China Business: A fresh look at the OIO regime

By Cathy Quinn

In Australia foreign investment consent takes up to 40 days; here, it can take six to 12 months - and that’s too long, writes Cathy Quinn.
The bid by Shanghai Pengxin to buy the Lochinver estate was scuttled by the Government. Photo / Richardson Parsonson
The bid by Shanghai Pengxin to buy the Lochinver estate was scuttled by the Government. Photo / Richardson Parsonson

Foreign investment in any country can be an emotive and political topic. Indeed it would seem to be in New Zealand. A variety of politicians, in my view, oppose foreign investment at different times to advance their own political agenda.

The reality is that New Zealand has relied, and continues to need, foreign investment to grow and develop New Zealand businesses for the economic prosperity of our nation. That foreign investment often creates or maintains jobs for New Zealanders, supports innovation, opens up markets, brings global perspectives to New Zealand business and creates wealth for New Zealanders. These are all good things. They are things in my mind we should celebrate and encourage.

New Zealand is indeed an island but we cannot lock ourselves away from the world. Indeed the overwhelming majority of New Zealanders do not want to be isolated from the world.

To survive as a small nation at the end of the world we need to connect with and explore opportunities with the rest of the globe. As our Prime Minister often says — no other country owes us a living. Part of that is being open to foreign direct investment in our country, particularly with respect to investment in business enterprises. Our current foreign direct investment regime, contained in the Overseas Investment Act, Regulations and interpreted by case law, could do with an overhaul, in my opinion.

The Act and Regulations were written in 2005 and have not been reviewed or amended since then. Why an overhaul? In my view the current regime is too slow and has become overly complex.

In saying this, I am not being critical of the Overseas Investment Office or others involved. The Overseas Investment Office is simply seeking to do its job, has struggled with limited resources and responding to the impact of decisions of the Court, in particular, in relation to the High Court decision in respect of the Crafar Farms.

It is only natural that office holders want to take the time to follow a process and make decisions that they believe will withstand judicial review proceedings.

The reality is that where "sensitive land" is involved it is not uncommon for applications to take six to 12 months to be approved.

The Overseas Investment Office may take issue with this time period and refer to a faster turnaround from the time they deem an application to be complete. This however can be some time after an application has been filed.

From an applicant's perspective what counts is the time period that follows from when they believed they lodged an application — not when the regulator has decided that it is complete.

Certainly most experienced corporate lawyers will manage clients' expectations by referring to a 6 month to 12 month timeframe — noting that there are exceptions and occasions where consent can be obtained in a shorter time frame.

Having to wait six to 12 months for the outcome of a regulatory approval process to know whether a transaction can proceed or investment made is too long. Our Australian counterparts typically expect an approval from their Foreign Investment Review Board within 40 days.

Deal dynamics can change dramatically over a six to 12 month period: the availability of credit for financing can change significantly, foreign exchange is likely to change — sometimes drastically — competitive forces may change significantly, and markets change. These changes in the market while waiting for OIO consent can add considerable cost and transaction risk for parties to transactions.

The fact that it can take 6-12 months to obtain OIO consent and that the ability to obtain consent is not clear in light of the need to pass the "counterfactual test" is causing concern to parties investigating investing in New Zealand and doing transactions here.

It can be difficult to explain to a global player doing a transaction across multiple jurisdictions why it is that obtaining OIO consent can take so long and be so difficult, when it is a comparatively smooth and simple process across the Tasman.

I fear that if parties have a choice of where to invest that New Zealand will be discounted in favour of jurisdictions which are seen to be easier to do business and more welcoming of foreign investment.

If I could wave a magic pen, I'd conduct a fresh review of the OIO legislation and regulations. I'd change the law to:

• Exclude land which in reality not "sensitive" from being caught within the definition.

Currently, for example, some manufacturing sites that no NewZealander would remotely regard as "sensitive" fall within the sensitive land regime definition due to a drain or creek resulting in the site falling within the definition. I'd keep as "sensitive land", land that Kiwis do think is sensitive (even if I may not) — for example, farmland and land adjoining foreshore or lakes.


• Remove the Court-created "counterfactual test".

