Tuesday 16th April 2019
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The government is eyeing the power to veto major foreign investments it deems not in the public interest. That could include sectors as broad as media and finance.
Associate Finance Minister David Parker today launched a consultation on proposed changes to the Overseas Investment Act, focused on giving policymakers greater discretion in rejecting potential foreign investments while also stripping out unnecessary complexity that's deterred would-be investors.
"This has two aims, cutting some of the unnecessary red tape, while also giving decision-makers the ability to consider the broader impact on potential investments," Parker told a briefing in Wellington. "This discretion could be broad but rarely used, which is the method that other countries that we compare ourselves with use in respect of this sort of discretion."
Parker pointed to the 2008 rejection of the Canada Pension Plan Investment Board's proposed takeover offer for Auckland International Airport and Cheung Kong Infrastructure Holdings' acquisition of Wellington Electricity's network the same year as two transactions that could have triggered consideration under a national interest test.
The proposed reforms are the second tranche under the Labour-led coalition government, which rushed through earlier changes to effectively ban the sale of existing residential property to foreigners and free up investment in forestry to support its 'Billion Trees' programme. The government also tightened up what constituted sensitive land.
Treasury is leading the consultation, which closes on May 24. Parker plans to have legislation passed next year.
At a high level, the reform seeks to balance the competing tensions between supporting high-quality investment, while giving ministers the flexibility to manage risks associated with foreign investment.
The consultation paper said current legislation isn't working efficiently or effectively. The law is much too complex and may be a turn-off for the types of investors New Zealand wants, while the screening regime may capture too many low-risk investments.
The country has struggled to attract the most valuable forms of foreign direct investment, although the paper noted that newer technology sectors targeting global markets had attracted overseas investors and tended to fall below the screening threshold.
At the same time, the government is limited in its ability to veto a major investment, and can't consider such impacts on national security, dual-use technology with civilian and military applications, or protecting critical infrastructure assets.
Parker said the veto power wasn't needed urgently, and cited Australia as an example where policymakers have shown restraint in how they use a broad discretion.
"They effectively protect their reputation for being open to foreign direct investment by being careful they don't overuse the discretion rather than surrounding it with rules."
Adopting a similar national interest regime as Australia was one of five options in the consultation paper. Treasury officials expected such a power would be a strong positive for managing risk by letting policymakers weigh up all the pros and cons in an application but would be moderately negative in supporting investment and could lift compliance costs. It would also be moderately negative to the level of certainty for investors.
Parker used the example of national infrastructure as a potential transaction that could warrant consideration, but said such a power wouldn't necessarily be that narrow.
"If a monopoly asset is owned by an overseas owner and that overseas owner gets into financial trouble, then they may be disinclined to invest in their New Zealand asset, which can be to the detriment of the wider New Zealand economy," he said.
The paper identifies strategically important industries that could require a national interest test as media, telecommunications, transport, defence and military, encryption and securities technologies, finance, and critical infrastructure. Officials also flagged any asset where the investor was a foreign government or associate.
Among proposals to make it easier for foreign investors would be lifting the threshold of a locally listed entity, which currently deems those entities as overseas buyers if 25 percent or more of their stock is owned offshore. A similar loosening is on offer for portfolio investors, such as certain KiwiSaver schemes.
While those are seen as strongly positive for supporting investment, Treasury officials note the countervailing impact on the government's ability to manage overseas investment risk.
The Overseas Investment Office last week told Parliament's finance and expenditure select committee that new pre-application vetting and triage processes had helped weed out applications for doubtful transactions, with would-be investors withdrawing rather than pressing on with a costly and potentially fruitless application.
The office is processing major business transactions at a faster rate, but was taking longer on sensitive land applications since the ministerial directive last year meant it had to consider smaller blocks of land.
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