Review Of the
Overseas Investment Act:
- Bill Rosenberg
On November 10, 2003, the Minister of Finance, Dr Michael Cullen, announced a "First principles review of Overseas Investment Act". His press statement began: "Iconic sites to get greater protection from first principles review of the Overseas Investment Act" and that is what the wide coverage of the announcement in the news media focused on. We welcome that aspect of the review. It is long overdue. CAFCA and Watchdog have documented this in often depressing detail over the decades.
However the review has a trap in it, large enough to engulf any benefits the review of land sales may bring if indeed it does.
According to the terms of reference for the review (which is reprinted in full below):
Removal Of Any Oversight Of Foreign Company Takeovers?
The second purpose threatens to remove any remaining oversight of by far the most important foreign investment in New Zealand in an economic, social and environmental sense: company takeovers and establishment. Of the billions of dollars invested annually in New Zealand, at the most hundreds of millions is for buying land. The Government is signalling that it may drop even the minimalist and largely ineffective oversight there currently is of hugely significant events like the takeovers of Telecom, New Zealand Rail, all our major banks, large parts of our electricity system, half of our supermarkets, most of our forestry, the list goes on.
To take just one well-known example, Tranz Rail. As we, and others, have repeatedly documented, the takeover of our railway system, privatising it as Tranz Rail, led to run down of its services, tracks and rolling stock, asset stripping of the most blatant and irresponsible kind, massive redundancies in its workforce, and safety at such a life-threatening level, killing and maiming its staff and customers, that it led to a public inquiry. Our railway system should have never have been sold; it certainly should never have been sold to such owners and managers. The Overseas Investment regime should have acted to prevent this, or to put an end to it as soon as its faults became obvious, many years ago. Yet it did nothing. Unfortunately there are many more such examples.
In the wider picture, New Zealand is dangerously dependent on foreign investment most of it takeovers of existing assets, not the new industries and ideas its proponents (such as Dr Cullen) tell us it brings. New Zealands international liabilities amount to $178 billion or $101 billion net when assets owned by New Zealand residents overseas are deducted. Half (49.6%) of the financial liabilities which are part of that are due within 12 months. The cost of servicing that debt and direct investment in overseas investors income (dividends and interest) alone is $7 billion each year, or about as much as New Zealands total dairy and forestry exports.
Even supporters of foreign investment such as the New Zealand Institute for Economic Research (NZIER) now acknowledge "that New Zealand has an unusually high reliance on foreign capital", and that "A high reliance on foreign capital and the associated positive risk premium on our interest rates has contributed to low real income growth and a large decline relative to the rest of the world." ("Savings, capital and growth: Has low domestic saving constrained New Zealands economic growth?", report to AMP Financial Services, September 2003, NZIER).
In other words we are at best over-reliant on foreign investment. CAFCA would say that we should not be reliant at all: the economic and political price is too high. Either way, we need to be more selective in the foreign investment we allow in if we allow in any more at all. We need to be able to control both foreign direct investment (where control of a company is intended), and foreign portfolio investment and debt.
Both the example of Tranz Rail and our economic position provide convincing arguments for a stronger Overseas Investment regime, not for weakening it or doing away with it entirely. Yet that is apparently what the Government is contemplating.
"International Treaty Obligations"
We hope we are wrong. Yet the terms of reference say that the review must "take account of New Zealands international treaty obligations". All the pressure from these and treaties the Government wants to sign, such as a free trade agreement with the US is to dismantle our overseas investment legislation entirely.
In the World Trade Organisation (WTO), commitments under the General Agreement on Trade in Services (GATS) froze our overseas investment legislation and regulations as at 1994 at least for services. Demands from major powers in the current round of negotiations are for us to remove the remaining protections, and force even further deregulation through changes to the agreement itself.
The WTOs Agreement on Trade-Related Investment Measures (TRIMs) prevents us putting many useful conditions on investors.
The Closer Economic Relationship agreement with Australia has already crowbarred up the threshhold at which the Overseas Investment Commissions (OICs) oversight comes into force. It has many other provisions preventing controls on investment from Australia.
The Closer Economic Partnership agreement with Singapore further constrains our ability to tighten the rules.
The US has made clear it has the overseas investment rules in its sights if it ever deigns to begin negotiating a free trade agreement with New Zealand.
There are numerous other bilateral and regional agreements in the pipeline.
