Overseas Investment: is New Zealand 'Open for Business'?

Abstract

The economic purpose of an Overseas Investment Act (OIA) should be to enable foreign investment that has a positive (or at least non-negative) impact on a country's economic performance and to prevent investments which will likely have detrimental net effects. An examination of both the content and application of the New Zealand Overseas Investment Act 2005 finds that it is not well-aligned with this purpose. The Act imposes different tests depending upon whether the transaction involves any interests in land deemed "sensitive" - predominantly farm land non-urban land in excess of 5 hectares heritage and conservation land and small parcels of land adjoining the foreshore and seabed regional parks heritage or conservation land. Where no such land is involved only a test of the applicant's character is required for the acquisition of interests in firms with assets exceeding $100 million. Thus transactions detrimental to the New Zealand economy can proceed without any economic analysis being undertaken. By contrast any application involving sensitive land - no matter how small the value of the transaction - must meet the requirement of strictly positive benefits (or in many instances a higher standard of "substantial and identifiable" positive benefits) to New Zealand. Analysis of decisions made under the Act indicate that the determination of benefits arising exclude private gains accruing to New Zealanders as a consequence of the transaction proceeding thereby leading to the rejection of some transactions with potential gains to the New Zealand owners (or even foreign owners with interests in New Zealand land-based firms) simply because the foreign purchasers do not bring any additional further benefits to the New Zealand economy as a consequence of the purchase. Such decisions will lead to reductions in the value of New Zealand assets associated with 'sensitive land' and lock in their existing owners to ongoing (unwilling) ownership even though there may be willing foreign purchasers. Moreover the process of making the assessments is subject to considerable discretion in the weighting given to various costs and benefits assessed leading to the potential for inconsistent decision-making and hence great uncertainty as to the outcome of OIA decisions. Widening the scope of benefits considered to include private gains to New Zealanders and bringing the economic tests in line with standard cost-benefit procedures will bring both economic benefits and increased transparency and predictability around OIA decision-making processes. There is a need also to address the inconsistencies between transactions that do and do not involve some categories of land. If foreign ownership of some land-based assets is untenable (e.g. 'strategic assets on sensitive land') then it would be less distorting for their ownership to be addressed via separate restrictions thereby freeing up the Overseas Investment Act to focus simply upon the economic consequences of foreign investment in New Zealand assets.