Overseas Investment Review: A wasted opportunity?

David Boswell, Partner | Thursday 7 October 2010

For the second time in three years New Zealand's overseas investment regime has become the victim of short term political thinking.

Last week Finance Minister Hon Bill English announced that the Government has decided not to make changes to the Overseas Investment Act 2005, noting that to do so "would cause a degree of uncertainty that would outweigh potential benefits."

Instead, in response to public pressure, the National Government has announced that it proposes to make changes to the related regulations (the Overseas Investment Regulations 2005), when change is hard to justify.

Like the "strategic asset" change made by the Labour Government in 2008, rather than improving the overseas investment regime the National Government's proposed changes will increase complexity, uncertainty and cost to what is already an overly complex, uncertain and expensive regime.

Changes for the "benefit test" and clarification of Government policy

Under the changes to be made to the Overseas Investment Regulations, two additional factors are to be included in the "benefit test" used to assess overseas investment in sensitive land, namely:

• A new economic interest factor that will allow Ministers to consider whether New Zealand economic interests are adequately safeguarded and promoted; and

• A new "mitigating" factor that will enable Ministers to consider whether an overseas investment provides opportunities for New Zealand oversight or involvement.

In addition, Mr English said a new Ministerial directive letter would be issued to the Overseas Investment Office to clarify Government policy on overseas investment in sensitive assets.

Commentary

It is clear that the proposed changes are the Government's response to public concern about overseas ownership of New Zealand farms.

Following the announcement of the proposed changes, Mr English said he thought the public were concerned about two matters being:

• the undue aggregation of farm land; and

• vertical integration, being where someone buys land and builds processing facilities and/or takes responsibility for the whole supply chain.

He indicated these factors would be reflected in the proposed new Ministerial directive letter.

Effect on sales of farm land

The proposed changes may go some way to address the public confidence issue and enhance Ministerial flexibility, but they will no doubt be opposed by those who want to stop the sale of farms to overseas investors. Those people not wanting to restrict farm sales should be reasonably satisfied with the changes as they should only apply in limited situations and do not appear to be aimed at stopping the sale of individual farms to overseas persons who meet the current criteria.

New hurdles for all sensitive land applications

Unfortunately, irrespective of whether people are for or against tighter controls of sales of farm land, the Government's approach will have far broader ramifications. The proposed changes not only apply to farms but they will also apply to all other categories of "sensitive land", for example other non-urban land over 5 ha and other land over a designated size that includes or adjoins certain reserves or parks. Sensitive land may include certain industrial land in urban areas that adjoins a reserve.

By not limiting the new regulations to farm land, the Government has raised the hurdle for all sensitive land applications.

In addition, the broad scope of the new "economic interests" factor adds complexity and uncertainty. It raises the question as to what exactly an overseas person needs to do to in order to establish that New Zealand's economic interests are adequately safeguarded and protected. For instance, will expert reports from such people as economists be required?

The need to address the new criteria in all sensitive land applications will increase both the cost of preparing applications and the time it will take to process them.

Existing factors provide sufficient Ministerial flexibility

There are already 19 factors that Ministers must take into account when considering farm sales and other sensitive land applications. Within these factors there is sufficient flexibility for Ministers to take into account New Zealand's broader economic interests and Government policy when deciding whether to approve a sensitive land application. This being the case we question the need for the proposed changes.

Even if the new factors can be supported on the grounds of increased Ministerial flexibility, it is difficult to identify any justification for extending their scope beyond farm land.

While the Government was looking to increase Ministerial flexibility, it appears to have ignored the impact that the new regulations are likely to have on New Zealander vendors of sensitive land.

Is this the final outcome of the 2009 review?

While it is not entirely clear, it appears that these latest proposed changes will be the final changes to the overseas investment regime arising from the Government's overseas investment review initiated in 2009. The only other changes were made shortly after the review commenced. The Government's April 2009 Designation and Delegation letter reduced the number of applications requiring Ministerial approval by increasing the categories of applications that can be considered by the Overseas Investment Office. The Government also introduced some minor amendments to the Overseas Investment Regulations in July 2009, expanding the scope of some existing exemptions and adding some new ones.

Changes fall short of original objectives

If this is the final outcome of the 2009 review, it is a significant change from the National Government's stated objectives for the review. When it announced the terms of reference for the review, the Government acknowledged that there was scope to improve the design and implementation of the current overseas investment screening regime to ensure that it provided clarity, certainty and predictability for overseas investors. It also noted that it would like to ensure that investment applications were processed efficiently and in a way that minimised compliance costs for overseas investors.

The two new regulations proposed by the National Government will do little to strengthen the government's ability to address the sale of farm land to overseas purchasers. Instead the new regulations will be an unnecessary addition to an overseas investment regime that both overseas investors and New Zealand vendors of sensitive land were looking to the National Government to simplify.

Clearly, the National Government has learnt that there is little political mileage to be gained in trying to address the recognised shortfalls in the overseas investment regime. This would require amendments to the Overseas Investment Act and associated debate in the House and related public scrutiny. The Government appears to consider that the least damaging approach is to make minor changes via regulation and Ministerial directives.

Limited improvements for the regime

The Government's April 2009 Ministerial directive letter and July 2009 amendments to the Overseas Investment Regulations do go some way to increase the timeliness of the application process, by reducing the number of applications requiring Ministerial approval. But these measures are narrow in scope, and do little to improve the application process for non-urban sensitive land. Mr English recently implied that these earlier measures have seen the time for processing applications drop from an average of 63 days in the year to August 2009 to 38 days in the year to August 2010. But, this is probably more to do with the fact that in the same period, the number of applications declined by nearly 40 percent as a result of the current economic downturn.

Details of the latest Ministerial directive are still to be announced. It is unlikely that this directive will have any effect of reducing the level of uncertainty for overseas investors on whether their application will ultimately be approved, but it is hoped that this directive will provide clearer guidance for overseas investors about the relative importance of factors used to assess applications.

Timing of latest developments

The Government's latest announced changes are expected to take effect from December this year.

We will provide details of the Ministerial directive letter when it is released.