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ECONOMICS LEGISLATION COMMITTEE
12/04/2011
Foreign Acquisitions Amendment (Agricultural Land) Bill 2010

CHAIR —Welcome to the inquiry. Thank you for participating. I remind witnesses that they are protected by parliamentary privilege in Australia but I understand that that does not necessary apply in New Zealand. Are you happy to go ahead on that basis?

Ms Moyes —Yes.

CHAIR —Would you like an opening statement?

Ms Moyes —Yes. My intention was to simply provide a brief summary of New Zealand’s foreign investment regime so far as it might be of interest to the committee, particularly with regard to agricultural land, and then turn over to the Overseas Investment Office to make some comments about the implementation of the regime. Then we are available to answer your questions. Would that be a helpful approach?

CHAIR —Yes, thank you, that would be very useful.

Ms Moyes —By way of context, I would like to reiterate the point that we made in our written submission to the committee which is that New Zealand’s main interest in any amendments to the Foreign Acquisitions and Takeovers Act is to ensure that they would be consistent with the investment protocol that we have recently signed with Australia and more broadly with the closer economic relationship and the single economic market agenda—the overarching aim, obviously, of reducing barriers within the trans-Tasman economy. We hope the committee will bear all these things in mind when contemplating any changes to the act.

I also thought the committee may be interested in just a little of the historical context to New Zealand’s overseas investment regime. New Zealand has a long history of regulating investment in farmland, which reflects the traditional view in New Zealand that land ownership should not be concentrated in the hands of a few but should be able to be widely dispersed amongst the population. In fact, up until 1995 all purchases of farmland in New Zealand, including by New Zealanders themselves, required regulatory approval in order to avoid undue aggregation of the land. In addition to that, since 1968 there has been a regime for scrutinising investment by foreign investors in farmland in New Zealand. Since 1995 that has all been encompassed as part of our Overseas Investment Act.

Turning to our current regime, the guiding philosophy behind that regime is that foreign investment is welcome in New Zealand but is also a privilege. To that end there are three categories of foreign investment that require approval under the act. These are investments in substantial business assets, investments in the fishing quota and investments in sensitive land. All agricultural land greater than five hectares falls within that third sensitive land category. There are various other types of sensitive land, such as coastal land, land with particular significance to Maori and other categories.

For investments in sensitive land to receive approval there are a number of criteria that must be satisfied. These are, broadly speaking, that the investor is of good character, that the investor has relevant business experience and acumen to manage the investment and has demonstrated financial commitment to the investment, and finally that the investment will be of benefit to New Zealand. For all land over five hectares, that means there must be substantial and identifiable benefits.

Lastly, there is an additional requirement for farmland, which is that it must have been offered for sale on the open market to allow New Zealanders the opportunity to purchase the land.

I have a couple of comments on that third area of the test, the benefits test. The benefits test only applies to investments in sensitive land and involves weighing up a number of factors in order to determine whether the investment is of benefit to New Zealand. There are around 20 factors which are all specified in either primary legislation or regulation and cover social, economic and environmental factors. Applications have to be determined on a case-by-case basis and not all factors will be relevant in all cases. Some factors may have more weight in particular cases depending on the circumstances. The regulator is limited to taking into account only factors that are predefined in the legislation, and decisions can be subject to judicial review.

Ms McClure —There is probably not a lot I can add to Toni’s outline. It may be that there are specific questions you would like to ask me in relation to the implementation of the legislation.

CHAIR —We will start off by asking about your submission, which said that you would be concerned if any of the proposed amendments were to increase the restrictions on trans-Tasman investment. Do you see in this bill that we are examining any potential to restrict trans-Tasman investment or are you confident that this would not?

Ms Moyes —We have not yet examined the bill to come to a particular view on that, so we would have to reserve our comments until we have taken the opportunity to do so. On an initial view, I do not think we have any concerns that have been raised to date.

CHAIR —Have you done any analysis on whether your foreign investment regulations in relation to farmland have served the country well over a period of time? It has been quite some considerable time that the restrictions have been in place. Has there been any analysis of whether this has restricted foreign direct investment or reduced benefits such as bringing in new technology or business practices?

