In recent days, both Australia and New Zealand have announced changes to their screening criteria for the admission of foreign investment. In Australia’s case, the backdrop is the awkward political situation which has developed following the late collapse of the Chinalco/Rio Tinto deal in June 2009. In New Zealand’s case, the backdrop is the stated objective of the present Government to review and simplify New Zealand’s foreign investment regime.
Chapman Tripp partner Tim Williams is a member of the Technical Reference Group assisting the review of the Overseas Investment Act 2005 (the Act), and we have recently written a Brief Counsel proposing technical changes to the Act.
This article takes a somewhat broader approach. It looks at the recent developments, on both sides of the Tasman, in view of evolving international investment obligations and offers some thoughts as to some key legal and political issues to be taken into account.
Australia's new rules
On 4 August 2009, the Australian Treasurer, Wayne Swan, announced several changes – planned to take effect in September 2009 – with the aim of further liberalising Australia’s screening procedures for inward foreign direct investment (FDI). This will be done by amending the Foreign Acquisitions and Takeovers Regulations 1989 to reduce the types of applications which require approval by the Federal Government’s Foreign Investment Review Board (FIRB). In particular, the changes will:
- replace the existing thresholds for screening private business investment with a single threshold of a 15% stake in a business worth A$219million. The intention is that private foreign investment in Australian business can, in most cases, proceed without any review
- index the new threshold to inflation to prevent erosion over time, and
- abolish the existing notification requirement for establishing new businesses valued above A$10million.
Mr Swan estimates that 20% of applications will now not need to be screened.
This all seems fairly uncontroversial. The rather more interesting overlay is how this announcement accords with Australia’s treatment of investment from the United States – presently Australia’s largest supplier of inward FDI (at 39% of the 2007 total), and China – which is actively seeking to expand its FDI into developed country assets.
The position of US investors is, in fact, not significantly enhanced by the new announcement, as US investors already enjoy preferential treatment due to the 2005 Australia-US Free Trade Agreement (Aus-US FTA). The threshold for review for a private business investment by a US investor is presently, and will remain, A$953million; and US investors are already free from notification requirements for establishing new businesses.
The position of Chinese private investors will be the same as for non-US private investors. But this overlooks the elephant in the room. The most substantial Chinese investors are either owned or controlled by the Chinese Government. And the proposed changes specifically do not apply to sovereign foreign investments.
In the post-recession world, China’s state-owned corporations and sovereign wealth funds (as well as those from other countries, particularly in the Middle East), will become major players in foreign investment markets. A recent example is the minority investment by a Chinese sovereign wealth fund China Investment Corporation (CIC) into Canadian mining company Tech Resources Ltd. Notably, CIC’s investment was not blocked by Canada’s Investment Canada Act 1985, which was amended in March 2009 to introduce a broad public interest test. (The reason for the amendment was a 2008 US bid for a Canadian IT firm which was refused out of national security concerns, due to fears about US ownership of Canada’s satellite technology.)
It is arguably legitimate to treat government-owned investors differently from purely private investors. But the Australian regulations already provide special treatment for US Government-owned investors, which is comparable to its treatment for private US investors (see rr 11 and 13 and s 17G). This implements obligations in the Aus-US FTA, which require Australia to provide to US investors “treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment [and] acquisition...of investments in its territory” (Article 11.3). It would appear that a US investor which is owned or controlled by the US Government falls within the terms of this provision. The width of the Article 11.3 commitment is watered down by both countries in their respective schedules of non-conforming measures, but the Australian schedule does not distinguish between US private and US state investors.
Especially vis-à-vis their American cousins, Chinese state investors are unlikely to feel any more welcome in Australia than they did before the Chinalco/Rio Tinto collapse. Although that deal fell over for private reasons, it may well have been blocked by an FIRB decision due to be issued only ten days later. Indeed in March 2009, Mr Swan had blocked the acquisition by Chinese company Minmetals of OzMetal’s gold and silver mine in Woomera, South Australia, supposedly due to national security concerns. Fear of Chinese state FDI is not restricted to Australia. There have been comparable instances of Chinese state investors failing to penetrate the US (think China National Offshore Oil Corporation’s 2005 bid for Unocal). Even more well-known is the 2006 US House of Representatives Appropriations Committee vote to prevent the acquisition of a US port by shipping company P&O, due to P&O’s Middle Eastern ownership. This resulted in the transaction being completed through a US entity. These sorts of cases highlight the extreme sensitivity in this area.
New Zealand’s new rules
On 9 July 2009, New Zealand announced technical amendments to r 33 of the Overseas Investment Regulations 2005 to increase the exemptions from the foreign investment approval process. They broaden one of the existing exemptions (for intra-group transfers) and create three new exemptions with the effect of facilitating portfolio investment without the need for approval.
They are not earth-shattering changes. These amendments can be seen as the first step in what will be a more thorough review of New Zealand’s screening process for foreign investment. One potential change on the horizon is the elimination of tax on foreign portfolio investment through portfolio investment entities (PIEs), which could stimulate significant increased capital flows and encourage the increased use of New Zealand investment vehicles internationally.
