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Cabinet Paper DEV-20-SUB-0066: COVID-19 Economic Response: Reform of the Overseas Investment Act 2005
Office of the Associate Minister of Finance (Hon David Parker)
Chair, Cabinet Economic Development Committee
1This paper seeks agreement to:
1.1policy decisions on the design of the reform package for the reform of the Overseas Investment Act 2005 (the 'Act') in response to the COVID-19 pandemic,
1.2procedural decisions to implement the Overseas Investment (COVID-19 Emergency Measures) Amendment Bill and the Overseas Investment (Other Measures) Amendment Bill under a split bill legislative process,
1.3introduce the attached Overseas Investment (COVID-19 Emergency Measures) Amendment Bill on 14 May 2020,
1.4deal with the Overseas Investment (COVID-19 Emergency Measures) Amendment Bill  ,
1.5introduce the attached Overseas Investment (Other Measures) Amendment Bill, and
1.6withdraw the Overseas Investment Amendment Bill (No 2).
2Consistent with paragraph 2.39 of the Cabinet Manual, I submit this paper with the knowledge and approval of the Minister of Finance.
3The Act provides a framework for regulating foreign investment in sensitive New Zealand assets, being sensitive land, significant business assets and fishing quota. It seeks to balance the government's objective of supporting high quality investment, while ensuring the government has the necessary tools to manage the risks associated with foreign investment.
4The Phase Two reform of the Act (which Cabinet endorsed in November 2019) aimed to improve the balance struck by the Act, through strengthening the government's ability to manage high risk investments with the introduction of a national interest test, and removing consent requirements for a range of low risk transactions, such as minor adjustments to existing shareholdings.
5The COVID-19 global pandemic and related economic downturn have changed the foreign investment risk environment. In particular, they have intensified issues identified in the Phase Two reform of the Act and revealed additional issues, resulting in:
5.1failing or distressed firms increasing the risk of overseas investors being able to acquire ordinarily productive firms or strategically important assets at 'fire sale prices' without government scrutiny. This may be with an intention of undermining New Zealand's national security, result in a transfer of knowledge and jobs, or the loss of entry points into global value chains or control of cornerstone businesses in sectors displaced by the COVID-19 pandemic. These would all trigger a corollary reduction in long- term domestic living standards, and
5.2an increasing number of economically distressed firms will require quick access to debt and equity finance to remain viable, and many such transactions currently require consent. Regulatory impediments to the flow of capital can compromise a firm's survival.
6To date, the Government has announced approximately $20 billion of direct fiscal support measures for businesses, which sit alongside the easing of monetary policy, to cushion the negative economic impacts. These measures provide financial support to firms, reducing their need for foreign investment (and the associated risks around loss of control). However, by themselves, these measures are unlikely to be sufficient to guarantee ongoing business viability. Firms will still need to access external capital, including, in some cases, foreign capital, to remain viable.
7It is critical that the government is able to manage the risks associated with such transactions, but equally, that Crown intervention does not delay investment that protects jobs and economic growth. This kind of foreign investment will be vital to New Zealand's economic resilience during the pandemic, and to our growth in the recovery.
8The reform package in this paper contains measures that respond to the heightened security and economic risks presented by the COVID-19 pandemic, which form part of the attached Overseas Investment (COVID-19 Emergency Measures) Bill ('Emergency Measures Bill'). They build on many of the changes agreed to by Cabinet under the Phase Two reform. These changes augment the Government's business response package, protecting those businesses important to our national security, economy, and communities. In particular, I propose:
8.1temporarily requiring investors to notify the government of all foreign investment transactions, regardless of the monetary value, that would result in more than 25 per cent foreign ownership of a firm or its assets. If necessary, these transactions can then be assessed for consistency with the national interest (and that the government publish clear guidance on what constitutes the national interest to inform this assessment),
8.2exempting two classes of low risk but economically important transactions in the financial sector that are necessary to support lending to New Zealand, and
8.3introducing new regulation making powers to manage transitional risks associated with the rapid development, drafting and implementation of these proposals.
9New Zealand is not alone in taking measures to increase oversight of foreign investment in the current crisis. Australia, Canada and a range of European countries have all tightened their ability to review transactions, in comparable ways to what I propose in this paper.
11These measures, along with many of the changes agreed to in the Phase Two reform are needed urgently to protect New Zealand's economic, security and other essential interests. I propose implementing these changes via a 'split bill' legislative process under which:
11.1the urgent Emergency Measures Bill (attached) is introduced and subject to a one week Select Committee process before being passed  . This Bill comprises the new tools proposed in this paper as well as the provisions of the Phase Two Reform Bill most critical to the Government's COVID-19 response,
11.2the non-urgent Overseas Investment (Other Measures) Amendment Bill ('Other Measures Bill') (attached) is introduced concurrently and referred to the Select Committee. This Bill would contain the remaining provisions of the Phase Two Reform Bill.
12To further ensure the contents of the urgent Emergency Measures Bill are subject to appropriate Parliamentary and public scrutiny, the Select Committee reviewing the Other Measures Bill would also be given scope to consider and recommend changes to the enduring provisions enacted under the urgent Emergency Measures Bill. This would occur after the Emergency Measures Bill has been passed into law.