NZ Initiative's Bryce Wilkinson says it is bizarre that the Government does not have to assess the financial cost to Kiwis of declining an overseas bid for NZ assets

NZ Initiative's Bryce Wilkinson says it is bizarre that the Government does not have to assess the financial cost to Kiwis of declining an overseas bid for NZ assets

By Bryce Wilkinson*

Should the owner of Lochinver Station, the Stevenson Group, have the right to sell it to the Crown at the Shanghai Pengxin bid price of $88 million?

In that case, the Crown could (and should) immediately sell the station to the highest bid from a New Zealander. 

Purely by way of illustration, suppose that New Zealander bid $70 million. New Zealanders would then know that the financial cost to New Zealanders of the ministerial decision to reject the overseas bid was $18 million.

The heat would promptly go on ministers to justify their case that it was not in the public interest to secure that $18 million gain.

If ministers can justify it to the public's satisfaction, well and good. The public at large should then be happy to fund the $18 million. To do so accords with the benefit principle of taxation.

Under this proposal, the Stevenson Group would not be uniquely taxed for the benefit of New Zealanders at large. It would get the $18 million that it was rightfully entitled to under long-standing common law principles. 

As a result, it would be better able to afford and fund its planned New Zealand investments.

If, on the other hand, ministers can't justify spending $18 million of New Zealanders' wealth in this cause, that is their (political) problem. Under this proposal they would have known at the time of their decision that they could be held to account in this way.

The current situation lacks that discipline. It is bizarre that ministers are not required to assess the financial cost to New Zealanders of a decision to decline an application.

The actual situation is worse than bizarre. Incredibly, even if ministers had that information, they would be obliged to ignore it. As the Prime Minister has pointed out, ministers have to comply with the law in reaching their decisions.  That means complying with the Overseas Investment Act 2005.

That Act lists a myriad of secondary considerations that ministers must consider. The list does not include the prime benefit any seller of any property gains from selling to the highest bidder – greater financial wealth.  As detailed at page 9 in the New Zealand Initiative's 2014 report, Open for Business: removing the barriers to foreign investment, a 2012 High Court decision determined that this omission was what the Act intended.

Yet, no competent economic or commercial analysis would ignore the financial benefit to New Zealanders of being allowed to sell to the highest bidder. Imagine if the government stopped you from selling your home to someone out-bidding everyone else by $100,000 on the grounds that the gain is not a benefit!

What could be wrong with providing compensation for New Zealanders who are stopped from selling their properties to the highest bidder purely because the highest bidder happens to be an overseas person?

Actually, skilful design of such a scheme would be needed. Here are a few reasons why.

First, what if the overseas party is in cahoots with the New Zealand vendor? The two might collude; the overseas party might offer to pay an artificially high price in a bid that contains other provisions designed to ensure the authorities have to decline the proposal.

Well, if those provisions would violate existing environment, safety or other laws that a New Zealand owners would have to comply with, rejection of an application on those grounds should not trigger a compensation provision. But other safeguards against fundamentally fraudulent offer prices would likely be needed.

Second, the offer price could well be conditional on evolving financial or market outcomes. A conditional offer is not worth as much to the vendor as an unconditional offer. One option would be to make rejected conditional offers non-compensable.

Third, if the offer is made subject to compliance with requirements to spend money on public walkways, local schools, or whatever that would not be imposed on a New Zealand buyer, the offer price is likely to be lower than it would have been in the absence of (the expectation of) such requirements. Such requirements are an implicit tax on New Zealand farmland values. The forced spending is also a waste of New Zealand resources if the benefits to New Zealanders are small relative to the amount of the tax.

Fourth, would the proposal allow multiple bites of the cherry? Would the New Zealander buying the same farm from the Crown then offer it to a foreign buyer? No, the Crown would put a covenant on the title preventing this prior to selling it the first time.

Where would Federated Farmers stand on such a proposal?  The Overseas Investment Act's definition of sensitive land is exceedingly broad, covering all non-urban land over 5 hectares. That definition likely encompasses all farms of an economic size.

Yet Federated Farmers has not been fronting up on the case for greater respect of private property rights on this issue. Plausibly it faces the problem that whereas individual members might like to be able to sell their own properties to the highest bidder, they would prefer to interact with neighbouring local New Zealand owners rather than overseas owners. 

That viewpoint is easy to understand. Who is more likely to support the local rugby club, a local guy, or an overseas person who likely has different values and interests? (Personally, I would not rush to answer that question. Overseas owners have an incentive to build relationships with the local community and may be well-placed to contribute substantially. But the question of "us" versus "them" is ingrained in the human psyche, for better or for worse.)

However, the point of this "put option" proposal is that it allows ministers to block a sale as at present by putting whatever weights they choose on the contending considerations. So farmers could achieve the price offered by the highest bidder while seeing that bid rejected if from an overseas buyer.

Another option for farming communities that really wanted to remain closed would be to agree to mutual covenants on their properties that precluded ownership by an overseas person. That would save everyone the time and costs of Overseas Investment Act processes. Perhaps Federated Farmers could survey its members to see how many of them would be willing to do that?

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*Dr Bryce Wilkinson is a Senior Fellow at the NZ Initiative. This is the Initiative's weekly column for interest.co.nz.

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16 Comments

12
up

... you have certainly made a mess by overcomplicating a simple solution. How about we just stop selling the trees and only sell the apples?

Since the NZD is a derivative of the fiat USD reserve currency system it should not be a surprise that the worth attributed to the asset under discussion along with many others in it's realm is a function of the rate attributed to central bank credit fabrication and it's subsequent near zero cost.

