Trade & Export Growth Minister David Parker tells the China Business Summit a temporary strengthening of NZ's Overseas Investment Act is necessary. Photo / Supplied: China Business Summit
COMMENT:
The foreign investment tightrope — how protecting 'national interests' could hurt recovery and growth.
As part of its response to Covid-19, and the threat of a potential looming economic crisis, the Government has taken the rather drastic step of reducing the monetary threshold for screening foreign investment transactions from $100 million to $0.
The changes were brought about as a new protectionist measure to prevent fire sales of New Zealand businesses to foreigners.
Minister David Parker now has the power to vet and reject transactions of any value, assessed against a broad "national interest" criteria.
On paper, it looks rational — and it's certainly going to be popular from a political standpoint. The question is whether the regime can adequately protect vulnerable assets while still allowing inflows of productive offshore capital.
Foreign investment needed to grow New Zealand's economy
This approach is not an anomaly — it's broadly consistent with that taken in other countries particularly Australia, Canada and the European Union, which have all strengthened protectionist measures to shelter national assets.
The popular political rhetoric is that foreign investment is adverse to the national interest and home-grown companies should remain Kiwi-owned.
However, while nobody wants to see businesses that have strong local roots and positive impact in the community sold cheaply to offshore investors, the extent to which the national economy relies on foreign investment should not be understated.
Overseas investment encompasses not just as the acquisition of New Zealand assets, but also the injection of capital needed to grow businesses, increasing employment, productivity and helping New Zealand brands compete on a global stage.
Effective offshore investment plays a large role in increasing employment and productivity, and since 2013 there has been more than $40 billion invested into New Zealand across 340 acquisitions.
The New Zealand economy is strongly reliant on foreign investment.
New Zealand is seen as an attractive destination for foreign investors due to strong in-market opportunities, regional benefits, a buffer against uncertain global market conditions, and fair valuations with a positive deal environment.
With the economy lining up to be a key discussion point in the election, how the overseas investment regime can be balanced to encourage the injection of offshore capital, while protecting vulnerable New Zealand assets, is likely to be a hot topic.
We expect that New Zealand's reputation as a good place to do business will only be strengthened due to the country's relative stability throughout the Covid-19 response.
Overseas investment regime may deter investors
Our attractiveness however is tempered by a strict overseas investment regime that is seen by some foreign investors as a deterrent, even before the introduction of the $0 monetary threshold.
New Zealand has been assessed by the OECD as the seventh most restrictive foreign direct investment regime (out of the 68 OECD countries).
The new regime requires that investments need to be notified to the Overseas Investment Office where an "overseas person" will acquire 25 per cent or more of the interests in a New Zealand company, or acquires assets representing more than 25 per cent of the value of the vendor's assets. Notifications need to be reviewed against the "national interest" test.
The national interest test is primarily focussed on investments in "strategically important businesses", such as ports or key infrastructure, or investors with foreign government ownership, but there is a heavy overlay of ministerial discretion in what may be contrary to the national interest.
Government guidance suggests that, in applying the national interest test, one of the considerations is the likely impact of the investment on New Zealand's economy and society, and the extent to which benefits to New Zealand are commensurate with the sensitivity of the asset being acquired. Consideration will be given to whether the investment supports broader Government priorities and policy settings and aligns with New Zealand's values and interests.
Despite being pitched as "temporary measures" and subject to periodic 90 day review, it is expected that the $0 threshold will remain in place for up to two years.
Once the temporary measures are lifted, the national interest test will remain in place for business transactions of at least $100m or for "call in" transactions where strategically important businesses are involved.
Regime's disadvantages may outweigh benefits
It is questionable whether the regime will achieve its policy objective and be of genuine value to the country. It certainly has its disadvantages from a business standpoint noting that the regime gives Minister Parker the opportunity to block transactions that might embarrass the Government.
Smaller businesses are disproportionately affected under the new regime. They wouldn't ordinarily be subject to the regime and will suffer heightened compliance costs and unexpected delays.
We also expect non-compliance as many smaller businesses will not even know the regime exists — whereas larger scale investments would have been caught by the regime in any event.
Despite initially being described as a simple online form, the notification process requires a large amount of detail and the OIO strongly advises that a professional legal or investment adviser complete the notification as it is quite technical in nature.
While we haven't seen foreign investors discouraged from forging ahead with an investment due to the notification regime, it has definitely raised a few eyebrows, particularly in relation to low-value transactions.
There are lingering concerns over certainty of timing and exercise of the national interest test, but we expect these concerns will ease following the initial "cooling off" period, particularly once we see a pattern of direction orders being granted promptly and assurance that the national interest test will only be used sparingly.
Then there is the question whether any transactions will actually be blocked. It is expected that there will be very few, but one of the aims of the regime is to discourage the types of transaction which would not meet the regulatory hurdles, rather blocking any application for consent.
Ultimately, there still remains a disconnect between the Government's intention to prevent fire sales and the need for distressed business to access cash quickly.
If two capable parties agree on sale terms of a business, even at a reduced value, there is fragile ground for the Government to intervene on the grounds that it is adverse to the national interest. We think that such intervention would be viewed as unnecessary interference by the state and cut across business autonomy.
Foreign investment likely to become an election issue
National were not avid supporters of the overseas investment reform, and we expect any change in Government would see the $0 threshold lifted sooner than expected. National described the reform as being "anti-growth" and "padlocking away foreign investors being able to come in and invest strategically in New Zealand at a time when New Zealand surely needs it".
With the economy lining up to be a key discussion point in the election, how the overseas investment regime can be balanced to encourage the injection of offshore capital, while protecting vulnerable New Zealand assets, is likely to be a hot topic.
Restricting foreign home ownership under the overseas investment regime formed a key part of Labour's campaign in 2017, and we wouldn't be surprised if similar narratives come up in this election campaign.
- Michael Pollard is a senior corporate partner and Holly McKinley is a solicitor at Simpson Grierson.
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