Mr Nees —I was involved in the recent review of the act, where we looked at a lot of those issues. To answer the first part of your question, we found that around 98 per cent of all applications are approved. That means we know that they must have provided benefit to New Zealand. We know that some investments are probably deterred as a result of the regime. There might be some that do not come through because of the regime. But, overall, I think we know from the review and from the ongoing monitoring that the Overseas Investment Office does that the investments do provide benefits. We are able to put conditions on the investment to make sure that that happens—for example, providing additional capital or developing the land.

CHAIR —That is assessing against your requirements. Have you benchmarked against any other similar countries the nature of your agricultural businesses and whether they are up to speed as against other countries in business practices, investment and profitability et cetera?

Mr Nees —That is not the language we have looked at particularly closely, certainly not in the context of the screening regime that we operate.

CHAIR —It is of interest to the committee that you talk about sensitive land as being agricultural land greater than five hectares, which is pretty small in Australian terms. In New Zealand terms, do you have many farms of that smallish size, five hectares or just above?

Ms McClure —It tends to capture what we would call lifestyle blocks like hobby farms. The other thing is that the definition in our legislation of non-urban land can also capture, for example, mining operations or dairy factories that are on smaller blocks of land but are in an agricultural setting. So our definition of non-urban land over five hectares in fact encompasses more than just farmland. As I said, it can also encompass dairy factories, mining operations and so forth that are carried out in a farmland setting.

CHAIR —I see. So if someone had a large holding of land just outside a major city like Wellington, for example, and they wanted to sell it to someone else they would have to get approval through this?

Ms McClure —That is correct, yes. That can often happen in conversion from farmland to, for example, residential or commercial. It can capture those smaller land holdings.

CHAIR —That is not covered by your planning regulations; that is covered by this legislation.

Ms McClure —It is covered by both.

CHAIR —I see.

Senator XENOPHON —Thank you for giving evidence before this inquiry. Australian Treasury has raised concerns that if we adopted the New Zealand approach, the five-hectare threshold, it could impede foreign investment. For how long have these changes been in? What was the previous threshold? To what extent has there been an assessment of the impact of this threshold on foreign investment in agriculture in New Zealand?

Ms McClure —I can speak to the first part of that question and then I will hand over to Chris for the second part. The changes date from 1968. There was an act called the Land Settlement Promotion and Land Acquisition Act.

Senator XENOPHON —Which year?

Ms McClure —It was 1968. Basically, New Zealand put in place controls to screen overseas corporations or persons who were not ordinarily resident in New Zealand. The threshold at that time was five acres, which is around two hectares. That changed only in 1996, when it was lifted to five hectares. What happened in 1966 was that the Land Settlement Promotion and Land Acquisition Act was repealed and the screening provisions were then placed into the Overseas Investment Act 1973. In summary, the thresholds have been lifted from about two hectares, which they originally were in 1968, to five hectares in 1996. They have remained at that level since then. Chris might want to talk to the second part of the question.

—In terms of your question, Senator Xenophon, on whether we have assessed the impact of the five-hectare threshold on FDI, again we have not done a systemic assessment of that. Through the recent review that we did of the act we heard from investors that in some cases our regime or that threshold was acting as a deterrent to investment. But it is very difficult to say what we are missing out on, because we simply do not know how many investors looked at our investment regime and decided not to seek approval. However, as I mentioned before, we know that of those investors who do make an application roughly 98 per cent are approved.

Senator XENOPHON —In terms of the mechanics of this, how many applications would you get in a year, how quickly are they assessed and what is the process? Is it a fairly seamless process? Do you tick a few boxes as an initial screening? How efficient is it as a scheme and what feedback have you had from foreign investors who are subjected to this threshold?

Ms McClure —There are usually between 150 and 200 applications per year. Of course, not all of those are farmland applications. I would say probably half would be farmland applications.

Senator XENOPHON —And how long does it take to assess an application?

Ms McClure —We aim to turn them around within 50 working days. Having said that, in some cases applications can be very complex and it can possibly take anything up to six months. As I said, we sometimes have some very large applications which have difficult features to them, and in that case processing that application will obviously take much longer.

Senator XENOPHON —Of the 75 to 100 farmland applications you would receive each year based on those figures, you would have a couple each year that might be rejected. Is that right?