The difficult issue of calibrating the screening process for FDI is, however, still to be tackled. This has always been more controversial than portfolio investment because of the sensitivities and security risks inherent in direct foreign ownership of nationally strategic assets. Treasury’s February 2009 Report states “Treasury would be comfortable with removing the screening regime altogether”, but goes on to recommend wholesale changes instead.
New Zealand had its own moment of panic at the foreign ownership of a strategic asset last year, when the Canadian Pension Plan Investment Board made a bid for shares in Auckland International Airport. The Government's response was interesting. Although it had only three years previously repealed the Overseas Investment Act 1973 and replaced it with the 2005 Act and Regulations, it decided that these instruments did not give it a sufficiently clear power to reject the investment application on public interest grounds. It therefore promulgated an amendment to the 2005 regulations to add an additional factor for determining whether to grant an application with respect to sensitive land, r 28(h): “whether the overseas investment will, or is likely to, assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land”. Its decision was based on r 28(h) and other grounds.
In making this eleventh-hour amendment, the Government noted it had been advised that altering screening requirements through legislation would have infringed New Zealand WTO obligations as well as an OECD instrument on capital liberalisation. It is true that the General Agreement on Trade in Services (GATS) does regulate the cross-border supply of services through commercial presence, and that it contains a national treatment obligation. But this only applies to investments which also provide services and is subject to the significant carve-outs in New Zealand’s schedule of commitments which state broadly that (pursuant to the 1973 Act) approval is needed for any investment in rural land and any other investment higher than US$10m. The OECD instrument is merely “soft” law and does not impose binding commitments.
The Government also noted its advice that making screening criteria more restrictive could violate New Zealand’s obligations under the investment chapters of its free trade agreements. The two which were in force at that time were the NZ-Singapore and NZ-Thailand Closer Economic Partnership Agreements. New Zealand now has a Trans-Pacific Partnership Agreement with Brunei, Chile and Singapore, and FTAs with China and the ASEAN countries (the latter of which is not yet in force).
Whether and to what extent these agreements affect the operation of New Zealand’s domestic screening legislation depends upon how they are drafted. As a general rule, investment chapters of FTAs do not extend pre-entry rights – leaving the question of whether to permit establishment of an investment to the national law. In contrast, the investment chapters of our agreements do tend to provide pre-entry rights of national treatment (i.e. a guarantee that a covered investor can make its investment in the same terms as a local), subject to broad exceptions. Thus, the Singapore and Thailand Agreements both provide a right to establishment, but subject this to New Zealand’s Overseas Investment Act regime. Similarly, the right to establishment in the Australia-ASEAN-NZ FTA (Chapter 11, Article 4), is subject to a list of exceptions still to come (Article 16(5)). The NZ-China FTA does not provide a national treatment right of admission or establishment (Article 138). The Trans-Pacific Partnership Agreement does not contain an investment chapter at all.
Of great significance is the fact that New Zealand is, amongst other initiatives, negotiating an expanded Trans-Pacific Partnership Agreement, which if successful is likely to include: (a) the US, Australia, Peru and Vietnam as parties; (b) an investment chapter and (c) a compulsory investor-state arbitration procedure – something not included in the Aus-US FTA. The US approach has historically been to seek pre-entry rights. Our negotiators may well be induced to offer greater concessions in this regard.
This broader context should give the New Zealand Government pause before making wholesale changes to the 2005 Act. Simplification, streamlining and ensuring thresholds are appropriate and current are good ideas. So is encouraging portfolio investment. So also is encouraging FDI, which New Zealand needs. But our own recent experience – as well as that of the US, Canada and Australia – shows that political pressure can escalate very sharply once the spotlight is placed on sensitive FDI, especially on an investment which may have national security implications. And politicians – no matter what they might say in the cold light of day – are often moved to respond in haste to intense political pressure. Thus the US House of Representatives blocked the P&O/Dubai port investment, despite it having been approved by the Federal regulator; Canada rejected a US investment using the blunt “net benefit” test in the existing Act, leading to this year’s revisions to its legislation to give it clearer powers in this regard; and the NZ Government blocked the Canadian-NZ airport investment, even though it considered it needed to pass new regulations to do so.
The risk for New Zealand in acting in haste is two-fold. First, any adverse decision may be judicially reviewed in the New Zealand courts (as has happened in the past). It will be easier to withstand such review if criteria exist on the statute book to permit taking account of strategic and national security implications. Secondly, next time around a disgruntled investor may seek to sue the New Zealand Government pursuant to the investment chapter of a relevant free trade agreement.
What New Zealand does not want to do is what the Government was forced to do in 2008: pointedly and retrospectively amend the law to prevent a politically unpalatable foreign investment. This would make both a judicial review and an investment treaty arbitration harder to defend. Thus, the law should be drafted with an eye to the future and delineate appropriate circumstances justifying denial of approval on strategic and national security grounds – as well as be integrated as far as possible into New Zealand’s international evolving investment commitments.