The right to pick and choose overseas investment
- by Bill Rosenberg
In November 2004 the Government introduced the Overseas Investment Bill, which arises from a yearlong review of the foreign investment regime (conducted, by officials, behind closed doors). This Bill, due to take effect by mid 2005, will supersede all previous legislation on foreign investment. See the following article, and the enclosed model submission, for details on the Bill. Ed.
Immigration stirs public debate. Though it is welcomed by most, we take great care to choose who we let permanently into New Zealand. We select on the basis of their skills, their character, their numbers, and other criteria. But the damage potentially done by one badly behaved immigrant pales beside a huge transnational corporation misbehaving in New Zealand. Yet successive governments have given away the right to make any but the most superficial choices when selecting most investment entering New Zealand, and the Government is now proposing to weaken its powers under the Overseas Investment Act even further.
The scale of the damage that can be caused is vividly shown by our experience with TranzRail. Overseas investors supported by Fay Richwhite interests bought the privatised New Zealand Rail for $328.3 million in 1993, including a 99-year lease of the track for $1 a year. They proceeded to run down the company, neglecting maintenance while extracting hundreds of millions of dollars in capital repayments and dividends which the company could ill afford. In plain words, they asset stripped New Zealands rail system.
Results included an appalling safety record, killing and maiming staff and customers; track so bad that trains could not run at full speed; unreliable services that lost the confidence of its customers; and a near bankrupt company. The Government had to bail out rail by taking back the track and paying at least $200 million to restore it to a useable state. The original investors sold their shares years ago leaving us to suffer the consequences and pay to put things right.
This experience is not unique. Forestry company, Juken Nissho, which operates wood processing plants in Kaitaia, Masterton and Gisborne, has a horrifying health and safety record. It had 269 serious harm notifications from 1995 to 2003, and 11 convictions under the Health and Safety Act, with fines ranging from $6,000 to $10,000. In 1997 Juken Nissho was prosecuted for exceeding permitted emissions at its Kaitaia plant. Neighbours complain of the effect on their health.
An analysis of Juken Nisshos New Zealand accounts from 1999 to 2003 showed that it reported losses and paid no tax. It was totally debt-financed and under normal circumstances would be insolvent. Many of the companys transactions appear to occur through related parties and may provide a way to shift profits offshore and avoid tax.
Full details of the corporate misdeeds of Tranz Rail, Juken Nissho, and other transnationals, can be found at http://canterbury.cyberplace.co.nz/community/CAFCA/publications/Roger/index.html. If, for any reason, that Link does not work, go to www.cafca.org.nz and follow the Roger Award Links. Juken Nissho won the 2003 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand; Tranz Rail won three out of the first six annual Awards, before it was shunted into the Hall of Shame and declared permanently ineligible for nomination. Ed.
Notoriously Weak Rules
Those defending overseas investment, like the Minister of Finance, Michael Cullen, say that it brings access to new markets and to new technology and ideas. Rather than being a statement of religious faith, this should be determined on the evidence and monitored. Some overseas investors quite clearly bring neither new markets nor innovation and do more damage than good.
Indeed even consultants employed by the Government at the early stages of its "growth and innovation strategy" conceded that some overseas investment was poor and we needed to be selective. The Boston Consulting Groups 2002 report on how to target foreign direct investment (FDI) conceded that: "Although the nation has at times attracted significant quantities of FDI, the quality has been poor. Almost all FDI in New Zealand has involved privatisation or merger and acquisition activity with little flow-on benefit. Export-oriented greenfield investment has been sparse, and is generally concentrated in low-growth, low-return sectors". It proposed that New Zealand should be selective about which foreign investment it chose: greenfield investment which creates new businesses or expands current businesses. Selecting on that basis would at least make asset stripping less likely.
Our rules for selecting overseas investment are already notoriously weak. There are only three criteria, except where land and fishing quota are involved. Investors must have "business acumen", must make a financial commitment, and must be of good character. This is about as rigorous as selecting a car on the criterion that it has wheels.