Ms McClure —Yes, that is correct.

Senator XENOPHON —Do you publish decisions for rejections?

Ms McClure —Yes, we publish decisions both for rejections and when consent is granted.

Senator XENOPHON —And they are publicly available?

Ms McClure —Yes. Every month we post every decision that we make on our website.

Senator XENOPHON —If an application is rejected, it could be subject to judicial review. Is that right?

Ms McClure —Yes, that is correct.

Senator XENOPHON —And how often do you get judicial review applications against your decisions?

Ms McClure —Over the last five years we would have had probably three or four.

Senator XENOPHON —So it is pretty rare.

Ms McClure —Yes.

Senator XENOPHON —Could you, on notice, provide details to the secretariat of this committee of some of those rejections and the like? Also, in terms of the test, one of the arguments from a policy perspective has been that you cannot be too prescriptive with a national interest test. But, as I understand it, your legislation and regulations actually codify what a national interest test would be. Is that right?

Ms McClure —I think that is correct, yes.

Mr Nees —That is right. We have specific criteria laid down specifying what the investment is assessed against.

Senator XENOPHON —Have the regulations changed in recent years, or have the national interest assessment criteria been fairly stable over the last few years?

Ms McClure —There have been two changes since 2005. One was in March 2008, when there was a strategic interest test added. Benefit to New Zealand is currently assessed by 20 different factors, and one additional factor was added in 2008. Then in January 2011 two more factors were added.

Senator XENOPHON —Thank you.

Senator COLBECK —Thanks for giving us evidence. You have referred a few times to the term ‘sensitive land’. How is that classified?

Ms Moyes —The definition of ‘sensitive land’ is again prescribed within our legislation. It essentially covers all non-urban land which is over five hectares, and there are a number of other categories of sensitive land such as pastoral land or land next to a river. Those blocks of land only have to be greater than 0.4 hectares to fall within the scope of the act.

Ms McClure —There are some others which are 0.2 hectares and some with no area thresholds at all, such as land on offshore islands and land that might contain foreshore. There are no area thresholds there. There can also be inherently sensitive land, which might, for example, contain a historic place. Land can also be sensitive because it adjoins land that is sensitive. For example, you may have a block of land that is 4,000 square metres that adjoins conservation land that is more than 4,000 square metres, and that would be categorised as sensitive. So there is a relatively complicated test to determine whether or not land is sensitive, because it can be intrinsically sensitive, but it can also be sensitive because of the land that it adjoins.

Senator COLBECK —Okay. I was just trying to get a sense of how extensive and complete it is, but effectively you have everything covered, and to different degrees of intensity and sensitivity, if you like. So there are degrees of sensitivity in that overall process.

Ms McClure —Yes. There is sensitivity because of type and sensitivity because of size and sensitivity because of a mix of both.

Senator COLBECK —Do you have in this process a register that gives you a sense of the proportion of land held in various hands? Would you know how much is held by local and by foreign entities?

Ms McClure —When we assess an application for consent, all the data that relates to the particular property is gathered by us and we store it. It is very comprehensive. We do have data in relation to particular properties. What we are not able to determine is how much land is held in New Zealand hands and how much is held in foreign hands. There are a number of reasons for that. First, we only started gathering data about overseas investments probably in the early 1990s, so we do not have a base from which to start. Also, overseas ownership can change and it can become very hard for us to track ownership changes for a particular property. For example, an individual an American investor might come in and pitch a block of land but then gain New Zealand citizenship. That would be very hard for us to track. Whereas we do have data on individual investments, that soon becomes out of date and of course we have no database that tracks foreign ownership of all land in New Zealand.

Senator COLBECK —So effectively all you do is monitor each individual purchase and assess it against the benefits tests. But you would not be able to say, ‘Five, 10 or 30 per cent of New Zealand land is held in foreign ownership.’

Ms McClure —That is correct.

