Review, large change of Overseas Investment Act desperately needed

Investment in business is a critical issue. Firms need investment to build scale, grow jobs and thrive. It can be hard for a business to gain sufficient investment in New Zealand given our small economy and relatively shallow capital markets.

Many New Zealand firms would like to gain funds from overseas but can’t because of the Overseas Investment Act (OIA), which makes it difficult for people overseas to invest here. This law is holding us back and making us poorer.

In many other countries, overseas investment is welcomed with open arms, with the recognition that it can powerfully boost business and economic growth. A great example is Ireland — its investment policies, with low-tax policies, have enticed huge amounts of capital into the Irish economy and contributed to its boom. This has seen the establishment of hundreds of multinational companies and hundreds of thousands of jobs in Ireland. Prosperity for the Irish people has grown strongly — Irish GDP per capita is now well over $US100,000 ($NZ158,000). New Zealand’s GDP per capita is roughly half that.

While Ireland’s policies actively seek investment from abroad, New Zealand’s policies restrict it. New Zealand is one of the most hostile countries in the OECD for foreign investment, according to the OECD. BusinessNZ raised the issue during the election campaign, and we were pleased to see National and Act campaign for better investment policies and to see these emerge in the policy direction of the new government. We think the government should review the Overseas Investment Act and change it significantly.

New Zealand’s Overseas Investment Act is an outlier compared with similar legislation overseas.

More than a hundred other countries have overseas investment laws. In most cases these are aimed at promoting, not restricting, overseas investment, and where they have restrictions these are mostly related to national security. Our OIA is different. Passed by Labour in 2005 and tightened over the years, our law also restricts investment on the grounds of national security, but its firmest constraints are placed on investment in land and natural resources.

Under the OIA it is difficult for a foreign person or enterprise to buy an existing residential house or farm in New Zealand.

At first glance, Kiwis might be happy about that, but a key problem with the Act is that anything over 5ha is defined as sensitive land (and therefore subject to OIA rules). That is a relatively small amount of land, and most manufacturing businesses would need 5ha or more for normal operations. A manufacturer wanting to grow their operations on a larger parcel of land would have trouble gaining foreign investment to do so, because of the compliance costs triggered by selling "sensitive land" under the OIA.

It’s understandable that our OIA seeks to protect New Zealand’s key resources. After all, New Zealand is a small country with a limited stock of productive land and we would not want to be swamped by dominant foreign interests gaining broad control of our land and natural resources. The OIA is a staunch defence against this fear. But its staunchness goes further than needed.

In fact, land-related purchases by foreigners have never been significant. Of all the foreign direct investment in New Zealand, worth around $150billion, only about 7% is invested in land-based assets. By restricting investment in land so vigorously, the OIA tends to stymie other investments too. For example, it restricts selling land that is "next to" farmland or coastal land — in 2019 this rule blocked the sale of land near Waihi next to the OceanaGold mine, preventing the mining company from expanding its operations there.

Another change is needed regarding ministerial discretion. Under the OIA, Cabinet ministers can make the final decision on whether overseas investment may or may not proceed. This creates uncertainty for would-be investors and could raise perceptions of unfairness with a decision based on ministerial whim rather than agreed regulations.

Removing ministerial discretion over OIA decisions would help prevent any such impression of unfairness. Our big concern with the OIA is how it damages the growth prospects of New Zealand companies. It limits the amount of foreign capital that New Zealand companies can access — capital that is fundamental to business growth and development.

The OIA has the potential to depress the value of New Zealand resources over time. In effect, the OIA prevents a New Zealand company from getting the best price for an asset if the price is offered by an overseas bidder — it’s not hard to see how this price ceiling could over time reduce the realisable value of New Zealand resources generally.

For New Zealanders, the OIA stands in the way of us attaining the prosperity we all want. It is timely for the OIA to receive scrutiny as the coalition government deliberates what it wants to do about overseas investment. We believe a review of the OIA would be a good call and could improve our prospects for a better overseas investment regime.

 - Catherine Beard is BusinessNZ director of advocacy.