Weak Criteria Forced Cullen To Approve Powerco Sale
Cullen found that out for himself just recently. He was forced by the weakness of the criteria to approve the sale of New Plymouth-based Powerco to the Australian corporate raider, Prime Infrastructure Networks, despite considerable misgivings. In an unusual move for such approvals, he made a media release highlighting his frustration. "It is, however, with great reluctance that I am letting the deal proceed as there were aspects of the process that concerned me", he said (21/10/04, "Powerco sale reluctantly approved"). His concerns were the lack of consultation by the various North Island councils selling their majority shareholdings in the company, and the preferential treatment overseas shareholders were given in the deal. He could have had other concerns, for example that Primes main aim is likely to be asset stripping, but he would not have been able to act on them either: "the buyers clearly meet the criteria of the Act", he said. The rickety car had wheels never mind if it wasnt safe for the road.
The only potentially meaningful criterion is that individuals controlling the investment must be of good character. But good character is undefined, and applies only to individuals not corporations. Waste Management International, former US parent of Waste Management NZ, was allowed to invest despite a long and appalling record of bribery, bid rigging, price fixing, price gouging and environmental breaches, and tens of millions of US dollars in fines and penalties. Archer Daniels Midland (ADM) was allowed to take part ownership of Canterbury Malting Company even though some of its executives were imprisoned for massive international price fixing crimes for which it was fined US$100 million (and more have followed). Even where individuals are concerned, the Overseas Investment Commission routinely accepts as "evidence" letters from solicitors attesting to their clients good character. Now the Government is proposing to raise the limit below which investors require no approval under even these lax rules from $50 million to $100 million.
Its defence is that overseas investors are subject to New Zealand laws, implying this is sufficient control. It quite clearly is not. If immigrants behaved like the above companies, they would probably be deported. Further, it is not a crime to asset-strip, massively avoid tax, or run down strategic infrastructure, but it is hugely damaging to New Zealand. We should reassert the right to control entry of corporations likely to damage the country, monitor their behaviour, and revoke their right to stay, or require appropriate behaviour, if they cause damage.
A fig leaf is provided by the Governments modest tightening of the rules for land sales to overseas investors. The direction and some of the proposals are creditable, though the end-result is still weak. Only time will tell how effective it is. But land sales, while of great cultural importance, are only the tip of the overseas investment iceberg. They total tens or hundreds of millions of dollars a year compared with billions in core areas of economic and social life.
Quality Of Overseas Investment Matters
Investment income sent overseas is a drain on the resources available to New Zealanders. Interest and dividends remitted overseas cost us $8.9 billion in the year to March 2004, of which $4.9 billion resulted from investment under the overseas investment criteria. Thats as much as our total milk powder, butter and cheese exports, and many times more than any new trade agreement promises, let alone delivers.
Why is the Government persisting with such reckless rules? Pressure from overseas investors themselves is part of the answer. With 46% of the share market and probably a similar share of the entire commercial economy, they have enormous economic and political leverage, particularly given New Zealands high overseas debt.
But international trade agreements also hinder improvement. Officials state that commitments made in 1994 under the General Agreement on Trade in Services (GATS) in the World Trade Organisation (WTO) prevent us tightening the rules. So do an Organisation for Economic Cooperation and Development (OECD) code and the free trade agreement with Singapore. Signing further such agreements particularly with the US, as Australians have discovered in their Free Trade Agreement would narrow our ability to regulate our own economy and society still further. For example, it is likely that the $100 million threshold would be locked in or raised even higher.
I began by comparing our ability to control overseas investment with the controls we use for immigration. Immigration brings people with new ideas, skills and diversity, which enrich our society. It is to be welcomed, but no one would advocate it be uncontrolled. Yet we allow overseas corporations free entry, assuming they will behave in our interests. That assumption is demonstrably wrong. Its time to tighten the rules to reclaim our right to pick and choose.
to Watchdog 107 Index