The onus is on the government to explain how a looser overseas investment policy will have net benefit for New Zealand

This year we’ve seen two examples of the way the global rip current is pulling, yet we’re out swimming in it, Piha Rescue-style.

Hong Kong-based Chinese company Natural Dairy Ltd wants to buy the Crafars’ North Island dairy farms. Earlier, in a now-collapsed deal, Dubai interests aligned with a hapu to fund the purchase of 28 Southland farms. This is but a fraction of the Gulf states’ and China’s larger food security strategy (see further here, and here, and here) — a strategy they’re pursuing with some determination. Aspects of both deals had a flavour of evasion, of the overseas investment review requirements.

But whereas these other countries are thinking ahead, moving to secure good cheap food supplies, unwilling to put their faith long-term in commodity markets, our own government policy seems directed to opening up investment, and abolishing the premise of the present settings, that it is a privilege to invest in New Zealand.

Last year Treasury advised the government that it should review the overseas investment legislation, because it is a barrier to foreign investment in New Zealand. The aim of the review, announced shortly after that briefing, is to “promote and encourage the flow of foreign investment”, while addressing valid concerns about it.

The review will consider, among other things, whether the purpose of the Act should be restated to reflect a more open approach; whether the screening thresholds for investments, including sensitive land investments, should be adjusted (ie, raised); and whether the types of land considered sensitive can be can be refined.

The last overseas investment review, carried out in 2003 and 2004 by the Labour government, from which the current Act resulted, had a similar terms of reference. In other words, one should not leap straight from the terms to the conclusion that death, destruction and despair are imminent. As a result of that earlier work, aspects of the legislation were tightened, others relaxed. This might, therefore, be just another instalment in the iterative process of getting the balance right.

However, this is Treasury-led work, and the whole tenor of their briefing is deeply worrying to me.

First, it says, “A more open approach to foreign investment could be shown by restating the purpose of the Act. The premise of the current Act is that it is a privilege to invest in New Zealand and this frames the way the Act is implemented.”

I would have thought this was self-evident; just as it is self-evident that the Act would be a barrier to investment, since that is, after all, its purpose. We’re a small (if lightly populated), not particularly wealthy, notoriously under-capitalised country. Land is our key piece of capital. How else should we regard it, but a privilege?

Second, “While Treasury would be comfortable with removing the screening regime altogether and relying on protections in other existing legislation, we recognise that foreign investment raises concerns for a number of New Zealanders and some form of screening may help to alleviate these concerns.”

Whilst acknowledging the irony that I am busy tapping out a page of words to prove their point, I find the tone of this extraordinary: that the Act exists principally as a sop to some nebulous public insecurities.

Third, the briefing says any screening regime needs to target relevant concerns about foreign investment, and give New Zealanders confidence those concerns are being assessed and addressed. But then it goes on to talk about efficient processing, and other possible ‘simplifications’, which might include removing the requirements to offer back special land to the Crown and offer farm land for sale on the open market. To my eyes that's a fairly substantive change to be dubbed a ‘simplification’, since surely what this would do is remove New Zealanders’ option of first bite at the cherry—or, shall we say, the plums.

Fourth, it considers worthy of further investigation (whilst acknowledging the difficulties and the fundamental nature of such a change) an OECD suggestion, that the burden of proof might be placed on the regulator. So the Overseas Investment Office would need to show that any particular investment would cause harm or loss for it to be declined.

New Zealand is land grabbing too: Fonterra has extensive Latin American operations (although Latin America embraces and encourages this, it seems). And we need foreign capital: I read somewhere on my travels that the proportion of such investment has declined, significantly; and Bernard Hickey, in characteristic style, says we made a sort of Faustian pact, exchanging future sovereignty for a credit binge, and now the devil is extracting his price.

But two things bother me.

First, this feels like another instance of burning the furniture to keep warm — putting the country’s capital assets up on the auction block, with no guarantee of net benefit. We should be as wary of the smashing downsides of corporate colonisation, as we are eager to ride its wave of benefits: it prices ordinary farmers and their aspirants out of the Kiwi way of life.

Second, whereas other countries are taking explicit forceful steps to secure the future for their citizens, and the United Nations, et al are becoming strident, we are the grasshopper who sang all summer. If nothing else, food and water security are basics New Zealanders should be able to count on, but from that biggest blessing also stems our biggest risk: complacency. Here, I wrote about factors driving the rising cost of food, and our exposure to all of them, by having embraced so wholeheartedly the international commodity market, and dairy specialisation — not unlike Cuba and sugar. Here, I found that no one quite knows how much food we import: it might be as much as one third, all unlabelled, undermining the individual sovereignty of personal choice.

