KEY POINTS:
The Government's sudden change of the rules around overseas investment has unsettled some foreign investors, but whether it will have an enduring effect on the cost of capital is too soon to tell.
In a move expressly aimed at the Canadian partial takeover offer for Auckland International Airport the Government announced on Monday evening that it had, by executive fiat, introduced a new test for approvals under the Overseas Investment Act: that they should maintain New Zealand control over "strategically important infrastructure on sensitive land".
Cathy Quinn, a senior corporate lawyer with Minter Ellison Rudd Watts and member of the Securities Commission, said it was not a good signal to send to foreign investors.
Although the change itself was similar to what you might find in other countries such as Australia, New Zealand risked damaging its reputation by not following good practice about consultation and fair warning, she said.
"Personally I don't object to having some rules around foreign investment in strategic infrastructure. But it is the way it was done - overnight. That is what is damaging to our reputation," she said.
It was also inappropriate to change the rules in the middle of a transaction.
"I've had some feedback from offshore clients. It unsettles people," she said.
NZX chief executive Mark Weldon said he was in Australia talking to people who invest in New Zealand when the announcement was made.
The main reaction was that it had introduced a new element of uncertainty: What assets would count as strategic?
"Uncertainty comes at a cost," Weldon said.
"No one wants a list ... but having guidelines, definitions or some clarity about the kinds of things that will be considered when assessing whether something is strategic is quite important for New Zealand corporates' cost of capital."
James Miller of ABN Amro was loath to say it would change the cost of capital in the longer term.
Some elements of the cost of capital were transparent and easy to calculate, but others were sentiment-based and elusive.
"It could be just a short-term effect where everyone gets over it and says New Zealand's just in line with Australia now. Or the reaction could be `You just can't deal with this place. They are changing the rules on us and we don't know what we are dealing with'."
Unlike Telecom or Air New Zealand the airport shares were offered to the public with no strings attached in the form of restrictions on foreign ownership.
"If you take the higher price when you put a prospectus out because it can get taken over, markets feel hard done by when that is taken away from them."
Weldon doubted New Zealand's brand as an open investment destination would suffer from the change, citing restrictions on foreign ownership in place in Australia and the United States, and moves under consideration in Europe to limit investment by sovereign wealth funds.
"You might want to think about the fairness of us taking a principled position about how the world should be, when the world is not like that any more," he said.
