Corporate Advisory

05 Feb 2008

New Zealand Government creates legal quicksand for overseas investors in strategic infrastructure

Finance Minister Dr Michael Cullen announced yesterday the introduction of a new regulation under the Overseas Investment Act 2005 (Act) and Overseas Investment Regulations 2005 (Regulations) to require the Ministers of Finance and Land Information to take into account the following factor when considering applications for Overseas Investment Office (OIO) consent:

“whether the overseas investment will, or is likely to, assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land”.

According to Dr Cullen, this change was "made in response to the uncertainty and debate that have emerged surrounding the Canadian Pension Plan Investment Board's offer to shareholders in Auckland International Airport (AIAL) ". However, by responding to that specific uncertainty and debate with a two-line regulation change, Dr Cullen has created a new and greater area of uncertainty in New Zealand's foreign investment regime. This would appear to be a classic example of difficult cases, at least in the eyes of the current Government, giving rise to bad law.

Investment in infrastructure in New Zealand is a focus of the current Labour-led government. In a recent speech (7 February) regarding new infrastructure investment Dr Cullen said "the Labour-led government is serious about maintaining our investment in major infrastructure projects"  and yesterday Dr Cullen has indicated that any Public Private Partnership (PPP) infrastructure investments will receive government consent as part of the PPP process. Other than to observe that we are in an election year, it is difficult to reconcile that approach with an ad hoc two line regulation change which creates huge uncertainty for overseas investors looking to invest in New Zealand infrastructure assets and consequently undermines the goal of greater investment in infrastructure. The Government needs to back up its regulation change quickly with further detailed changes to the Regulations, or policy statements or other guidelines, in order to give overseas investors some further guidance and comfort on their ability to invest in New Zealand infrastructure assets.

Legal Context

In order to understand this change to the Regulations, it is necessary to understand the context of the Act and the current Regulations.

Under section 16 and 17 of the Act, certain factors must be taken into account when considering an overseas investment which is the subject of an application for OIO consent. In summary these factors are:

• whether the overseas person has business experience and acumen relevant to the investment;
• whether the overseas person is financially committed to the investment; and
• whether the overseas person is of good character.

Additionally, where "sensitive land" is involved, the overseas person must demonstrate that the investment will result in a net benefit to New Zealand, which involves the consideration of factors such as:

• whether the investment will result in new jobs, introduction of new technology or business skills, increased exports, added market competition, improved efficiency or production, additional investment for development, or increased primary processing;
• whether there are adequate mechanisms to protect significant aspects specific to the land in question including significant flora and fauna, wildlife, historic heritage, walking access and areas of foreshore and seabed; and
• any other factors set out in the Regulations.

The final factor "any other factors set out in regulations"  is where the new two line regulation change is being inserted. The effect of this change is that the Ministers must now always consider the relevance of New Zealand control of strategic infrastructure in relevant applications for OIO consent. Requiring the Ministers to consider that factor is one thing but, from an overseas investor's perspective, the weight that Ministers will give to that factor when deciding whether to grant consent and the conditions they may look to impose on applicants are more important issues.

In our experience, the OIO has not been willing to discuss or disclose what weighting is given to the long list of factors under the Act and Regulations that must be considered. However, as anyone who has been through the OIO process knows, an application must provide reasonable information on every factor, before the OIO will make a decision. Accordingly, we expect that every application for OIO consent that might possibly involve "strategic infrastructure on sensitive land" will need to comment on whether the investment will assist New Zealand to maintain New Zealand control of those infrastructure assets. Exactly what such comment might include is difficult to conceive.

"Assist New Zealand to Maintain New Zealand Control"

The law change appears to be designed to give the Government a mechanism to impose conditions on any relevant overseas investment to preserve New Zealand control of the relevant infrastructure assets.

Based on a plain reading of the words of the new regulation, it is difficult to see how the Canadian Pension Board's proposed investment, for example, would ever "assist New Zealand to maintain New Zealand control". In making that investment, the Canadian Pension Board would gain a level of control over AIAL. How can a transfer of control from current investors to an overseas buyer such as the Canadian Pension Board ever "assist New Zealand to maintain New Zealand control"?

Using the AIAL example, the only way we can see an overseas investment such as this assisting New Zealand to maintain New Zealand control is if the Canadian Pension Board limits its investment or control to preserve a level of New Zealand control. This might include agreeing to cap its current and future investment at a certain level or perhaps to cede some degree of control in some way to New Zealand interests, a step already taken by Canadian Pension Board. Other examples might be for the overseas person to agree to a Kiwi Share-type deal or regulatory oversight of the business to ensure New Zealand control is maintained. 

The Canadian Pension Board has publicly announced that it has entered into a deed which will restrict its ability to vote on resolutions to appoint and remove directors of AIAL and that it proposes to acquire a minority stake, not a controlling stake. Assuming the offer proceeds and the Ministers are required to reach a decision, time will tell whether those mechanisms will satisfy the new regulation and the Ministers. Exactly what the Ministers expect is unclear. What is clear is that, when planning any relevant investment, careful consideration will need to be given to the level of investment and control being acquired to determine whether this new factor might be of relevance to the required OIO application.

