Corporate Advisory

05 Nov 2008

Overseas Investment in Strategically Important Infrastructure: Any More Certainty?

Earlier this year we published an FYI which considered a new Overseas Investment regulation.That new regulation requires the Ministers of Finance and of Land Information to take into account, 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".

We concluded this new regulation created significant uncertainty and that, to promote foreign investment in New Zealand, which is critical to our economy, the Government must remove that uncertainty.

More than six months on, the Ministers have considered a number of consent applications where this was a relevant consideration. The Regulations Review Committee (Committee) recently released its report in response to a complaint about the new regulation.

There remains a crying need for more certainty, and quickly, particularly given recent political statements that investing in infrastructure will be an important part of helping the New Zealand economy weather the current global economic downturn. We endorse the Committee's recommendation to review the new regulation and to consider amending the Overseas Investment Act 2005 (Act) to introduce a new class of sensitive assets, separate to sensitive land.

Recent Applications

The recent relevant decisions of the Ministers relate to:

• the Canadian Pension Plan Investment Board's (CPPIB) bid for 40% of Auckland International Airport Limited (AIAL);
• the Cheung Kong Infrastructure Holdings Limited (CKI) and Hong Kong Electric Holdings Limited (HKE) purchase of Vector Wellington Electricity Network Limited (Vector); and
• the BG Group plc (BG Group) bid   for Origin Energy Limited  (Origin).

AIAL (April 2008)

In April, the Ministers rejected CPPIB's application for OIO consent for its investment in AIAL. So, what can we learn from the published reports on the decision?

CPPIB was seeking consent to acquire up to 40% of the shares of AIAL. To try to satisfy the new regulation, CPPIB limited its voting rights (in most situations) to 24.9%.

Strategic Infrastructure

The OIO report on the AIAL application is not helpful in interpreting "strategically important infrastructure". It assumes that AIAL's assets are strategically important infrastructure.

Assist New Zealand to Maintain NZ Control

The OIO report is more helpful where it outlines the meaning of key words used in the new regulation:  "assist", "control", "maintain" and "New Zealand". "Assist" means "to help or aid". "Maintain" means "to keep up, to preserve, or to cause to continue". "New Zealand" means "persons other than "overseas persons" (as defined under the Act). The essence of "control" is found to lie in rights to appoint or remove the majority of directors.

AIAL Decision

As for CPPIB's application, the OIO ultimately said that it is "not known whether the overseas investment is likely to maintain New Zealand control of strategically important infrastructure on sensitive land". The Ministers' comments were very brief, recording that the investment is "unlikely to assist maintenance of New Zealand control of this strategically important infrastructure", and that "would be particularly so if the investment is taken in conjunction with potential further small acquisitions of shares by overseas investors in AIAL".

This decision is of limited value. What we do know is that the voting limitation path will not necessarily work, particularly where other overseas investors are able to make small acquisitions of shares in the target company (without the need to obtain OIO consent) and further erode the level of New Zealand control.

Vector (July 2008)

In July, OIO consent was granted to CKI and HKE to acquire Vector. The Minister of Finance publicly announced "the Wellington Electricity Network does not involve any sensitive land. As a result, none of the national interest tests that were the subject of discussion over Auckland International Airport earlier this year applied in this case.… The hurdle the applicants had to clear was significantly lower".

The test under the new regulation did not need to be applied because of a technicality. The land owned by Vector was not "sensitive" under the statutory definition. So, the OIO did not have to consider whether the investment "will, or is likely to, assist New Zealand to maintain New Zealand control" of strategic infrastructure on sensitive land, as the electricity assets were not situated on sensitive land.

This shows how rushed the introduction of the regulation was. If the policy was to protect New Zealand control of strategically important infrastructure, it is difficult to reconcile why the sale of all of the Wellington lines network is any less worthy of protection than the sale of a shareholding in AIAL. 

Origin (August 2008)

In acting for BG Group, we obtained OIO consent for its intended 51% investment in Contact Energy (via its bid for Origin). Origin's New Zealand assets include an interest in the Kupe Gas Joint Venture and 51% of Contact Energy. Even though this was an upstream transaction between a UK company and an Australian company, OIO consent was still required, as it involved a high value downstream New Zealand investment in many assets including "sensitive land".

We had to grapple with the new regulation, and what it meant, and we put together an application that worked.

One key observation from our process was the continuing lack of guidance on "strategically important infrastructure". Again, the OIO assumed relevant assets were strategically important infrastructure; there was no particular test or logic that was applied. This means any OIO application involving sensitive land with infrastructure must demonstrate how that investment will assist New Zealand to maintain New Zealand control of those assets, or risk declinature.

Regulations Review Committee Report (September 2008)

In response to a complaint from the New Zealand Business Roundtable and the Wellington Chamber of Commerce that the new regulation lowered AIAL's value and that the Government had trespassed AIAL shareholders' property rights, the Committee investigated and, in September, reported  its recommendations to the Government.

The Committee considered why the new regulation considers only strategically important infrastructure assets located on sensitive land. This appears to have arisen because the Act only allowed regulations to be made by the Ministers for sensitive land applications, not all OIO applications. The Committee said this was "an unusual and unexpected use of the regulation-making power".

Treasury advice to the Minister said the new regulation would "make it easier for future governments to take a more selective approach to foreign investment and this itself may raise uncertainty". The Committee found the concept of strategically important infrastructure to be such a broad and significant class of assets that it deserved a statutory class of its own.

The recommendation was to review the regulations, and consider an amendment to the Act for strategically important infrastructure as a class of sensitive asset, separate to sensitive land. We endorse this. 

If there is to be a policy to protect New Zealand control of strategically important infrastructure, then legislation should be debated and enacted in a full government process, and then applied in a consistent manner for all strategically important infrastructure. Such legislation would provide valuable guidance to potential investors when considering New Zealand investment opportunities. Our offshore investors are important, and they need to know what they must do to obtain consent and meet any New Zealand control requirements.

The Committee also made recommendations to legislate to prevent further regulations being implemented in the same way as this one. At a minimum, the Committee thought there should be consultation.

We do not agree with the Committee's and Treasury's view that "share value fluctuation due to authorised regulatory intervention is something that shareholders simply have to accept". Changing the law without regard to the potential impact on the value of investments deters investment. This would push up the cost of capital in New Zealand to the detriment of all New Zealanders.

Conclusion

New Zealand actively seeks foreign capital and investment and yet, in a critical area of foreign investment, significant uncertainty has been created. This uncertainty must discourage foreign investment, especially where (as is often the case) the investor has other options available to it. The Government needs to take immediate steps to act upon the Committee’s recommendations and remove that uncertainty.

Authors

Kevin Jaffe

Partner - Corporate & Commercial

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Shelley Cave

Partner - Corporate & Commercial

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Peter Hinton

Partner - Corporate & Commercial

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Don Holborow

Partner - Corporate & Commercial

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Michael Pollard

Partner - Corporate & Commercial

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Peter Stubbs

Partner - Corporate & Commercial

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Alex Campbell

Senior Associate - Corporate & Commercial

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Craig Nelson

Senior Associate - Corporate & Commercial

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