Bill Rosenberg: We need stronger rules on foreign investment

The possible sale of Allan Crafar's farms to overseas investors has reminded the public of bad experiences with takeovers. Photo / Herald on Sunday

The Crafar farms sale has once again stirred controversy over overseas investment. The prospect of farm sales to overseas owners raises concerns about loss of control and benefit from New Zealand's land.

This is important, but there are even more important matters at stake. The Government is currently reviewing overseas investment rules. Much stronger regulation is needed.

Foreign direct investment, which involves control of firms and assets, is a very significant part of New Zealand's economy. In 2008 it was equivalent to 42 per cent of gross domestic product (GDP), compared with the average 25 per cent for developed economies.

In 1998 it was at a peak of 60 per cent, swollen by overseas takeovers of privatised government services, the third highest among developed countries behind only Ireland (now a basket case) and major foreign investors Belgium and Luxembourg.

The income foreign investors receive from all their investment, including portfolio investment and foreign debt, is more than agriculture, forestry and fishing contribute to our GDP. It is in the national interest for New Zealand to ensure we are getting the greatest benefit possible from that huge outflow of resources.

Yet foreign investment has been steadily deregulated in New Zealand, locked in by the growing number of international trade and investment agreements we have signed with Australia, Singapore, China, ASEAN and Chile. Many more such agreements are under negotiation, including one involving the United States.

Only for investment in land and fishing quota do the regulations allow the Overseas Investment Office and responsible ministers to consider whether it is improving exports, creating or saving jobs, or bringing new expertise or other benefits.

For the really large investments, such as Kiwibank if it were privatised, there are no such criteria.

The only considerations then are whether the overseas investor is putting in money and whether individuals controlling the investor have relevant "business experience and acumen" (always assumed if they have money) and are of good character (often determined by themselves or their lawyers signing a statement to say that they are). Investments of less than $100 million (and soon to be $477 million for Australian investments) need no approval.

Even for land, there is considerable concern that the criteria is too weak and not enforced rigorously enough.

For land, there are risks around recreational access and all the problems of absentee ownership, but there are also important economic risks.

The production from the land can get tied into a supply chain back to a country we had previously exported to, limiting the returns New Zealand receives for the produce.

Profits go overseas, lower prices may be paid for the produce to suit the owner or to avoid tax. Valuable processing and jobs may be moved offshore and New Zealand loses flexibility in diversifying markets.

Farmers experienced that with British-owned meat companies until Britain joined the European Union.

There is sense in John Key's statement that he "wouldn't want to see a wholesale sale of New Zealand's land productive sector". Damage could be done with considerably less than "wholesale sale".

But there are even more important matters at stake with billions of dollars of overseas investment not involving land. The Treasury and the Inland Revenue debated some of the issues in the lead up to the May Budget.

A study by the IRD of the top 200 non-bank businesses showed that overseas companies make more than twice the after-tax rate of profit of New Zealand-controlled companies (26 per cent of equity compared with 12 per cent).

The IRD argued their high profits were mainly from "economic rents", which frequently means they are in dominant positions in their markets and can push up consumer prices or force down supplier prices to increase profits.

Other than oil and mining companies, most of them were below-average exporters. Think of the oil companies, Contact Energy, Telecom, Vodafone and Woolworths supermarkets. The big four Australian banks (not included in the analysis) are similarly dominant. The IRD argued that New Zealand would lose by lowering company tax and the companies wouldn't threaten to leave because their high profits were reliant on their presence in New Zealand.

The Treasury argued the higher profits were because the overseas companies could spot more profitable New Zealand companies to take over and because they brought new techniques and skills to improve productivity.

In fact there is little hard evidence, other than selected individual cases, that many overseas companies do bring new techniques and skills, or that when they do they spread them to New Zealand companies and staff.

There is plenty of evidence that many are just comfortably dominating markets.

Many New Zealanders are understandably sceptical that overseas companies bring these benefits, given the 1990s experience of privatisation and asset stripping (such as with the railways), and the private equity takeovers of the 2000s with job losses and legacies of heavy debt (an early casualty being Feltex).

It is unlikely their views will change unless they can see effective oversight of investment coming into New Zealand. If overseas investment can indeed bring benefits such as jobs, export markets, new technology, skills and "spillovers" of these into New Zealand firms, an effective set of rules would ask investors to demonstrate such benefits.

Unfortunately, the commitments made by New Zealand in trade and investment agreements would need renegotiation to make such rules possible.

Until then, it is likely there will be continuing public concern, resistance and bad experiences with overseas investment in New Zealand.

Bill Rosenberg is CTU (Council of Trade Unions) economist and policy director.