First published in National Business Review, 3 July 2009.
Cutting through the red tape to attract valuable foreign investment in New Zealand is squarely in the Government's sights – but there are some initial worrying signs that changes may not go far enough.
A review of the overseas investment rules was announced earlier this year and in the last six weeks the Government has taken its first steps to speed up the processing of overseas investment applications. It moved some decisions from the Minister's hands to the Overseas Investment Office and has increased the number of exemptions but it missed a valuable opportunity to make other logical changes to reduce frustrating and unnecessary delays. Is this a signal of how they may approach the much broader regime review?
The New Zealand economy struggling with a shortage of capital cannot afford to miss the opportunity to fix in a meaningful way our overly-complex, cumbersome, uncertain and slow system of approving overseas investment.
The OECD's latest Economic Survey on New Zealand noted that we score very poorly in providing a welcoming environment for investors. The latest OECD FDI restrictiveness index (2006) revealed that New Zealand restrictions were above OECD averages in six out of the nine sectors examined. The report suggests that New Zealand should do something to ease screening requirements noting that in New Zealand they "are some of the highest among OECD countries".
There is very little argument over the fundamentals of the New Zealand approach – to encourage desirable overseas investment while still protecting New Zealand's strategic and unique assets – but we haven't got the system right.
In the review that's underway the Government acknowledges the need to improve the overseas investment screening regime to ensure that it provides clarity, certainty and predictability for overseas investors. It also wants to ensure that investment applications are processed efficiently and in a way that minimises compliance costs. Now it must deliver.
The review is likely to take several months and changes to the Overseas Investment Act could take us beyond the end of the year, given time for public consultation and the select committee process.
The Government has other faster ways to effect some change - via Regulation and Ministerial directive letters to the Overseas Investment Office, the body responsible for administering the overseas investment regime.
In April the Ministers of Finance and Land Information issued a new designation and delegation letter to the Overseas Investment Office and this is where the first concerns arise about just how far the Government is prepared to go in bringing about change.
Designation and delegations letters set out the powers and functions the Ministers delegate to the Overseas Investment Office. This latest directive increases the categories of special land applications that can be considered by the Overseas Investment Office rather than the Ministers. It goes some way to speed up the process of considering applications but the delegations this time did not go as far as they could.
There are still some "sensitive land" categories requiring Ministerial approval that could well be handled by the Overseas Investment Office without risking New Zealand's strategic or unique assets.
It is perfectly understandable why Ministers want to retain the ultimate decision-making power when it comes to larger tracts of non-urban land involving unique assets such as the foreshore and lake beds, regional parks and Department of Conservation land. It is much more difficult to understand why they still need the right in other situations such as when the land being acquired adjoins smaller and arguably less sensitive or nationally vital land such as reserves or public parks.
Earlier this month the Government also introduced amendments to the Overseas Investment Regulations, expanding the scope of some existing exemptions and adding some new ones. These changes were welcome but could have gone further without undermining the regime. For example, there is a new exemption for underwriting of new securities issues. However it doesn't extend to selldowns of existing shares. There is also a new exemption for bundled loan securities but with a cap of $100 million it may be of limited benefit as many transactions exceed this value.
Yes, change is happening and those barriers to foreign investment that will bring a positive benefit to our economy are being broken down albeit slowly. No question, we need well-considered change and not just change for its own sake. Let's hope that the caution to date is not a sign that the Government will renege on its undertaking to overcome all the major shortcomings of the current regime. Next time the OECD researchers come to town, there is no reason we shouldn't have better news to share.