In this update:
What we know
Features of the Government's plan to "strengthen" the overseas investment regime emerged yesterday with the release of a new Ministerial Directive Letter (Directive). As expected, the focus is on sensitive land; rural land and forestry in particular. The Directive is the first interim step in the proposed comprehensive reform of the legislative framework.
In summary, the current state of play is as follows:
- Now the Directive is out, sensitive land decision-making will recommence (this has stalled since the election).
- A delegation will first need to be made to one of the four Associate Ministers of Finance, however, this should be imminent. Hon David Parker is expected to lead the policy reform with either Hon David Clark or Hon Shane Jones taking on the decision-making role.
- The Directive will apply from 15 December and state that the Overseas Investment Office (OIO) will be contacting current applicants so that they have a fair opportunity to make additional submissions under the new approach.
- The Directive extends the previous tougher test for large farms to all rural land (other than forestry) but the impact may be relatively nuanced in practice.
- There is a discrete section of the Directive for forestry which recognises, in part, the importance of overseas investment in this sector. However, current impediments to ongoing investment in forestry may have been overlooked. It will also be important that the focus on domestic processing does not result in unintended impacts on much needed investment streams.
- The Directive does not impact on significant business applications.
- The main changes to the regime are yet to come and will involve legislative reform, in particular, we understand:
- Residential property will be brought into the current Overseas Investment Act 2005 (Act) before Christmas by including it in the sensitive land definition.
- The substantive reform of the Act will be developed over the following months. In addition to reviewing and reducing the number of criteria and apply to sensitive land applications (currently there are 28), the Government has indicated it will introduce a "national interest" test for significant business asset applications, similar to that applied in Australia. This could have an impact on applications to invest in critical infrastructure in particular.
- The substantive reform will provide an opportunity for stakeholders, including overseas investors, to constructively engage in the policy and legislative process.
Reform of the primary legislation has been off limits for successive governments in recent years, resulting in a regime that is arguably no longer working well. The proposed reform provides a major opportunity to achieve a fit for purpose overseas investment screening regime that is more certain timely and targeted.
We summarise below the initial Government announcements, the Directive and what will likely come next.
Changes to the Overseas Investment regime
Reflecting on the Labour/NZ First coalition agreement, the Government has made various announcements around changes to the overseas investment rules, including that the Government will:
- "ban" the purchasing of existing homes in New Zealand by non-resident foreign buyers;
- look to tighten the Overseas Investment rules in relation to farmland and "other critical infrastructure" (these changes are achieved in part through the Directive, which is summarised below); and
- undertake a more substantive reform of the Act and its underlying regulations to make it simpler.
The Government announcement accompanying the release of the Directive states that it is intended to tighten how overseas investment in New Zealand will be assessed to ensure purchasers provide genuine benefits. However, the changes are relatively confined. The key points are as follows:
- All rural land will be subject to the weighting requirements that applied to large farmland under the previous directive (greater weight to be given to the economic factors - jobs, new technology or business, increased exports receipts, increased processing of primary products) and oversight and participation by New Zealanders). Rural land is all non-urban land larger than 5 hectares other than ‘forest land’.
- There is a separate section in the Directive that applies to the forestry sector. The section emphasises the need for overseas investment in forestry in New Zealand and also seeks to encourage investment that supports domestic processing and/or government policy. This could be helpful given other economic factors do not fit well with the forestry sector. However, without further clarification, current issues facing investment in this sector could be exacerbated. For example, there is a risk that this directive will impede overseas investment in forests where supporting a domestic mill is simply not feasible (because of location or existing contractual arrangements), creating associated illiquidity risk.
- The Government's general approach to special land is that it should be acquired (special land must be offered first to the Government under the Act) and there are various directives in relation to reliance on an intention to reside in New Zealand indefinitely.
- Conditions will now apply for up to five rather than three years.
- Direction is given as to how the OIO is to operate including for example, to perform its functions in a timely, consistent and efficient manner and to adopt a risk-based and proportionate approach to application assessment. The OIO introduced a "proportionality" approach prior to the election, however, this tended to focus on the size of land over other factors such as industry context/the nature of the transaction/risk. Further clarification may be required to ensure a more holistic and risk-based approach is developed.
While the directive is tougher on rural land (beyond large farmland), we note that the OIO, when considering sensitive land applications, already places a higher weighting on economic factors than other factors. That is, the difference in practice might not be significant. That said, the tougher directive now applies to any assets located on rural land, regardless of whether they are farming assets.
Usefully, the new approach reaffirms that this Government is more focused on environmental issues, but welcomes high quality overseas investment that:
- generates high levels of benefits to New Zealand;
- creates new productive assets (eg 'greenfield' investments);
- is environmentally sustainable, minimising adverse impacts on the natural environment, and is likely to create positive and long lasting environmental benefits;
- provides economic, environmental, social and cultural benefits to regional communities;
- significantly increases value added activities in New Zealand; and
- provides for significant participation and oversight by New Zealanders.
Note that these preferences do not fit exactly within the specific criteria in the Act and Regulations and we have found that the broader political statements in the previous directive letter did not have much influence on the OIO's approach and the recommendations it makes (it addresses the factors rather than broader policy concepts).
The Directive also contains a direction to the OIO to, via the OIO's website, increase the level of information currently provided about applications under assessment. While it is unclear what this is intended to cover, we would expect that the intention is not to include a register of all applications under assessment by the OIO, prior to the OIO making a decision.
More to come…
As noted, the Government is intending to undertake a substantive reform of the primary legislation. The Act has been in place now for approximately 12 years, and it has become increasingly clear that the Act does not neatly respond to a number of real world transactions. This has resulted in protracted processes and unintended or confusing outcomes - all of which negatively impact on the quality of overseas investors that New Zealand needs to attract. As we understand, the aim of the reforms is to narrow the current criteria to a more sensible number and tighten the Minister's discretion. It is also hoped this will reduce inefficiencies, speed up processing and give businesses more certainty.
The OIO is also continuing to work on its quality improvement programme, which is a two-way process focusing on making sure its website is comprehensive, up to date, helpful and accurate and keeping key stakeholders informed, while at the same time educating applicants and their lawyers to ensure applications are of high quality. Russell McVeagh stays in close dialogue with the OIO to ensure that it is at the forefront of, and can be involved with the OIO, in shaping these changes.