Part 2: Regulating overseas investment in New Zealand

2.1
New Zealand's foreign investment policy (and the one in place at the time of our review), allows investment from overseas, commonly referred to as "foreign direct investment". That policy can be the subject of review and debate, as it currently is under the new government elected in September 2017.

2.2
Where that overseas investment is to acquire certain types of assets, potential overseas investors have to apply to the Government for approval to make the investment. That requirement is set out in the Act. The Act acknowledges it is a privilege for overseas persons to own or control sensitive New Zealand assets and, in light of that privilege, requires overseas investments in those assets to be given consent before they happen.³

2.3
Approval is required for overseas investments in:

• sensitive land (investments in non-urban areas greater than five hectares in area, or smaller areas of land that include or adjoin bodies of water, parks, and other areas of sensitivity);
• significant business assets (investments when they are in a business worth more than $100 million); and
• fishing quota.

2.4
From 2014 to 2016, there were between 129 and 148 applications each year for overseas investment. Most applications were for investments in sensitive land. The net consideration value, representing the total dollar value invested in New Zealand, was between $1.3 billion and $4.4 billion each year.⁴ Three applications were declined between 2014 and 2016.

Administering aspects of foreign investment in New Zealand

2.5
The OIO is part of Land Information New Zealand and is the entity responsible for administering the application and consent process for overseas investments. The OIO has particular functions outlined in the Act:⁵

• Consider each application and advise the relevant Minister or Ministers on how the application should be determined.
• Exercise any of the powers or functions that have been delegated to the OIO under the Act or regulations.
• In relation to an application, consult as the OIO thinks appropriate.
• Monitor compliance with conditions of consent.
• Issue guidelines when necessary.
• Compile and keep records relating to applications, for example, the number of applications in a particular year.
• Compile and make available statistics relating to applications.
• Provide general information for the benefit of applicants for consent about New Zealand's overseas investment rules.
• Do anything else that is necessary for the efficient operation of the rules relating to overseas investment in sensitive New Zealand assets.

2.6
In practical terms, the OIO's role is to receive an application from a potential overseas investor and evaluate whether that investment can be given the consent it requires before it can happen. When the OIO has completed that evaluation, it makes a recommendation to the appropriate decision-maker (who can be the relevant Minister or a delegated person within the OIO) who decides whether consent will be granted. After consent is granted, the OIO has a role in monitoring the investment and whether the investor is complying with the requirements of that consent, and taking enforcement action if necessary.

2.7
When carrying out its functions, the OIO's responsibilities do not extend to:

• promoting foreign investment in New Zealand. This may be carried out by other parts of government, such as New Zealand Trade and Enterprise or the Ministry of Foreign Affairs and Trade;
• approving or supervising overseas investments that do not relate to sensitive land, significant business assets, or fishing quota;
• managing citizenship or immigration issues related to the investment. These are the responsibilities of the Department of Internal Affairs and Immigration New Zealand (part of the Ministry of Business, Innovation and Employment) respectively; and
• providing policy advice to the Government about overseas investments. This function is carried out by the Treasury.

The Overseas Investment Act 2005 and the Overseas Investment Regulations 2005

2.8
The Overseas Investment Act 2005 requires consent to be granted before any overseas investments in sensitive land, significant business assets, or fishing quota that meet the necessary criteria. The OIO is to consider each application on a case-by-case basis.⁶ Once consent is granted, any conditions placed on that consent are expected to be met.

2.9
The Act and the Overseas Investment Regulations 2005 (the Regulations) outline several requirements for the applicant to meet, which the OIO needs to evaluate when it is considering an application for consent. These requirements mean that there are a range of often complex factors to be considered when determining whether to grant consent for an overseas investment.

2.10
The OIO has to consider these factors when deciding how to advise the decision-maker.

Considering the type of investment, the suitability of the investor, and the benefits

2.11
There are some key issues for the OIO to consider in processing applications in sensitive land or significant business assets:

• Is there an overseas investment (in sensitive land or significant business assets)?
• Who is in fact making the investment or is in control of the entity making the investment?
• Is that person a suitable investor (the investor test)?
• Where the investment involves sensitive land, is there a benefit to New Zealand (the benefit test)?

The investor test

2.12
The investor test determines whether the character and experience of the overseas investor meets the necessary requirements. These requirements include whether the person behind the investment has the necessary business experience and acumen for that investment, has demonstrated a financial commitment to that investment, is of good character, and is not excluded under sections 15 or 16 of the Immigration Act 2009.

The benefit test

2.13
The benefit test (determining whether the overseas investment will, or is likely to, benefit New Zealand) needs to be carried out whenever an investment involves sensitive land. There are a number of criteria set out in the Act and the Regulations that the OIO must consider when making these evaluations. These criteria cover issues such as:

• whether the investment will or is likely to result in job opportunities, new technology or business skills, increased exports, or more market competition or efficiency; and
• whether there are adequate mechanisms for protecting or enhancing indigenous vegetation and fauna, certain wildlife, and walking access.

2.14
The Appendix shows the key decisions required by the Act. The reader may find it useful to refer to the Appendix while reading this report.