Similar thoughts are expressed with some strength, in an unexpected quarter, here (Federated Farmers dairy spokesperson Lachlan McKenzie) and here (Andrew Ferrier, Fonterra chief executive) and here (Sir Henry van der Heyden, Fonterra chair). Never mind the slight double standard, because their basic points are sound: we need a conscious national strategy around food production land and assets, the farming kingpins are saying, and a properly developed policy on food security, and prime earner Fonterra needs to make itself more resilient.

Call me cynical… I doubt Fonterra’s true concern is household food security, in the daily meal-on-the-table sense, as opposed to its (and our collective) self-interest in not waking up one morning to find itself offshore-owned. Think back to 2007 and early 2008, and the prices of blocks of cheese. That’s life, Fonterra said. Market prices. Nothing we can do. So I think what they’re really talking about is my first national asset point, but let’s not quibble: everyone else is alive to this issue, and our government needs to wake up, fast.

Agriculture Minister David Carter has acknowledged the issues. But it needs more than lip service. If, as it seems, a somewhat looser strategy is afoot, the onus is on the government — for any particular investment that the Overseas Investment Office approves, as well as the governing policy framework — to explain what the benefits will be, and why they exceed the costs. 

Comments (12)

by stuart munro on April 09, 2010
stuart munro

The thing that is clearly missing from foreign investment discussions to date is a minimum standard of public benefit. The same critique can be made of public spending - it is also an apt subject for ant & grasshopper homilies.

Face it - NZ's economy is a basket case, and neither our politicians nor our public servants have a clue about how to make things any better. So what they do is smarm up to business leaders, in the hope that some of the prosperity will rub off. You might call it cargo cult capitalism. And it is completely misguided - the thing that makes successful foreign investors is the habit of making sure nothing rubs off...

Now, I have an old friend who designed Korea's five year plans back in 1950-1960. The place was broke, had just lost 3/4 of it's foreign aid, and desperately in need of everything - food, infrastructure and capital - the state NZ will be in if we let these muffins run it much longer. Not a dollar was spent without the knowledge that it represented the best possible investment of funds. So only the most vital roads and the most cost-effective irrigation projects got built first.

In 1950, Korea was poorer than Somalia, now it is richer than New Zealand. But NZ spends, and makes foreign investment decisions like a despot. They must prove a substantial public benefit. If they can't, who needs them?

And the worthless politicians (like Palmer) who have enabled them to date, should be called to account. The history of recent foreign investment in NZ (Dow? Comalco? Mitsui?) is predominantly scandalous.

As it stands, our representatives will be able to say, proudly, looking back on their careers, "We made our country poor."

by Claire Browning on April 10, 2010
Claire Browning

The thing that is clearly missing from foreign investment discussions to date is a minimum standard of public benefit...

Hi Stuart. Thanks for that -- I very much agree. It sort of reminds me of other favourite concepts, "lower taxes for more growth", "trickle down", and so on. Also other failed foreign investment examples, eg, TranzRail, Telecom outsourcing 018 and Yellow. No one ever explains the precise route from A to B to Nirvana, it's just taken as an article of blind ideological faith. In the present context, that's not enough for me.

by Jane Thompson on April 11, 2010
Jane Thompson

Thank you for the article, Claire. I share your concerns about the sale of New Zealand to overseas interests and I see it as the biggest issue in New Zealand at the moment. 

I am not sure how we got to the stage where both our main political parties believe they have a mandate to sell New Zealand to the highest bidder. It seems truly bizarre. Many political decisions last the term of the government and can be easily reversed but selling our land  will change this country forever. The repercussions will last for generations- long after the current batch of short sighted politicians have gone. I hope this becomes the major election issue next year.

And I disagree with Bernard Hickey that we are obligated to sell our land to foreigners because of the foolish lending policies of overseas banks.The people of Iceland stood up against the elite and said no to bailing out the banks. It is not a done deal here either. The online polls and comments sections of the news sites ran hot over the Natural Dairy story and the numbers were overwhelmingly against the sale of farms to foreign interests. New Zealanders know the value of the land- no one in power seems to be listening though.