We are living in the age of magical thinking. Governments through central banks have muscled down money market interest rates to zero and in some cases below zero. Not content with that, they have implemented what economists chose to call "the portfolio balance channel". That’s a very fancy phrase meaning higher stock prices in the interest of rising aggregate demand. That was the theory of the Bernanke Fed and it certainly was the theory of the Chinese communists who sponsored the fly away levitation of the Shanghai A-shares. So the world over – and this goes for Europe as well – central bankers have taken it upon themselves to sponsor great bull markets in the hopes of making people spend more because they will feel richer. That was the theory. But they neglected to think through the full consequences of these policies. Read more

How could those (taxpayers) not directly in receipt of the devalued fungible issue ever attain the capacity to make up the difference you claim is owed to the New Zealand seller, if in theory a domestic resident executed the purchase at a lower level?

I do agree with you...... and it seems obvious.

I'd also throw in that NZs' own taxation regime makes it possible for a foreign entity to outdid any NZ entity.... and still end up with bigger returns on investment simply because of the tax laws around foriegn investment...
( I was told this by a Investment Banker who , over the last 10 yrs, has been continually outbid by foreign entities ( Japanese and Chinese in his case ) in trying to buy NZ food production type businesses ... He suggested that it amounts to a 3-5% difference in the net return on investment.??? ).... this is not my knowledege... so I don't know how correct it is...?????
If it is true.... It is kinda crazy..???

There's a simple analogy in that linked article:

"So interest rates are the traffic signals of a market based economy. Ordinarily, some are amber, some are red and some are green. But since 2008 they have mainly been green.

That got me thinking.

So, the global market based economy (with all its accompanying economic theory) is debased, defunct, extinct. Like a city with traffic lights that always stay green, anarchy becomes the new norm. Political leaders can no longer direct traffic through rational decision-making based on orthodox economic theory - hence, maintaining some semblance of order becomes purely part of the political realm.

Point is, when the lights were working properly the powers that be had to wait in traffic just like the rest of us. So they lobbied for road rule changes that created anarchy on the ground and took to the skies.

A law for some, and a law for others

For some, they don't even bother to change the laws, they just circumvent them, like Len Brown who parked in a loading zone last week and got off the ticket - the privileged in action

Surely any nation has a right to act in it's own self interest. China certainly does in not allowing foreign ownership of their land. Good on them. No body seems to find this a problem. In NZ law, no body has absolute ownership of land and freedom to do anything they like, because it affects others. It is at the pleasure of the crown. Individual actions have a profound affect on the whole society. Bead by bead, musket by musket, blanket by blanket (and a lot of other less honest actions); the Maori lost most of their land, economic independence and effective sovereignty. We are doing the same thing with the Canadians, Americans, English, Chinese, etc.

10
up

"Surely any nation has a right to act in it's own self interest."

Kiss that concept goodbye when the TPP comes in.

I suppose in that light sovereignty is being ceded to the multinationals and the giga rich 0.01%. And so called democracy has been gerrymandered in a way that we have no say over the matter.

ooohhh!!, on the basis of this article, just had a great idea to make us all stinking rich, the government can just put up all the properties in NZ for international tender and if they attract bids well in excess of what the local valuation is, just compulsorily acquire them from the current owners @ CV and hand them over to the highest bidder. It really is that simple if the only consideration is bucks in the pocket now.

Its simple NZ must lease land (with performance conditions) and not sell. Only in situation like the Harvard University sheared research work, or a business - they can buy outright, but must sell once the purpose intended is finished.

Where's the acknowledgment of the effect on young NZ farmers seeking to enter the industry from the inflation effect on land prices from these wealthy foreign entities. The average age of farmers is already 58 in the sheep and beef sector, allowing open slather entry to global bidders will only exacerbate that.

This is not looking good - from a number of angles
A decision was made - and the claimants don't like it
And now the lawyers are involved
Pengxin are willing and able to use our laws against us
This could blow up in the Governments face and set a serious precedent for all who follow
http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=11...

Or it could result in a decision that declares a lot of earlier decisions were flawed

Can't have it both ways

Meritorious - the Wilkinson PUT - a few hooks in it - but still, very clever

The owner of Lochinver Station, the Stevenson Group, should have the right to sell it to the Crown at the Shanghai Pengxin bid price of $88 million?

Am I missing something or is this article supporting the economics of greed? The model applied of being a cost to NZrs of $18 mil is rubbish. While the direct upfront cost is that amount, a foreign investor will be looking to profit from the deal, so land and business appreciation could well see much more than the $18 mill leave the country when the property is sold on. Also many of these companies structure their business so that they have little to no tax liability here, again raising the cost to NZrs for selling to a foreigner. I suggest any business operating, not jsut based, here should be laible for the full tax liability and not be able to move revenues offshore without paying tax. Also as has already been mentioned, selling to the highest bidder, and likely foreigner will have an extremely difficult to quantify but significantly higher cost, on NZrs when they want to buy farms or businesses.

Maori have learned an expensive lesson that when you lose your economic base when you lose your land.

Is land not of paramount importance to a commodity economy?

On that basis Bryce I would support your proposal for greater analysis of the economic cost but in reality your thinking is pretty shallow. Now if you included the cost to my children, and the children they might have, then it might be the start of a conversation with some intellectual merit.

Btw, going back 20 years to when I was in the military I made a visit to Lochinvar. That SAS recce might give some more hints as to why the sale was turned down for those so blinkered they can see past the dollar symbols.