Senator HEFFERNAN —I have to declare an interest here: I do not actually barrack for the All Blacks! One of the problems we have here in Australia is that no-one is thinking where Australia is going to be in 50 years time against the global food task and where Australia fits into that—and in your case it would be where New Zealand fits into that. By 2050 allegedly there will be 1.6 billion displaced people on the planet, the food task will have doubled and 30 per cent of the productive land in Asia will have gone out of production, with two-thirds of the world’s population living in that area. Countries like China have a sovereign plan to secure their food task into the 2070s. By 2070 with 1.8 billion people they are going to have to feed half their population from someone else’s resources.

In giving consideration to the New Zealand foreign acquisition, have you begun to figure where New Zealand is going to be in 50 years time in terms of food security, your sovereignty and controlling your own destiny? Do not worry if you cannot answer this. Our mob could not answer it either.

Mr Nees —That is a very good question. Those issues are certainly similarly under discussion in New Zealand, although we have not done a lot of specific work on that. Annelies mentioned before that we have made some recent changes to the benefits test. One of those changes was to add a new factor, which was to assess whether the investment was in New Zealand’s economic interest. There is no particular definition of ‘economic interest’ there but it certainly could encompass some of the issues you have mentioned around food security.

Senator HEFFERNAN —I will go back in history a bit to give you an idea of how long this has been going on. Canada 150 years ago had the fur trade war—and it is still happening in Canada today. Sovereign wealth funds are acquiring their sovereign assets and then excluding the country from access to the production of its own assets. In the case of New Zealand and Australia with the future of the global food task, which by the way is going to be far more important than the energy task, is New Zealand concerned or beginning to think about countries that would come in with sovereign wealth funds—and they may not necessarily be declarable sovereign wealth funds; they could be a bunch of shonks through a Cayman Islands company who then acquire New Zealand’s sovereign assets and then exclude New Zealand from access to the production of those assets to enable the foreign sovereign fund to secure its own task back home?

Mr Nees —Again, we do not have any differences in our regime for sovereign investors. Sovereign investors and private investors are treated the same through our screening regime. It is not a specific consideration in our regime.

Senator HEFFERNAN —Do you think it should be? I will give you an example. We have a company in Australia that has got into a bit of trouble. It was going to convert liquefied coal into urea. A problem we have in Australia is consolidation of markets and monopolies, and certainly fertiliser is one of them. The company was to produce two million tonnes of urea a year in Australia, which would have been great for competition in our fertiliser market but, due to the sovereign participation by the Indian government, 95 per cent of the production under the terms of agreement had to go back to India with no benefit to Australia other than the jobs in producing it. Isn’t this something that should light up the horizon on where we are going to be in 50 years time?

Mr Nees —I think those are good issues to be debating and considering. Again, our regime does not specifically consider that issue. As to your question as to whether it should, it was something we looked at in the recent review, but in the end the government decided not to put on any additional screening requirements. I think they took the view that our regime was already quite robust and we are able to consider a wide range of economic factors that might be relevant in that case.

Senator HEFFERNAN —I wish you the best of luck. I guess you would be aware that, with the free trade agreements and the closer economic arrangements we have with New Zealand, because of the currency fluctuation, which is dominated by China’s non-market currency position and the fact that the US is technically insolvent, we now have a 38 per cent trade disadvantage under the free trade agreement we have with the United States. We are at US$1.05. I wish you the best of luck if you do not do some of these things. And go the All Blacks!

Ms McClure —Thank you.

CHAIR —Roughly how many staff does the Overseas Investment Office have?

Ms McClure —At the moment we have about 12 staff.

CHAIR —And you deal with how many applications under this regime?

Ms McClure —Between 150 and 200 per annum.

CHAIR —Thank you.

Senator XENOPHON —You have had three or four judicial reviews in the last few years; is that right?

Ms McClure —That is correct.

Senator XENOPHON —What happened: were you upheld or were you knocked off?

Ms McClure —We were upheld in all cases.

Senator XENOPHON —That is not a bad strike rate. Could you give us some details of that? It is not as though you have changed the way you look at things as a result of judicial reviews saying you have done it wrong. In fact, you have been upheld.

Ms McClure —That is correct.

Senator XENOPHON —If you could take on notice to give us some more detail on those decisions, that would be useful.

CHAIR —We very much appreciate you taking the time to give evidence to the committee. It has been very useful to us.

Proceedings suspended from 12.47 pm to 1.36 pm