What should happen is that  the government declares productive land a strategic asset and makes it unavailable for sale to non- New Zealand citizens. Other countries protect their land- there is no reason why we can't do the same. But for some reason that completely escapes me our politicians won't look after our interests and I am often left wondering these days just who  they are representing.

by stuart munro on April 12, 2010
stuart munro

Jane, I think you'll find our self-styled elite bought into Friedmanite economics, in which both the benefits of market freedoms, and the desirability of foreign investment (even volatile foreign investment) are self-evident truths. Unhappily, our leaders are neither philosophers nor economists, which leaves them pretty much rags in whatever wind is blowing. Most of them are only there for the salary package.

Remember our vaunted free-trade policy, the stripping off of all the tariffs that cost 20,000 jobs in auto assembly alone? That was predicated on an export led recovery that, like every other economic promise our governing morons have made, never amounted to anything. It would be quite interesting to see the cost-benefit breakdown on that, because other countries did not reciprocate with market access, or reduce their own tarrifs. And at the end of the day, tarrifs were a nice little earner - they could have taken some of the heat out of GST rises, for instance.

Maybe we need to take a civil suit against our erstwhile leaders - it'd be no hardship to prove both negligence, and that they have cost us a bundle.

by Gareth Ward on April 12, 2010
Gareth Ward

You need to be careful discussing "public good" and throwing up comparisons with Telecom and Tranzrail though.  The Crafar farms are privately held, and they are exchanging one asset of theirs for another (~$1.5b).  That $1.5b does come to New Zealand (in at least the same way as the farms are "New Zealand's") - and imagine if that $1.5b that "New Zealand" now has was to be invested in some cutting edge green tech investment or the like.  Would be terrible if we stopped that happening in the future because nobody whose private investments were in farms could liquidate that holding to invest in some brighter opportunities.

 

However by focussing on the land component of the deal you can begin to explore the nature of resident-ownership with a little more validity.

by Claire Browning on April 12, 2010
Claire Browning

Mm ... I wasn't very sure myself that the Telecom and Tranzrail comparisons were valid, to be honest with you Gareth, just thought I might as well throw them into the mix ... What I was trying to say, was that we don't have a good history of picking winners on the foreign investment front, and the average Kiwi consumer both times has ended up being left in the crap; but it may also be that we are just more likely to hear about / remember the bad ones. Can anyone think of non-hypothetical good examples? Here's another one -- albeit partisan -- about Shania Twain, which if the source is to be believed, hasn't gone well either.

And I take your point, that the possibility of net benefit from such a deal shouldn't be excluded. I don't think I did exclude it: all I argued was that I expect more than some vague ideological explanation, and some surety that Ministers are thinking about and addressing the whole range of long term issues, with food security high on the list. We know that land, and the food that it produces, is only going to become more valuable in the years to 2050. Saudi, Dubai, China, et al know it too, which is why they're buying up now. I framed it in the post in terms of countries seeking security for their citizens; but equally, it's corporate conglomerates after the future buck. It makes no sense to me from any perspective, including a business one, to give away that security and advantage -- and May Wang is the wrong poster child. 

by Gareth Ward on April 13, 2010
Gareth Ward

Absolutely Claire, your post was the first to look at the more substantive issues - I was simply refering to the statements in the comments about public ownership etc. I think it's important to separate the business aspect from the land aspect here - the purchase of a private business really shouldn't depend on a NZ passport IMO (exactly why that little blue book will ensure good governance in the face of countering evidence from the Fays, Richwhites, Crafars, Watsons et all I don't quite understand) but your points about standards of governance etc in the dairy industry are good ones and show that the argument shouldn't be about nationality but the necessary qualification to be a significant player in the industry.  While I accept a higher threshold for non-NZers makes some sense, it can also lead to the odd situation where a bunch of cowboys like the Crafar's can buy up anything they want, while potentially much better owners (not necessarily this NZ Dairy crowd) are barred because they aren't a national.  And we should certainly be stopping NZ companies purchasing overseas businesses if that's the approach we're taking.

And while you didn't exclude the net benefit side, many others have outright ignored it.  The dairy business is simply an asset - an asset that is being exchanged for another asset (directly $1.5b in cash, indirectly whatever assets are purchased with that).  While we may suspect in this specific instance that the Crafar's haven't valued the business correctly, or will be poor investors of that new asset, it doesn't mean we can ignore the basic tenet.  If that $1.5b is put to much better use (either better returning, greater spin-offs etc etc) then the loss of a dairy farm doesn't really matter.  I guess that's where I'd like to see the OIC working - ensuring that people aren't making terrible business decisions that externalises net benefit from our economy.  But that is case-by-case and can't be blanketed.

