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.
10 Comments
Surely the best outcome for NZ is that the banks take a haircut - and a NZ owner(s) commit to spend more than the $14m in upgrading the farm(s).
As I assume the mortgages held are with foreign-owned banks - and all the profits head back overseas.
Hopefully, the OIO will consider this scenario.
Yes Kate, let's just ban all foreign investment in New Zealand. After Diary Farm purchases, the foreigner will go after Forestry, after that Beef and Sheep farming, after that Large commercial buildings, and after that (Horrors !) residential houses for rental....We surely don't want New Zealanders to be "Tenants in their own land"..... ( I always have trouble with this phrase, maybe should ask some Maori guys what it means)
In the future the OIO must assume there is an invisible hopefully existing party (any potential NZ group will do) that will do exactly what the foreign buyer will do....but will not pay the same price as the foreign buyer (like 25% discount) and then make a decision that the foreigner can buy if he pays even more >>>> like another 20% to top up the cream ???
If Pengxin if willing to invest $14 million into the farm to "improve" it but Mr Fay decide that only $10 million is required and that the "improvement" is enough, who then is to decide ?
(assuming Mr Fay says "I am a Kiwi Farmer and therefore is smarter than those Non-Farming, City Dwelling, Red Capitalist, Diary Land Buying Foreigner, and I can improve the land to produce the same amount of milk that those Foreigners will need $14 million to do." )
In future also any New Zealand party who wished to buy whatever is on offer on the cheap (like 20% to 30% discount to any foreign bid) has only to put up his hands and say "I will spend the same amount and effort to make the same improvement to the land as the foreigner but will only pay 20% or 30% less" will be able to overule any OIO decision. And the land must therefore be sold to the Nz party......Happy Days Are Here Again !!
Unnecessary use of sarcasm I'd suggest there kin.
The key the above statement was how much of a haircut should the Banks be forced to take for their really really poor lending decisions to the Crafar group. Westpac, Rabo and PGGW in there up to their proverbials. Let's not contemplate the unsecured creditors that have been well and truly shafted here or to use existing parlance, they took 100% haircut.. I don't think it's too much of a long bow to draw to suggest that the Banks will have been strongly 'guiding' the Receiver as to where they need to look to recoup the maximum amount of funds to minimise their loss of capital/assets.
I'm still sitting on the fence regarding foreign ownership (hell, I'm only a permanent resident here) but I am concerned that regardless of this deal, there is a land deal a certain number of years into the future where overseas interests will own more of NZ than NZ owns. This will be a socially and politically unsustainable situation and somewhere along the line, there needs to be limits set. A number of other countries already have policies which dictate how much of a province and a country as a whole can be held by majority foreign owned interests - Brazil is such a country.
And the use of the 'hypothetical' person is not a novel test in these situations. It has been around in valuation law and best practise that has been tested time and time again by the courts.
Welcome to the real world where legislation does get tested in court. The ball is now in the Governments court whether to appeal this decision or not.
ITYS,
I totally agree with you, that's why i advocate that we ban all foreign investment into the country. All the goverment has to do is pass a law to say so. Simple.
Then we can save money by not having to pay for the OIO budget (no need for one)
Hypothetical test are BS stuff....it's hypothetical because it Don't Exist !!
Hypothetical may be BS to the man in the street (no pun intended) but has reference in law the whole world over.
I'm not advocating a ban, simply pointing out that at a given point in time, with the current rate of investment, the equilibrium will be too far to the 'investor'.
The arguement that nees to be had is what foreign investment is good (productive), which is bad (unproductive).
Commentary and the court ruling at the moment suggests that land investment is unproductive and therefore bad.
It seems to me that the Crafar group might well be offering more than the Fay group in this case, and would be awarded the contract on the second time through.
But I am actually really happy about this ruling. It's important that we do apply the right tests to this and all future cases, and it's clear that the OIO has been extremely slack in that regard. It's come out from this that OIO was ignoring all possible downsides, and comparing an overseas buyer with nothing, rather than comparing it with a domestic owner. They're solving all the wrong equations. How can we have confidence in that? Here's hoping this ruling makes it change for the better.
The problem as I see it is that in theory the OIO are sopposed to consider the benefits of overseas investment, trouble is if they actualy do that istead of ignoring the equations they may work out there are NO benefits to NZ. And that simply will not fit the ideology which is realy what this is about.
Alex Tarrant: "the OIO says it is now considering what it believes a hypothetical New Zealand purchaser would do with the farms"
It's a relative of the auctioneers "man-in-the tree" and the lawyers "man-in-the-street" ... or to say it another way .. "what could you do better" if you "hypothetically" ran a $2 shop.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.