Overseas Investment Office has to revise Crafar farms decision by applying new test of what a hypothetical New Zealand buyer would do

By Alex Tarrant

Following the High Court's direction for the Overseas Investment Office to revise its decision to approve a Chinese company's bid for the 16 Crafar farms, the OIO says it is now considering what it believes a hypothetical New Zealand purchaser would do with the farms.

Justice Miller's decison on Wednesday to set aside the decision means the OIO is now reassesing how it considers what economic benefits foreign ownership brings to New Zealand, and how these benefits would compare to a situation where an asset, such as the Crafar farms, was not sold into foreign hands, but to New Zealand interests.

In making its decision approving Shanghai Pengxin's application for the farms, the OIO applied a 'before and after' test of the asset being purchased to determine the benefits the foreign investment would bring, ie, the OIO assesed what the foreign buyer would invest in the farms versus the status quo.

In the Crafar farms case the status quo was the 16 run-down farms, and the foreign buyer was, among other things, promising to spend at least NZ$14 million upgrading the farms back to working condition, to make them economically and environmentally sustainable.

However, Justice Miller concluded that the government Ministers who signed off the OIO's decision "misdirected themselves in law by adopting the OIO's 'before and after' approach to the economic factors in s 17(2)(a)."

"The statute requires that they assess those factors by assessing what would happen 'with and without' the overseas investment that they are being asked to approve," Justice Miller said in his judgement.

It's all about the counterfactual

Possibly the most important part of Justice Miller's judgement forcing the OIO to reasses its decsion are paragraphs [37] and [38]. They address sections 17 and 28 of the Overseas Investment Act which outline factors for assesing the benefits of overseas investments in sensitive land. Here they are:

[37] Second, the statute's perspective is forward-looking, as the s 17 factors collectively demonstrate. The OIO must assess what will happen if the overseas investment is made (the factual). If it is to isolate economic benefits attributable to the overseas investment, the counterfactual must similarly be forward-looking, requiring that the OIO ask what will happen if the investment is not made.

[38] Third, causation occupies a central place in the statutory scheme. The legislature intended to grant the privilege of of overseas ownership of farm land only where the overseas investment is likely to benefit New Zealand. It emphasised that objective in s 17(2)(a), which inquires whether the overseas investment will "result in" certain economic benefits. The Ministers could scarcely serve the legislative process if when assessing a given economic benefit they were to ignore clear evidence that the benefit will accrue anyway, should the land remain in (or, where another overseas investor already owns it, retun to) New Zealand ownership. Further, farm land is a special case. The benefits of overseas investment much be identifiable and substantial. If a given benefit will happen anyway, it cannot easily be described as a substantial consequence of the overseas investment.

With these and other comments in the judgement, Justice Miller has required the Overseas Investment Office to assume certain economic benefits stemming from new ownership of the farms would occur whether the buyer was foreign or local, namely investments made to bring the farms back to a normal state of affairs as they are currently so run-down.

In the Crafar case, instead of only acknowledging Shanghai Pengxin's promise to spend NZ$14 million improving the farms, the OIO has to effectively assume others would make this investment as well.

Further benefits brought by a potential foreign investor needed to be "identifiable and substantial," and not "accrue anyway".

Identifiably and substantiably over what?

Following the judgement, a spokesman for the OIO told interest.co.nz that the Office now needed to, "on a case by case basis determine whether or not the benefits being claimed by the applicant would happen without that investment.

"It would have to say, would the benefits that the [foreign] investor is proposing happen if the applicant didn't purchase the farm?" the spokesman said.

That equated to the OIO having to consider what benefits a "hypothetical" New Zealand purchaser of the farms could bring to the table, he said.

So what's Pengxin bringing to the table, and is it indentifiably and substantially above what a hypothetical NZ buyer would bring?

Justice Miller's comments in the judgement were strong in suggesting the OIO should expect any buyer of the farms to spend the required amount to get them back up to scratch. In Pengxin's application, and the OIO's decision, that is represented by the promised NZ$14 million investment to upgrade the farms.

So the OIO would now be busy trying to asses whether the other proposed economic benefits offered Shanghai Pengxin would be identifiably and substantially above what it considers a hypothetical New Zealand buyer.

In April 2011 when it applied to the Overseas Investment Office for permission to buy the farms, Pengxin said it was looking to spend NZ$100 million marketing products such as cheeses, ice creams and baby products in China. Instead of vertically integrating to control the entire supply chain, it said it would rather use New Zealand dairy plants to create and manufacture these value-added products.

When the OIO granted Pengxin's application in January, it revealed Pengxin had also promised to establish an on-farm training facility for dairy farm workers, and said it would meet the costs of establishing that facility. It would give two scholarships of not less than NZ$5,000 each year to students of the on-farm training facility with the first two scholarships to be awarded by 31 December 2013.

Pengxin, and its subsidiary Milk New Zealand would also "use reasonable endeavours to assist Landcorp to extend its business to, and market its products, in China."

The Overseas Investment Office now has to consider whether that's identifiably and substantially better than what a hypothetical New Zealand buyer would bring to the table.