The complicating factor (and one that you discussed) is that there is significant land involved in a deal like this.  I fail to see how the Shania Twain statement from the anti-foreign control guys has anything to do with the fact she's Canadian, but in general the foreign ownership of land is perhaps somewhat trickier (although I must confront myself with if I was being ideologically sound I'd see it as simply another asset that we should be able to swap for another asset).

Perhaps our issue is that NZers on the whole are poor decision-makers when it comes to exiting a business - perhaps we rarely "swap our assets" for net benefit.

by stuart munro on April 13, 2010
stuart munro

Gareth, you are mistaken in thinking business should enjoy any kind of exception to land ownership rules. A productive farm is not something to be swapping around the international community. This prioritizing the transfer of wealth favours real estate speculation, and gives us benefits like the Soeharto purchase of high country stations.

Flexibiltiy and openess to international buyers detaches NZ governments from the local results of their (pathetic) economic policies. If foreign sales were better controlled, the pressure on government to perform would be appreciably greater. And they have a lot of catching up to do.

But it should be residency linked, not passport linked. You might consider that a major factor in the expansion of the British empire was a policy of defending & enforcing British law on any purchased real estate - it proved to be profitable. Current policy is a reversal of this - it's guaranteed to impoverish the country over the long term.

But current policy is weak even by the standards of the gutless parasites who presently infest Wellington: the OIC has not declined a single application. That means that they are or should be redundant.

A farm or group of farms is not simply an asset, it forms part of the local economy, it is significant to the community and to the local ecology, it has heritage and cultural and sentimental and recreational value, and it forms part of the 'economic ladder' for local businesses or aspiring businesses. These are matters that can not be allowed to drift offshore - it would be against the national interest.

On the whole, the NZ government is an apalling decision maker, and it has changed the traditional policy on foreign ownership of land without a mandate or any conspicuous benefit. It should reversed forthwith.

by Gareth Ward on April 13, 2010
Gareth Ward

Stuart the point I attempted to make was that land ownership rules do have a much higher threshold that I agree with, and never argued business should enjoy any kind of exception to land ownership rules.  Quite the opposite - I said we should make the discussion about land ownership given the nature of dairying, but not expand it to all business investment without land.  In short, I agree with you about land.

Your latter point around the public "stake" in a local farm is perhaps a little tenuous and romanticised.  While I don't really see it, if you can make the case for externalised public good in a farm then certainly those factors should be considered - I'm not sure that the ultimate owner of the farm being a Kiwi really changes though however.

by Claire Browning on April 13, 2010
Claire Browning

Your latter point around the public "stake" in a local farm is perhaps a little tenuous and romanticised.  While I don't really see it, if you can make the case for externalised public good in a farm then certainly those factors should be considered ...

I quite liked Stuart's 'tenuous and romanticised'. Or perhaps, because it was romanticised, I didn't mind that it was tenuous ...

But I do agree it is difficult to make the 'externalised public good' argument in the narrow food security context. In other words, it matters little whether the Crafars, organic Johnny Hayseed, or Natural Dairy is running the local farm, if each of them elects to export all its produce and / or make us pay market prices domestically. The post alludes to that, talking about Fonterra, but I didn't tackle it head on, and it really does need to be tackled by anyone wanting to make the overseas
investment --> food security link.

by Claire Browning on April 14, 2010
Claire Browning

Last night on The Beatson Interview Pundit's David Beatson interviewed Selwyn Pellett, co-founder of the Productive Economy Council.

A press release from Pellett on the Crafar farms issue is here.

Sadly, I don't think Stratos puts either transcripts or footage online, but at risk of vastly over-simplifying a quarter-hour interview ... 

David grilled him pretty decently on all the accepted wisdom, eg, how can NZ, which depends for its economic survival on trade liberalisation, justify self-protectionism? He said he wouldn't call it protectionism. He said:

  1. instead of making ad hoc decisions, as currently, the government needs to set a strategy against which each decision can be measured;
  2. it is bad strategy to be selling NZ's wealth creation assets, because without that capital advantage, what are we left with?
  3. he'd like to be able to tell his grandchildren his generation did the best they could for NZ, but the present policy settings aren't;
  4. if NZ stood up for itself, it would be respected by other countries, particularly China, for that stance, because they would understand it, it's what they're doing themselves.
by Claire Browning on April 14, 2010
Claire Browning

The ODT reports Natural Dairy may also have its eye on up to 100 farms in Otago and Southland, not confirmed by spokesperson Bill Ralston, but not denied either.

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