What you need to know about the Overseas Investment Office

OPINION

New Zealand’s foreign direct investment regime is ranked the seventh most restrictive within the OECD yet the Overseas Investment Office (OIO) is routinely accused by its critics at home of being little more than a rubber stamp.

It is this dual reality, or non-reality, which invites the conclusion that the OIO may be our least understood public agency. The confusion arises from the fact that almost all of the applications which are vetted by the OIO are approved.

But the reasons for that are not that the OIO is soft. They are that people seeking to purchase an asset of any significance will first ensure that they have access to expert advice and, partly arising from this, that the high costs inherent in the system exert a powerful filtering effect with the result that investors will take an application forward only if they have a high degree of certainty that it will succeed.

This is particularly true of acquisitions involving sensitive land, which tend to evoke the strongest emotions and therefore dominate the public debate. 

Such applications typically take five to six months to complete and attract an OIO application fee of around $22,500. On top of this, there will be legal fees and the cost of economic and/or environmental consultants and other advisers which will often run to many more times that.

Although relatively strict by OECD comparison, our regime has the advantage of being reasonably transparent in that it sets out clearly how an application should be presented and how key factors – such as the economic, environmental and policy benefits to New Zealand – should be demonstrated.

Poorer quality proposals which do not on their face adequately demonstrate compliance with the statutory criteria do not make it past an initial screening by the OIO, or are allowed to lapse.  We understand that the OIO typically rejects for assessment one to two such applications a week and, while a few are resubmitted, most are not. 

These “non-starters” are not recorded in the OIO figures. Neither does the high approval rate in the official statistics capture the increasing rigour of the screening process. Applications involving sensitive land must satisfy two tests:

• an "investor test" which looks at the character, relevant business experience, acumen and financial commitment of the investor (or individuals with control of the investor), and
• a "benefits test" which examines whether the investment will advance the public interest in ways which would not be conferred by a New Zealand buyer.

The OIO requires increasingly detailed information in support of the benefits test in particular – hard data about forecast capital investment, job creation, increased productivity and export receipts, etc. Generally an investor will need to prepare a business plan that explains the rationale for the investment and any plans (such as capital investment or job creation) that will result in benefits to New Zealand.

Crucially, the benefits shown need to be more than what would occur in any event without the foreign investment. Depending on the intentions of the vendor, this may require identification of a hypothetical New Zealand purchaser (even if no actual New Zealand bidder exists) and consideration of what benefits would arise from ownership of the assets by this hypothetical New Zealand purchaser.   

This hypothetical “counterfactual” analysis represents an evolution in analytical approach that adds more complexity to the test and particular challenges when acquiring mature assets where there is limited scope to lift productivity, deploy new technology or create new jobs. 

An investor will also be subject to ongoing reporting obligations, providing (in most cases, annual) reports to the OIO about implementation of the business plan and realisation of the benefits identified in support of the consent application.

If there is a weakness in the system, it is in the resource constraints on the OIO. This under-resourcing risks impairing the OIO’s ability to monitor compliance with consent conditions to ensure the investment is delivering benefits to New Zealand.

Chris Bougen is a senior associate at Chapman Tripp, specialising in corporate and regulatory law.  Chapman Tripp has acted for a wide range of overseas entities seeking consent under the OIA, including several active overseas investors in agriculture assets