman welcomed the change and said the current regime had unfairly disadvantaged these companies compared to their domestic competitors because they had to go through a complicated process to acquire assets that other New Zealand-controlled companies could easily obtain.

Timeframes for decisions would be set by regulation and the Government would have to reach decisions within them, Parker said. 

Forman said decisions under New Zealand’s OIA process had notoriously taken a long time. 

There would be a change to the “benefits” test around the purchase of “sensitive land” too, and the benefits of a foreign purchase of land greater than five hectares no longer had to be “substantial and identifiable”.

And the “good character” test under the current OIA would be replaced by a consideration of whether the overseas investor had acquired convictions resulting in imprisonment of 5 years or more, had civil “contraventions” that were punished with monetary penalties, or faced allegations of the above that were making their way through the courts. 

Penalties for breaches of the OIA were also being hiked with maximum civil penalties for breaches increasing from $300,000 to $500,000 for individuals and $10m for corporates. 

Overseas purchasers of land to be used for water bottling will have to jump through a few more hoops. Photo: Lynn Grieveson

Water bottling and agriculture

Parker’s announcement also came with some changes specifically affecting the water bottling industry and which Forman termed a “populist type move”. 

A ministerial directive letter drafted in the coalition’s first year in government (that required overseas purchasers of rural land to demonstrate that their acquisitions would add value or create something substantially new) would be enshrined in law. 

“The big danger is that we have politicians of the day making decisions which may not be based on evidence.”

And where purchases of “sensitive” land would involve water bottling those making a decision on the application would have to take positive and negative impacts on water quality sustainability into account.

Forman said he didn’t see why there should be water bottling restrictions that apply to foreign companies but not domestic ones, and said the Government had to be careful the OIA didn’t wander into areas better dealt with by other pieces of legislation like the Resource Management Act. 

“The devil’s in the detail of how it’s going to be implemented and what the criteria are going to be.”

“The big danger is that we have politicians of the day making decisions which may not be based on evidence.”

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