Justice Miller put on his radical robes yesterday and turned the prevailing view of foreign investment on its head. So what does it mean for the overseas ownership debate and the Crafar Farms deal?
Privilege – that's what it's all about. You've got to earn it. The ruling by Justice Forrie Miller to set aside the government's decision to allow the sale of the Crafar Farms to Chinese company Shanghai Pengxin has turned on its head the political – and, it seems, legal – assumptions about foreign ownership of our most sensitive assets.
In recent decades, the consensus in our two main parties has been that it's a privilege for New Zealand to get our hands on any foreign money. Like some garage saler wanting to empty the garage we've said, "gosh, thanks so much for noticing us down here. You want to buy something? Well then, what would you like? Help yourself".
Such as has been our desperation for capital and contacts. Justice Miller, however, in a bit of populist legal rabble-rousing that goes against the beltway establishment but is entirely in line with public opinion, has said 'This is Godzone, by crikey. If you want to come here Johnny Foreigner, you're going to have offer something pretty darn special'. (That's assuming that Miller is a posh Anglophile, which is what judges tend to be in my imagination).
Like some robed bouncer, he's told Shanghai Pengxin – and all potential foreign investors – that we have a dress code in this country and if they want to come in they'd better polish their shoes and put on their best suit. And given the value of productive farm land to our country's wealth, our national identity and our great-grandchildren's prosperity, that's probably not a bad view to take.
I'm wary of heading into legal territories where Andrew and the rest of the online legal gang could offer much more insight (and beat me up very publicly should I have this wrong). However as I read the decision, it boils down to this:
- The Overseas Investment Act prefers New Zealanders to buy "sensitive assets". To earn the privilege of ownership here, a foreign investor has to show "substantial and identifiable benefits" to New Zealand.
- The Overseas Investment Office had previously taken that section at face value – a sale had to be beneficial to national interests. And hey, in most cases fresh cash coming into the country is good for business, so case closed. No, no, says Justice Miller, you have to consider "a counterfactual" – in this case, what would happen if the Crafar Farms were sold to New Zealand buyers. Or, in his words, "assess what would happen 'with or without' the overseas investment".
- So, if the overseas buyer offers no greater benefit than a New Zealand buyer, then no deal... pack your bags... you haven't earned the right to do business here, son.
In short, Miller has raised the bar – now overseas buyers don't just have to offer a deal that's beneficial to New Zealand, they have to offer a deal more beneficial than any potential local sale.
And, Miller argues, simply offering a higher price for the land doesn't equate to a greater benefit. He writes:
The Act finds New Zealand ownership of sensitive assets desirable, and it advances that preference in several ways; for example, by requiring that sensitive land first be offered for sale to non-overseas persons. By excluding financial benefits to the vendor, s17 ensures that an overseas investor cannot pass that benefit test merely by outbidding others".
I'm not sure he's got this bit right. The principle is bang on – private gain is not necessarily a public good. But the reasonable argument in this case is that Shanghai Pengxin offered tens of millions more than the next highest bidder, and such a significant amount of money is good for our economy and therefore good us all. If the counterfactual is much, much less money, "financial benefits" must be considered, mustn't they?
My first reaction to the ruling? Irony. That Michael Fay of all people should be party to making foreign investment in this country more difficult is surely the gods mocking us. In trying to get the farms for a knockdown price under cover of iwi and faux-patriotism, Fay has made it much harder for anyone else to do what he did in the 1980s and 90s, ie flog stuff off to overseas companies. Bizarre.
My second thought is that the deal is still likely to go through. As I wrote in my previous piece, it seems to me that the receiver and government had negotiated a damned good deal given the current law. Even ignoring the higher price bid, Shanghai Pengxin offered to invest more than $14m into the farms; protect the Nga Herenga and the Te Ruaki pa sites and improve walking access to the Pureora Forest Park and Te Rere falls; and offer on-farm training to new farmers.
More crucially for me, the Chinese bidders bring close relationships with Chinese supermarket chains and promised to create two new New Zealand dairy brands (Nature Pure and Pure 100), spend $100m over the next five years promoting New Zealand dairy in Asia and help Landcorp sell its products in China.
More subtly, the deal also put the government, via Landcorp, in charge of managing the farms as well as protecting Fonterra and diplomatic relations with our second largest export market.
Can Fay and the iwi offer such benefits? I don't see how, and for me this is where the judge's argument stumbles; he has no idea what the actual counterfactual is. The Fay consortium has indicated a price it's willing to pay (one so low the receivers didn't even bother to reply), but has never put in a formal bid. Would they keep the walking tracks? Protect the pa sites? Create new brands and spend $100m on promotions?
Miller suggests that a counterfactual New Zealand buyer would spend just as much developing the farms and improving farm production and... well, that's it. It's as if increasing farm production is the only benefit New Zealand accrues from this sale.
But the real benefits for New Zealand in the Shanghai Pengxin bid are those generated by the precise fact that they are a foreign company, and so have contacts, market leverage and a marketing spend that any local buyer is unlikely to be able to match.
Which is why I suspect the OIO will next week again recommend the sale go ahead.
That's not to say I'm comfortable with this deal, or any loss of large tracts of New Zealand land into foreign hands. We have to look more deeply at ways to gain the benefits of such partnerships without becoming tenant farmers in our own land.
And it could have implications for businesses here. Do overseas investors want to come here enough to up their game? Will they want us more than we want them?
What of the party politics? Rather than make this an incredibly long post, I'll write about that shortly, in another piece.