A ministerial directive guides the Overseas Investment Office's work

2.15
The Minister of Finance also provides the OIO with a detailed directive that needs to be followed when evaluating applications.⁷ Under the Act, the Minister is able to direct the OIO about:⁸

• the Government's general policy approach to overseas investment in sensitive New Zealand assets, including the relative importance of different criteria or factors in relation to particular assets;
• the asset types, value thresholds, and area thresholds over which it has power to make decisions;
• the level of monitoring required in relation to conditions of consent;
• the criteria for including reserves, public parks, or other sensitive areas on the list of the types of sensitive land that the OIO must keep; and
• any general or specific matter relating to the regulator's functions, powers, or duties.

2.16
At the time of our review, the OIO was working to expectations outlined in a letter dated 8 December 2010 from the then Minister of Finance to the Chief Executive of Land Information New Zealand. The letter contained expectations that were directly relevant to the key decisions when considering an application and determining whether consent for an overseas investment should be granted.⁹

2.17
The letter contained detailed guidance about how to apply certain concepts in the Act. An example of this was the "overall policy approach to overseas investment in sensitive New Zealand assets":

The Government's overall policy approach to overseas investment in sensitive New Zealand assets is to achieve a balance between ensuring those assets are adequately protected while facilitating overseas investment that provides benefits to New Zealand. While the Government acknowledges the purpose of the Act and the consent regime it establishes, the Government wishes to minimise any unnecessary delays or administrative costs in the consent process. The Government's general policy approach is to enable those investments that meet the statutory criteria for consent to proceed, by ensuring that they are not hindered by administrative issues and that the regulator's resources are used efficiently.

2.18
Another example was an expectation about conditions that might attach to a consent:

When imposing conditions of consent on an overseas investment, the regulator should ensure that the condition is necessary and achieves the intended result in the least onerous way including, where possible, at the least cost to the investor.

2.19
The letter also outlined expectations about how the OIO will carry out its functions, powers, or duties. When providing advice to Ministers, the OIO will:

• perform its functions in a timely, consistent, and efficient manner;
• seek sufficient information from applicants to be assured that information, advice, recommendations, or assessments of benefits is accurate;
• verify information provided by applicants by seeking evidence or input from third parties at the regulator's discretion;
• seek to recover operating costs for applications from applicants by fees set by regulation; and
• monitor compliance with conditions of approval, consent, permission, or exemption granted.

2.20
Together with the criteria in the Act and the Regulations, these directions provided a prescribed framework within which the OIO was to consider applications and make recommendations. Part of that framework was the direction that the information the OIO used would be gathered efficiently and would be accurate. At the same time, unnecessary delays and administrative costs were to be minimised.

2.21
In November 2017, after the completion of our fieldwork, the Minister in the newly elected government issued a new Directive Letter that included changes to criteria relating to rural land and forest land.¹⁰ For example, the new directive does not contain the expectation about imposing conditions which "achieves the intended results in the least onerous way" that was in the previous directive. The letter took effect on 15 December 2017.

Authority to make decisions about applications for overseas investments

2.22
There are three Ministers with decision-making powers under the Act. They are the Minister of Finance, the Minister for Land Information, and the Minister of Fisheries (previously the Minister for Primary Industries). Each of these Ministers has different responsibilities depending on whether the application involves significant business assets, sensitive land, or fishing quota (see Figure 1).

Figure 1
Ministers with decision-making powers under the Overseas Investment Act 2005

2.23
Where two Ministers are to consider an application, the application goes to both Ministers. The advice from OIO to Ministers is that Ministers should discuss their views with the OIO and the other Minister if they propose to disagree with the other Minister.

2.24
Ministers have delegated some of their decision-making powers to the Chief Executive of Land Information New Zealand.¹¹ These powers have, in turn, been delegated to senior staff in the OIO. These are decisions about whether to grant consent for an investment in significant business assets and decisions about specified types of sensitive land applications (generally the "low-level" or "low-risk" applications).

3: Section 3 of the Overseas Investment Act 2005.

4: The "gross consideration value" of these investments was between $7.6 billion and $9 billion.

5: Section 31 of the Overseas Investment Act 2005. The Chief Executive of Land Information New Zealand is the "regulator" under the Act and is responsible for carrying out these functions. The functions are carried out through the OIO.

6: A person is also able to apply for an investment to be exempt from needing consent in situations including certain transactions relating to the holding of certain securities, New Zealand-controlled persons, where land of certain type and area is already in overseas ownership or control, and Australian investors in respect of certain overseas investments in significant business assets. Exemptions are outlined in the Overseas Investment Regulations 2005.

7: The Minister of Finance is able to provide these directions because they are responsible for the Treasury, which administers the Overseas Investment Act 2005: see section 34 of the Act.

8: Section 34 of the Overseas Investment Act 2005.

9: The 8 December 2010 letter from the Minister of Finance is available at linz.govt.nz.

10: The 28 November 2017 letter from the Minister of Finance is available at linz.govt.nz.

11: The delegations are described in a designation and delegation letter dated 27 April 2009 from the Minister of Finance and the Minister for Land Information. It is available at linz.govt.nz.