In essence, this test requires foreign buyers to establish that they will bring a significant and identifiable benefit over and above what a hypothetical New Zealand purchaser would do. There are cases where a New Zealand owner wishes to sell their well-performing business to a foreigner so that there will be no such benefit. The foreigner simply wants to hold the well-performing New Zealand business and continue to run it in the same way with the same management team (which may include many New Zealanders). In my view, our law should not make it so difficult for such transactions to occur.


• Give the Overseas Investment Office a governance structure more akin to other significant entities in our regulatory regime such as the Financial Markets Authority and the Reserve Bank. I'd have a board to whom the management of the OIO reported. That board would include people with commercial, economic and other skills that would assist the management team.


• I'd allow parties to pay for the urgent dealing of their transactions in the same way that participants on NZX can apply for (and pay) for urgency.

• I'd require the OIO and Ministers to deal with applications within a much shorter timeframe than is currently the case.

Unfortunately I have no magic pen or powers. Further, the Government does not believe they have the numbers in Parliament to change the law. I expect that even if the Government had the numbers, that the political furore opposition parties would make about changing our foreign investment laws means the Government's appetite to do so would be low.

I expect opposition parties would make a furore, accuse the Government of selling out New Zealanders and the like because that makes good politics or headlines. I do not agree with the likely arguments those opposing change are likely to raise. The changes would be driven at making our foreign investment laws more efficient and workable.
On the basis that the law cannot be changed, what could be done to make our current regime more efficient, practical and workable? Here are some ideas

• Introduce an advisory board to the Overseas Investment Office. Have this board set key performance indicators (KPI's) for the OIO. Appoint a group of people that could assist OIO personnel on judgments around commercial and economic matters.

• Require the OIO and Ministers to "volunteer" to deal with applications within specified time periods of receipt.

• Use the power under Regulations to prescribe other factors that Ministers may take into account in determining whether to approve an investment (than currently relied on). In particular, I would suggest that the purchase price received by a New Zealand vendor should be a relevant factor the Ministers may take into account.

In my view, in order for New Zealand's economy to continue to grow, we need as a country to continue to attract foreign investment. Our regime should be efficient and no more complex than is required.

The current regime is widely seen by those in the investment and legal community as being too slow, complex and uncertain.

I urge the Government to use what powers it has to improve the current regime. In that regard, I understand the Government is open to and will be increasing the resourcing of the OIO so that it can more quickly deal with applications. I call on opposition parties to put politics aside and support changes for the broad benefit of our nation.

Cathy Quinn is chairperson of MinterEllisonRuddWatts


Pengxin loses bid for big chunk of Australia

Australia's foreign direct investment regime is arguably more transparent, but it was all politics when Treasurer Scott Morrison again blocked a Pengxin-led bid to buy the country's largest private land holding.

Morrison said last week he believed the A$371 million sale to Chinese-led Dakang Australia Holdings was not in the "national interest".

Coming on top of NZ's decision to block the Lochinver station acquisition last year, this was a double whammy for Pengxin — the driving force behind the formation of bid vehicle Dakang Australia Holdings.

Acquiring Kidman & Co — a company formed in 1899 which owns 10 massive cattle ranches spanning more than 100,000 square kilometres — in conjunction with Sydney-based Australian Rural Capital (20 per cent) would be a significant trophy for Pengxin founder Zhaobai Jiang.

It makes up 1.3 per cent of Australia's land mass and 2.5 per cent of its agricultural land.

But Morrison told AP there were not too many jurisdictions anywhere in the world where foreign acquisitions of land holdings of this nature would be permitted.

The Treasurer went on to to raise doubts as to whether Australian companies had been given enough opportunity to bid on the land and suggested the size of the sale may have been untenable.

Pengxin's initial offer for all of S. Kidman's ranches was rejected over "security concerns"as the largest ranch overlapped with a rocket firing range operated by the Australian military.

That ranch was dropped from the second bid, reducing the area for sale to 77,000 square kilometres.

It makes sense to observe that, with an Australian election pending, Morrison is not taking chances.

Fran O'Sullivan

- NZ Herald

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