David Parker: Keep farmland under NZ ownership

While we need foreign investment we must not lose control of our best income producing assets. Photo / Brett Phibbs

Opinion

The current application by an overseas company for approval to buy hundreds of millions of dollars of New Zealand farms should be causing concern.

No overseas purchaser has the right to buy New Zealand land or businesses. It is a privilege, not a right. Until the 1980s overseas ownership of our farmland was virtually prohibited. The rules on overseas investment still distinguish between land and businesses.

I have been saying for some time that business assets with monopoly characteristics - mainly infrastructure assets - should not be sold overseas. They always make a profit and extract monopoly rents.

Competition laws limit but do not eliminate monopoly rents. We ought not to export them overseas. I declined to approve the sale of Auckland Airport to Canadian interests in 2008 as a then Minister.

That decision was criticised by National, but I still believe it was correct. Infrastructure assets are especially important to the functioning of the economy, and ought to be run in the New Zealand interest. This is best achieved by New Zealand owners whose wider interests are more likely to be aligned with New Zealand's.

Not selling these sorts of businesses overseas seems to me a proper line to draw, but what about farmland?

For land greater than 5ha, Overseas Investment Commission approval must be obtained. It is within the discretion of the Minister to decline consent. The grounds upon which the Minister can decline to allow farm purchases are very wide.

The free trade agreement (FTA) with China does not stop our Government, through the Minister, declining to approve land sales. I was in Cabinet and explicitly checked this very point before agreeing to the FTA.

Mr English recently confirmed to me in Parliament that he understands the FTA does not mean we have to allow farmland to be sold to overseas buyers. Overseas ownership of New Zealand farmland has always been controversial, but for a number of reasons needs extra scrutiny now.

Land is our largest source of earnings in a fiercely competitive world. Land ownership is also the source of control of our major farming co-ops. Lose land ownership and New Zealand loses control of these co-ops and their crucial influence on ensuring a good part of the value chain accrues to New Zealand.

The world is divided between countries running huge current account surpluses (eg China and Germany) and those running large deficits (like NZ).

Even countries less wealthy than New Zealand can have concentrations of wealth from generations of inequality (or State-based control), so that the few with money are in a position to outbid New Zealand buyers for our best assets.

A major part of our current account deficit is comprised of interest and dividends paid to overseas investors. New Zealand's poor savings record means we are reliant on imported capital to fund the deficit.

Most of this comes via increased lending to home owners, but our deficit is used by some as a misplaced justification for the sale of more productive assets to overseas buyers.

China has a clear global resources acquisition strategy. It is widely reported as systematically acquiring control of primary resources - especially minerals, but also land - in Africa.

Our monetary policy settings have long meant New Zealand interest rates are higher than those normally paid overseas. An overseas purchaser with lower borrowing costs can afford to pay a higher price than a local buyer borrowing from local lenders.

Our minimum capitalisation rules for foreign investors are too lax - again this gives advantages to the overseas investor compared with a New Zealand investor.

The overseas investor as a consequence can pay less tax and so afford to pay a higher price for the same asset (all other things being equal). This also reduces the tax the Government receives, meaning the tax on others has to be higher or services have to be cut.

The Reserve Bank has said that the New Zealand banking system is currently exposed to shaky loans in the rural sector. Banks will want to sell-up borrowers in default to the highest bidder, so as to minimise the bank loss.

They will want to sell to an overseas buyer if they can get a higher price. This was clear from a recent radio interview with the bank receiver of the Crafar dairy farms. The banks' interests do not necessarily reflect the New Zealand interest.

Asset prices inflated beyond the means of New Zealanders also undermine social mobility, and lead to concentrations of wealth amongst a smaller number. Do we want that?

This combination of events means there are currently heightened risks that we could lose control of too many of our best wealth producing assets, including productive land.

These issues are complex and interlinked. To overcome them we need to increase our savings, and stop consuming more than we earn. Cutting back on Kiwisaver was a mistake.

We need better investment signals both via the tax system (as to tax mix; to change the comparative advantages speculative investments enjoy; and to improve minimum capitalisation rules) and through improved monetary policy settings. We also need changes to our financial sector.

In the meantime, we face heightened risks. How should we respond?

While we need foreign investment we must not lose control of our best income producing assets.

Why should we sell large tracts of our farmland or infrastructure assets to overseas buyers?

* David Parker is a former Minister of Energy and Climate Change.