Why has a bill to relax foreign investment rules had so little scrutiny?

While public attention has been focused on the domestic fast-track consenting process^[1] for infrastructure and mining, Associate Minister of Finance David Seymour has been pushing through another fast-track process – this time for foreign investment in New Zealand. But it has had almost no public scrutiny.

If the Overseas Investment (National Interest Test and Other Matters) Amendment Bill^[2] becomes law, it could have far-reaching consequences. Public submissions on the bill^[3] close on July 23.

A product of the ACT-National coalition agreement^[4], the bill commits to amend the Overseas Investment Act 2005^[5] “to limit ministerial decision making to national security concerns and make such decision making more timely”.

There are valid concerns that piecemeal reforms to the current act have made it complex and unwieldy. But the new bill is equally convoluted and would significantly reduce effective scrutiny of foreign investments – especially in forestry.

A three-step test

Step one of a three-step process set out in the bill gives the regulator – the Overseas Investment Office which sits within Land Information NZ – 15 days to decide whether a proposed investment would be a risk to New Zealand’s “national interest”.

If they don’t perceive a risk, or that initial assessment is not completed in time, the application is automatically approved.

Transactions involving fisheries quotas and various land categories, or any other applications the regulator identifies, will require a “national interest” assessment under stage two.

These would be assessed against a “ministerial letter” that sets out the government’s general policy and preferred approach to conducting the assessment, including any conditions on approvals.

Other mandatory factors to be considered in the second stage include the act’s new “purpose” to increase economic opportunity through “timely consent” of less sensitive investments. The new test would allow scrutiny of the character and capability of the investor to be omitted altogether.

If the regulator considers the national interest test is not met, or the transaction is “contrary to the national interest”, the minister of finance then makes a decision based on their assessment of those factors.

Inadequate regulatory process

Seymour has blamed the current screening regime for low volumes of foreign investment^[6]. But Treasury’s 2024 regulatory impact statement^[7] on the proposed changes to international investment screening acknowledges many other factors that influence investor decisions.

Moreover, the Treasury statement acknowledges public views that foreign investment rules should “manage a wide range of risks” and “that there is inherent non-economic value in retaining domestic ownership of certain assets”.

Treasury officials also recognised a range of other public concerns, including profits going offshore, loss of jobs, and foreign control of iconic businesses.

The regulatory impact statement did not cover these factors because it was required to consider only the coalition commitment. The Treasury panel reported “notable limitations” on the bill’s quality assurance process.

A fuller review was “infeasible” because it could not be completed in the time required, and would be broader than necessary to meet the coalition commitment to amend the act in the prescribed way.

The requirement to implement the bill in this parliamentary term meant the options officials could consider, even within the scope of the coalition agreement, were further limited.

Time constraints meant “users and key stakeholders have not been consulted”, according to the Treasury statement. Environmental and other risks would have to be managed through other regulations. There is no reference to te Tiriti o Waitangi^[8] or mana whenua^[9] engagement.

No ‘benefit to NZ’ test

While the bill largely retains a version of the current screening regime for residential and farm land, it removes existing forestry activities from that definition (but not new forestry on non-forest land). It also removes extraction of water for bottling, or other bulk extraction for human consumption, from special vetting.

Where sensitive land (such as islands, coastal areas, conservation and wahi tapu land) is not residential or farm land, it would be removed from special screening rules currently applied for land.

Repeal of the “special forestry test^[11]” – which in practice has seen most applications approved^[12], albeit with conditions – means most forestry investments could be fast-tracked.

There would no longer be a need to consider investors’ track records or apply a “benefit to New Zealand” test. Regulators may or may not be empowered to impose conditions such as replanting or cleaning up slash.

The official documents don’t explain the rationale for this. But it looks like a win for Regional Development Minister Shane Jones, and was perhaps the price of NZ First’s support.

It has potentially serious implications for forestry communities affected by climate-related disasters^[13], however. Further weakening scrutiny and investment conditions risks intensifying the already devastating impacts^[14] of international forestry companies^[15]. Taxpayers and ratepayers pick up the costs while the companies can minimise their taxes^[16] and send profits offshore^[17].

Locked in forever?

Finally, these changes could be locked in through New Zealand’s free trade agreements. Several such agreements say New Zealand’s investment regime cannot become more restrictive^[18] than the 2005 act and its regulations.

A “ratchet clause^[19]” would lock in any further liberalisation through this bill, from which there is no going back.

However, another annex^[20] in those free trade agreements could be interpreted as allowing some flexibility to alter the screening rules and criteria in the future. None of the official documents address this crucial question. As an academic expert in this area I am uncertain about the risk.

But the lack of clarity underlines the problems exemplified in this bill. It is another example of coalition agreements bypassing democratic scrutiny and informed decision making. More public debate and broad analysis is needed on the bill and its implications.

References

1. ^{^} fast-track consenting process (environment.govt.nz)
2. ^{^} Overseas Investment (National Interest Test and Other Matters) Amendment Bill (www.legislation.govt.nz)
3. ^{^} submissions on the bill (www.parliament.nz)
4. ^{^} ACT-National coalition agreement (assets.nationbuilder.com)
5. ^{^} Overseas Investment Act 2005 (www.legislation.govt.nz)
6. ^{^} low volumes of foreign investment (www.parliament.nz)
7. ^{^} regulatory impact statement (www.treasury.govt.nz)
8. ^{^} te Tiriti o Waitangi (theconversation.com)
9. ^{^} mana whenua (maoridictionary.co.nz)
10. ^{^} Getty Images (www.gettyimages.co.nz)
11. ^{^} special forestry test (www.russellmcveagh.com)
12. ^{^} most applications approved (www.linz.govt.nz)
13. ^{^} forestry communities affected by climate-related disasters (newsroom.co.nz)
14. ^{^} devastating impacts (theconversation.com)
15. ^{^} international forestry companies (www.stuff.co.nz)
16. ^{^} minimise their taxes (www.nzherald.co.nz)
17. ^{^} profits offshore (www.taxpolicy.ird.govt.nz)
18. ^{^} cannot become more restrictive (www.mfat.govt.nz)
19. ^{^} ratchet clause (trade.ec.europa.eu)
20. ^{^} annex (www.mfat.govt.nz)