"Control"

The fact that Dr Cullen in statements today referred to "the country's international gateway passing into foreign control and, potentially perhaps in the longer term, majority ownership" in a context where the Canada Pension Plan Investment Board's offer is for 40% of Auckland International Airport, is a clear indication that control can be something less than a majority.

The word control is not defined in the Act, but the phrase "25% or more ownership or control" is defined to mean a beneficial interest in 25% or more of the relevant securities, the power to control the composition of 25% or more of the governing body, or the right to exercise or control the exercise of 25% or more of the voting power at shareholder meeting. The fact that this "25% or more" threshold is used in relation to all overseas investments in land or business assets suggests that this is the likely applicable threshold that Ministers will have in mind when interpreting the word "control" in the context of the new regulation.

"Strategically Important Infrastructure"

In Dr Cullen's announcement, reference was made to specific foreign ownership restrictions on Telecom and Air New Zealand, as examples of existing special restrictions on strategic assets.

The press releases issued by Dr Cullen indicate that the Government view is that the term "strategically important infrastructure" will cover a very narrow range of important assets. This may be the intention, but the phrase itself is not currently defined and the Ministers will have to look for guidance as to what may be covered by the new regulation.

Similar phrases are used in other statutes and, not surprisingly, have very broad definitions. 

The Resource Management Act 1991 defines "infrastructure" to include gas or energy pipelines, telecommunications and radiocommunications networks, power stations and lines networks, water supply networks, structures for transport on land (roads, railways, cycleways and walkways), port companies and airports.

The Local Government Act 2002 also contains a definition of "strategic assets". In this example, strategic extends to assets that a local authority considers important to retain if it is to maintain the current or future well-being of its community. This may not be the way in which the Government is attempting to use the idea of strategic assets but is a good example of how wide the phrase can be.

It may be that further regulation or guidelines will be drafted to offer the relevant guidance to the Ministers. Without that there is a real danger that the regulation could be used in a much wider sense than intended. The problem is highlighted by one press release yesterday that stated that port companies such as Auckland and Tauranga would probably be covered but "whether Christchurch Airport would fit is something Ministers might have to decide in the future".

Australia

In order to try to understand what strategically important infrastructure is, it is useful to look at the Australian model. In commenting on the changes, Dr Cullen stated that the new regulation will move New Zealand into line with a number of other countries, including Australia, which currently restricts foreign ownership of airports.

In Australia, the Government has the power to block proposals which would result in foreign persons acquiring control of an Australian corporation or business or an interest in real estate where it is determined to be contrary to national interest. The Foreign Acquisitions and Takeovers Regulations 1989 set out types of business activities that will be of national interest. These are:

• media;
• telecommunications;
• transport (including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided within, or to or from, Australia);
• the supply of training or human resources, or the manufacture or supply of military goods or equipment or technology, to the Australian Defence Force or other defence forces;
• the manufacture or supply of goods, equipment or technology able to be used for a military purpose;
• the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems; and
• the extraction of (or the holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.

We cannot say that the above would constitute "strategically important infrastructure" for New Zealand purposes but, in the absence of better guidance from the Act, Regulations or any policy statement or guidelines, this list at least represents a reasonable starting point.

"On Sensitive Land"

Whilst the new strategic infrastructure factor will only be relevant when the investment involves strategic infrastructure on sensitive land, in our experience assets of strategic importance are often on sensitive land. For example, the Auckland Airport is on sensitive land and you could expect that any port would sit on sensitive land, given the port’s location over and adjoining the seabed.

Briefly, sensitive land includes non-urban land areas of land greater than 5 hectares and other parcels of land that are classified as "sensitive" due to their inclusion or proximity to waterways, parks, conservation areas, islands, wahi tapu or wahi tapu areas or areas historic significance. 

Conclusion

Clearly the new regulation has created significant uncertainty. In the interests of promoting foreign investment in New Zealand, something that is critical to our economy, the Government needs to take immediate steps to remove that uncertainty.

Authors

Kevin Jaffe

Partner - Corporate & Commercial

DDI: +64 9 977 5057

Mobile: +64 21 987 430

Email:

View Profile

Shelley Cave

Partner - Corporate & Commercial

DDI: +64 9 977 5260

Mobile: +64 21 660 090

Email:

View Profile

Peter Hinton

Partner - Corporate & Commercial

DDI: +64 9 977 5056

Mobile: +64 21 446 866

Email:

View Profile

Don Holborow

Partner - Corporate & Commercial

DDI: +64 4 924 3423

Mobile: +64 29 924 3423

Email:

View Profile

Michael Pollard

Partner - Corporate & Commercial

DDI: +64 9 977 5432

Mobile: +64 21 400 852

Email:

View Profile

Peter Stubbs

Partner - Corporate & Commercial

DDI: +64 9 977 5010

Mobile: +64 21 955 230

Email:

View Profile

Alex Campbell

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5177

Mobile: +64 21 918 311

Email:

View Profile

Craig Nelson

Senior Associate - Corporate & Commercial

DDI: +64 9 977 5185

Mobile: +64 21 918 309

Email:

View Profile