The Government could use its proposed new "national interest test" to block acquisitions by substantial overseas players - like India's state-controlled Hindustan Petroleum Corp - if Kiwis are uncomfortable about the source of proposed investments.

That's the upshot of the Government's intention to insert a national interest test into its rewrite of New Zealand's foreign investment rules.

Overshadowing the still murky criteria is the political litmus - or "smell test" - which in reality is what most national interest tests are about.

The trick is to balance New Zealand's need for economic development against outright capital xenophobia at a time when cash is king and many of our companies, including within our prime agriculture sector, desperately need new capital.

The big geostrategic shift now under way as a result of the international financial crisis means many traditional investment sources, like the United States, are too cash-strapped to provide all the capital and investment this country needs.

Those with the cash - like India, China and other parts of Asia - are out on the international investment trail trying to scoop up assets while prices are depressed.

Finance Minister Bill English has yet to spell out just what the new national interest test will entail. English told the Transtasman Business Circle last week that the previous Government's strategic asset test would go.

The new national interest test would be similar to those in other countries and will "balance providing certainty for foreign investors with safeguarding New Zealand's interests".

"Over the next 10 years it is going to become a bit of an issue when you think of who's got the cash and the places that we regard as politically compatible tend to have big debt problems and the places that are less politically compatible have got all the cash," English told this columnist.

Questioned further on when the test might come into play, English referenced Hindustan Petroleum which according to reports is considering a bid for Shell's downstream assets in New Zealand.

"Well, who the hell is that? We know a lot about Shell but we don't know a lot about Hindustan Petroleum Limited. So there is going to be a bit of a balance between attracting investment successfully on the one hand and maintaining New Zealanders comfort with who the investors are."

English's comments suggest the proposed foreign investment regime might not be quite so laissez faire as its opponents claim. Despite his suggestion that all the Government is doing is simplifying the bureaucratic process by devolving more power to the Overseas Investment Office to decide all applications, barring rural sensitive land or land adjoining waterways, there is still a lack of clarity.

Changes under way will reduce the number of ministerial decisions by 40 per cent and cut about two weeks off application assessment times. The more substantive changes still lie ahead: Increasing the thresholds at which land and business investments are screened ("so only genuinely sensitive assets are captured"); removing the ability to change the rules during applications to avoid the situation that the Canada Pension Plan Investment Board faced when the previous Government changed the rules midway through its bid for a 40 per cent stake in Auckland International Airport; and ensuring overseas investors, who acquire sensitive land, meet higher standards than local investors.

It is unclear whether the Canada Pension Plan's bid for a stake in Auckland Airport would pass muster under the proposed new test.

All English is saying is that any future bid for the airport will have to meet tests for investment in both sensitive land and local businesses. But Canada Pension Plan's Mark Wiseman did debrief Prime Minister John Key at this year's Boao Forum.

The Government is clearly of the view that New Zealand will face considerable hurdles accessing the investment it will need as the economy comes out of recession.

But there is a fundamental issue at stake. When existing New Zealand assets come under foreign ownership, more dividends and profits flow offshore adding to our invisibles deficit.

Of greater value in the longer-term would be a policy that incentivises greenfields investments that might create more new jobs or more policies that incentivise overseas investors (particularly from Australia which is now our major source of investment) to develop their New Zealand assets or companies to increase their exporting profiles.

Australia has acted to ensure its own jewels stay in predominantly Australian ownership. The basic sentiment that Australia should rule its own roost is strong.

A Lowy Institute poll found 90 per cent Australians either "strongly agree or agree" that the Government has a responsibility to ensure major Australian companies are kept in primarily Australian control, 85 per cent also agreed investment by companies controlled by foreign governments should be more strictly regulated than investments by foreign private investors.

There is no list of strategic assets here.

Australia references a "national interest test" within its own foreign investment laws but does not define the term. An April 2008 summary says the "Government determines what is 'contrary to the national interest' by having regard to the widely held community concerns of Australians".

The Australian Foreign Investment Review Board (Firb) notes proposals will be considered contrary to the national interest if they were inconsistent with:

* Existing Government policy and law.

* National security interests.

* Economic development.

The Firb website also notes: "The Government determines what is 'contrary to the national interest' by having regard to the widely held community concerns of Australians.

Reflecting community concerns, specific restrictions on foreign investment are in force in more sensitive sectors such as the media and developed residential real estate.

The screening process provides a clear and simple mechanism for reviewing the operations of foreign investors in Australia whenever they seek to establish or acquire new business interests or purchase additional properties.

In this way the Government is able to put pressure on foreign investors to operate in Australia as good corporate citizens if they wish to extend their activities in Australia."

The simplification of New Zealand's foreign investment regime also comes at time when Australia is grappling with a surge of Chinese investor interest into its bluechip resources sector, and, a general upsurge in protectionist sentiment.

Federal Treasurer Wayne Swan has issued guidelines in relation to proposed investments by sovereign wealth funds or foreign state-owned companies - which have been the source of much international angst.

Swan is concerned that investors with links to foreign Government may not operate solely in accordance with normal considerations and may instead pursue broader political or strategic objectives "that must also be examined".

English is now negotiating a new investment protocol between New Zealand and Australia. It hardly seems likely that Swan will be happy if this country adopts less rigorous criteria than Australia, which is already the source of some $85 billion invested here.