One of the crucial elements of the breakdown of the WTO Ministerial meeting at Cancun, Mexico, in September 2003 was European Union (EU) insistence and intense developing country resistance to a new investment agreement in the WTO.
Many New Zealanders will remember the debate over the Multilateral Agreement on Investment (MAI) in the Organisation for Economic Cooperation and Development (OECD), which would have stripped away our ability to regulate foreign investment had it not been defeated by world-wide popular opposition in 1998. We dont want a self-inflicted MAI.
The Forces Behind The Review
The review should therefore be seen in a context of at least three forces:
Dr Cullen tells us the review had already started when it was announced. "Treasury is leading the review with input from the Ministry of Economic Development, Department of Conservation, Reserve Bank, Land Information New Zealand, Te Puni Kokiri, Ministry of Fisheries, Overseas Investment Commission, Department of Immigration and Ministry of Foreign Affairs and Trade (MFAT)". None of this gives us confidence of a positive outcome. Quite the contrary.
What You Can Do
We urge you to:
The Government may well argue that it is not allowed to strengthen controls because of commitments made in international trade and investment agreements. That is an argument for withdrawing from those agreements, not for refusing to legislate in the public interest.
This response has been brief and general because the review was announced just before our deadline. We will bring you more detail in 2004.
Press Release And Terms Of Reference For The Review Of The Overseas Investment Act
Hon Dr Michael Cullen
November 10, 2003
1st principles review of Overseas Investment Act
Iconic sites to get greater protection from first principles review of the Overseas Investment Act
The Government is undertaking a first principles review of the Overseas Investment Act to better reflect economic policy priorities while also providing greater protection to iconic sites of special historical, cultural or environmental significance.
Announcing the move, Finance Minister Michael Cullen said the Government was committed to maintaining a liberal investment regime because New Zealand needed foreign capital if it was to return to the top half of the OECD and to develop the economy to its fullest potential.
"We value the benefits foreign investors bring in terms of access to markets, technology and ideas," he said. "But we also need to ensure that our unique cultural and natural heritage is protected".
Currently foreigners need Overseas Investment Commission or ministerial consent to acquire 25% or more of a business or property worth over $50 million; land over five hectares or worth more than $10 million; any land on most off-shore islands; certain sensitive land over 0.4 hectares; land over 0.2 hectares including or adjoining the foreshore; fishing quota.
Dr Cullen said specific questions for consideration were:
"The review, in terms of approvals, will focus on the areas which have caused most concern: sensitive land [especially South Island high country and coastal land]; cultural and heritage issues and the monitoring process," Dr Cullen said.
Treasury is leading the review with input from the Ministry of Economic Development, Department of Conservation, Reserve Bank, Land Information New Zealand, Te Puni Kokiri, Ministry of Fisheries, Overseas Investment Commission, Department of Immigration and Ministry of Foreign Affairs and Trade.
Work began in mid October (2003) with the aim of producing legislation in June 2004 to come into force in the 2005 calendar year. The public will have an opportunity to make submissions during the select committee stages of the bill.
In the meantime, the OIC will continue to process applications in accordance with the existing requirements.
Terms Of Reference For The Foreign Investment Review
The purpose of the review is two fold.
First, to ensure that the overseas investment regime focuses on those assets of critical interest, such as certain sensitive land areas, natural resources (e.g. fish) and assets with historical or cultural significance (e.g. heritage buildings).
Second, to maintain a liberal foreign investment regime and to reduce compliance costs where this is feasible, while ensuring the Governments objectives are achieved.
a. Consider what assets are of critical interest and should be subject to scrutiny by the regime, and any assets that are currently subject to scrutiny unnecessarily, while taking account of New Zealands international treaty obligations.
b. Consider the necessary criteria to ensure appropriate protection for the different asset classes to be covered by the regime.
c. Consider whether any flexibility in the coverage and the criteria is appropriate, in order for changes to reflect any shifting priorities that may occur over time.
d. Consider the appropriate level of monitoring and follow up on approvals
e. Consider the appropriate balance between legislation and regulation.
f. Consider how New Zealands regime compares with other foreign investment regimes.
g. Consider what, if any, measures should be introduced to mitigate the risks around the transitional period between announcement of the new regime and the legislation being in force.
h. Consider the appropriate organisational design (e.g. stand alone or attached to a department) for the delivery of the developed foreign investment screening regime.
i. Consider the appropriate governance arrangements of the OIC.
j. Other matters considered appropriate, with the agreement of the Minister of Finance.
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