The New Zealand and Australian governments recently announced a new Investment Protocol for Australian businesses in New Zealand. Previously, the approval threshold for Australian investment in New Zealand was $100 million; it has now been increased to $477 million. What this means is that any Australian investment below $477 million in New Zealand will not require approval from the Overseas Investment Office (OIO). The new level for Australian investment is important for several reasons. Firstly, Australia is our main investment partner. It is the country of origin for the largest number of foreign investors in New Zealand. As Statistics New Zealand notes, in its recent overview of New Zealand’s Balance of Payments and International Investment Position: Year ended 31 March 2009 :

“ Australia remains New Zealand’s main investment partner, both as a destination for New Zealand investment abroad, and as a source of foreign investment into New Zealand. Our other main investment partners are the United Kingdom (UK) and the United States of America (USA). Australia is our main investment partner for direct investment, while the USA and the UK are our main sources of portfolio investment. However, the relative proportions attributed to these countries have changed over time” (emphasis mine).(1)

Since March 2004, investment from Australian has increased 88.5% or by $45.2 billion. As the New Zealand Herald notes this was mainly due to the loans given by the Australian banks to their New Zealand subsidiaries.(2) However, as one can see that, in spite of these loans, Australian investment is considerable. So considerable, that the lifting of the level of allowable (or uncontrolled) investment in New Zealand by Australian capital was, and remains, one of the central discussion points between the respective governments, whether National-led or Labour-led in New Zealand or Labor and Coalition in Australia. Meeting with his Australian counterpart, PM Kevin Rudd, in March 2009 to discuss the Closer Economic Relations (CER) Treaty, New Zealand Prime Minister John Key signalled a further overhaul of the investment rules between the two countries hinting particularly at further economic integration, especially in the investment field. As Rudd later pithily commented to the gathered reporters present, “any obstacles remaining in the investment field, in other fields, we’re determined to push our way through”.(3)

Protocol Is Trojan Horse For All Foreign Investors

The second reason that the new Protocol is so important is because the agreed levels set between New Zealand and Australia tends to become the benchmark for other foreign investment agreements. This has occurred twice, in 1999 and in 2005. Therefore, the level of $477 million for our major investment partner becomes the level by which all other overseas investment is governed. The CER Protocol transferred to other international agreements would certainly mean that a number of currently domestic and publicly owned business and institutions could and would be sold without the need for any public participation and OIO approval. As CAFCA noted in its media release on the new Protocol, significant assets in forestry, energy, tourism, mining and even elderly care would not need OIO approval to be sold (that press release used examples from the 2008 approvals by the Overseas Investment Office to demonstrate what would not require approval under the new rules. Ed.).

It is, therefore, perhaps no great coincidence that the Overseas Investment Act (2005) and its policing unit, the Overseas Investment Office, were in the media in July 2009 with the news that the Government had initiated a review of the various pieces of the Office and the Act with the intention of removing those obstacles which apparently makes overseas investment in New Zealand complex. The move would have the effect of “speeding up approvals and cutting red tape”.(4) It would appear that the “great push” has arrived.

In a speech to the Trans-Tasman Business Circle in the aftermath of the 2009 Budget, Finance Minister Bill English commented that overseas investments are often “tied up in a complex process that takes far too long”. English then went on to lament that this process, “...risks putting off investors who can take their valuable capital to another country”.(5) Amongst the obstacles that are put in the path of investors are apparently those applications that are put at risk as a result of such complications like land transactions and policy changes. Changes to legislation needed to be put in place which guaranteed investor confidence, he said.

However, English also admitted that 98% of all applications were approved.(6) Therefore, it appears that any changes to the Office and the Act are really designed to ensure that the already weak legislation is watered down to such an extent that there is really no opposition to sales. The argument put forward by English that the existing policy is somehow subject to radical political change or dispute, flies in the face of political actuality. The existing policy framework of the Act and the thresholds, despite the protestations of the Government, is strongly supported by the Labour opposition and by every other Party in the House, except the Green Party.

