Many investors find New Zealand's overseas investment regime perplexing in coverage and rigid in application. Getting consent takes a long time, the application process is costly, and outcomes can be unpredictable.
As it turns out, decision-makers do not find the Overseas Investment Act fit-for-purpose either.
So, hot on the heels of changes made last year to bring residential land into the regime and facilitate investment in rotation forests, Treasury has just finished consulting on options for another round of changes, with the stated purpose of:
- Reducing unnecessary complexity, and ensuring that compliance costs are proportionate
- Ensuring that overseas investment is consistent with New Zealand's national interests.
There is an obvious tension between the competing desires to reduce complexity and costs, and give decision-makers more discretion. It is not clear from Treasury's Consultation document how that tension will be resolved.
Against the background of New Zealand's need for foreign capital, we briefly canvass our views on the three main areas of proposed change, namely:
- Refocusing the regime on what really needs to be screened
- Increasing decision-makers' discretion to decline consent for investments they do not like
- Improving the way that investments are screened, including the process for getting consent.
Re-focusing the regime – quick wins
The Consultation document suggests a refocusing of the regime on what really matters. This could be achieved by removing the need to screen:
- Most types of "sensitive adjoining land" – ie investments in land that only require screening because the land is next to some other kind of sensitive land (eg a reserve or historic place)
- Relatively short-term leases, the screening costs of which are often disproportionately high given the limited nature of the interest
- Investments by "fundamentally New Zealand companies" – mainly those listed on the NZX
- Portfolio investors, where majority ownership and meaningful control of sensitive assets remains in New Zealand
- Small investments that result in the entity that is the subject of an investment becoming an overseas person, if there is no relevant increase in overseas control rights
- Small incremental investments by overseas investors to increase an interest in sensitive assets that they already hold.
In our view, there is no real policy justification for requiring screening of the above types of investments. Removing the above items from the application of the regime would provide the government with quick wins in terms of reducing complexity and ensuring compliance costs are proportionate.
Increasing decision-makers' discretion
Treasury’s Consultation document records that the design of the benefit test and “gaps in coverage” may undermine decision-makers’ ability to deny consent to investments that are not in New Zealand’s national interest. The consultation document discusses whether the government should introduce:
- Additional factors into the "benefit to New Zealand test", such as water extraction, national security, tax-related implications, and Māori cultural values
- A streamlined benefit test in place of the current one, to reduce overlap between the 21 existing factors and overall complexity
- A "substantial harm" test, under which consent could be declined for any investment that decision-makers consider could cause substantial harm to public order, health and safety or essential security interests. This would apply alongside the streamlined benefit test
- A "national interest" test, which could either replace the benefit test, or be used alongside it.
We would welcome any changes to streamline and simplify the current benefit factors. This would help ensure that there can be a reasonable degree of certainty as to how the law will apply to particular investments at the outset.
We are not convinced that the overseas investment regime is the appropriate place to consider topical political issues such as water and tax-related implications. There are separate detailed regulatory regimes and regulators that are better placed than the Overseas Investment Office to consider those matters.
In addition, the government should exercise significant caution in considering adopting a test that expands on the current test and/or allows decision-makers broad discretion to decline consent. Without appropriately defined boundaries, this will substantially increase uncertainty and have a chilling effect on investment. Importantly, it would also undermine any other changes that are made to reduce complexity and costs.
Improving the screening process
Treasury also discusses ways in which the screening process itself could be improved:
- Good character test: Almost all investors that apply for consent have to meet the "good character" test. This is a very broad test requiring disclosure and explanation of each matter potentially relevant to the character of individuals with control (eg boards of directors, many of whom may have extensive experience). Further, such disclosures have to be provided every time. Treasury sensibly suggests that the good character test be narrowed, and that provision be made for repeat investors so that the full exercise need not be repeated.
- Special land: If an investment involves "special land" (foreshore, seabed, riverbed, or lakebed), the current regime requires the vendor to offer that land to the Crown before consent is granted. In our experience, it is a significant and unwelcome burden on vendors, especially those less familiar with the regime. Treasury suggests some changes to clarify and improve the process, including shifting the burden of dealing with special land to purchasers. We think that Treasury should re-examine the policy justification for the regime, and if there remains one, make changes to clarify and improve the process in light of the policy.
- Farm land: Farm land must be advertised for sale on the open market before consent can be given for an overseas person to buy it. Treasury suggests that the requirement could potentially be removed, or if it is retained, that changes be made to clarify and update the provisions as well as set out when exemptions from the requirement can apply. In our view, review of these provisions is timely and we welcome potential changes to make it more fit-for-purpose. Vendors have strong incentives to test the market in any case. Overseas persons would still need to demonstrate benefit to New Zealand to get consent to invest in farm land.
- Timeframes for decisions: There are currently no timeframes for decisions on consents. The consultation document records that, based on OIO data, it takes around 100 working days for an application to be processed. Although this is an average (ie some decisions take a lot less time and some a lot more), the timeframes are very long by international standards. This is a source of frustration for investors, especially when combined with the lack of certainty as to how the benefit test will apply. Establishing statutory timeframes (and taking other measures to reduce the assessment timeframe) has some appeal, but we must also ensure that the decision-making process leads to robust results.
We think there is a good chance that the "quick wins" changes described above in relation to what should be screened, and changes to improve the screening process, will be made.
As for the "big picture" changes under discussion, decision-makers must come to terms with the fact that the decisions they make on overseas investment consents, while essentially administrative in nature, inevitably have political consequences. More discretion might seem attractive – but increased discretion will correspondingly reduce decision-makers’ ability to blame the framework when (and not if) an unpopular decision is made. Discretion also significantly increases the scope for judicial review of those decisions.
We look forward to hearing further from Treasury as to how it considers the balance between complexity/cost, and flexibility/discretion, should be struck.
If you would like advice on how the changes could apply to you, please contact a member of our overseas investment team.