What English could be referring to, however, are some abortive sales, such as that of Auckland International Airport Limited which dominated the news in late 2007 and mid 2008. In that situation, the sale was finally stopped not by the Act or the Overseas Investment Office, but by significant public opposition, which forced the then Labour government to halt the proposed sale to the Canadian Pension Plan Board (CPPB). But, it is important to remember that until the point when it became a political embarrassment to the Government, Labour did not act and, when it did act, it did so with reluctance.

Certainly, the Herald article and the speech to the Trans-Tasman Business Circle would suggest that this could strongly be the situation. One of the criteria of the rewriting of the legislation is the proposal “... to remove ... the ability to substantially change overseas investment rules during applications”.(7) Since this was the case in the proposed Auckland Airport sale, it could be argued that the “valuable capital” of investors is only threatened by the democratic wishes of the general population when they eventually force their political representatives to act upon their wishes. As I noted at the time: “It [the Government] has shown no desire to prohibit foreign investment as demonstrated by its commitment to free trade and the resulting deduction/elimination in tariffs and economic and foreign controls”. (8) The commitment to free trade and the elimination of tariffs remains an ongoing commitment for both major parties. Therefore, I think that foreign investors can rest assured that a dramatic change in overseas investment policy by either of the two major parties in Parliament is not a threat to their “valuable capital”.

As Much Use As A Cat Flap In An Elephant House

If the new CER threshold is transferred to other foreign investment, then there would be no requirement for such sales to be approved by the Overseas Investment Office. Indeed, if it was combined with the new proposals as outlined by English in his Trans-Tasman Business Circle speech and if these proposals are then approved, then it may mean that any sale no matter how contentious or publicly opposed could not be stopped once it had gone past the initial bidding stage. Auckland Airport Limited would almost certainly have been sold to an Australian company or the CPPB. Certainly, the failed $250 million bid by Cheung Kong Infrastructure in late 2008 for New Zealand Steel Mining would not have had to go through the Overseas Investment Office. In that case, the OIO actually declined the application on the basis that Cheung Kong simply did not have the necessary funds due to the deepening recession.(9)

The approval of the new CER protocols and the redrafting of the Overseas Investment Act and Office are simply yet more steps toward total deregulation of New Zealand’s investment regimes. They are further proof, if any is needed, of the Government’s commitment to “push through” those obstacles whether they are economic or democratic. One thing is certain, which is the country can expect more land and investment sales to overseas owners without having any input into those sales. The Government and the Opposition have both ensured that, in the words of Edmund Blackadder, the current legislation to oversee sales is about as much use as a “cat flap in an elephant house”.

Footnotes:

1 Statistics New Zealand, Balance of Payments and International Investment Position: Year ended 31 March 2009, page 8.

2 New Zealand Herald, 30/9/09, “Foreign Investors Took Out $9 Billion Last Year”.

3 The Australian, 2/3/09, “Kevin Rudd and John Key to Cut Trans Tasman Red Tape”.

4 New Zealand Herald, 23/7/09, “Foreign Investment Rules to be eased, says Govt”.

5 Bill English, speech to the Trans-Tasman Business Circle, 23/7/09, Wellington.

6 New Zealand Herald, 23/7/09, “Foreign Investment Rules to be eased, says Govt”.

7 New Zealand Herald, 23/7/09, “Foreign Investment Rules to be eased, says Govt”.

8 Quentin Findlay, “Government Vetoes Takeover of Auckland Airport”, Foreign Control Watchdog 117, April 2008, page 8, http://www.converge.org.nz/watchdog/17/02.htm

9 Quentin Findlay, “Hold the Front Page! Major TNC Takeover Vetoed”, Foreign Control Watchdog 120, May 2009, page 40, http://www.converge.org.nz/watchdog/20/05.htm. Interestingly, the incoming Minister of Finance, Bill English, noted that the refusal was because Cheung Kong Infrastructure did not meet the substantial and identifiable benefit requirement of the Overseas Investment Act. This was the same criterion used by Labour to decline the sale of Auckland International Airport Limited.