Danger ahead! US deal threatens all remaining foreign investment rules
by Bill Rosenberg
Investment rules in a “trade” agreement with the US are likely to …
- Weaken or remove our screening of overseas investment
The Overseas Investment Act provides for some screening of overseas investment. The US has stated as recently as last year: “The United States has raised concerns about the continued use of this screening mechanism.”
This would potentially allow overseas corporations and individuals
- a free-for-all in purchases of land
- to purchase strategic assets on sensitive land (such as Auckland International Airport), reversing the recent regulation that allows the government to scrutinise such acquisitions
- a free-for-all in purchases of fishing quota in our economic zone
- to purchase any assets, major or minor, regardless of their character or financial soundness, and without publicity
Measures which significantly reduce the value of overseas-owned corporate assets, or which are deemed not to be “fair and equitable” can lead to huge awards for “compensation” amounting to hundreds of millions of dollars. These judgements are made by international panels of trade lawyers (often acting in secrecy), and can be made even if asset values are affected for good reason (such as environmental protection, or rules on pricing of essential commodities) and even if the rules are fair and equitable to New Zealand as a whole.
“Fair and equitable treatment has been interpreted by international tribunals to include a right to a ‘stable and predictable regulatory environment,’ which has been used to successfully challenge changes in regulatory and tax standards,” says international trade law expert, Professor Matthew Porterfield. There are scores such rulings under similar agreements that have become public, and probably many more that have not.
For New Zealand, examples could include
- Changes in regulations such as the 2007 Overseas Investment regulation which allowed greater scrutiny of strategic assets on sensitive land (which investors criticised for coming in the middle of a takeover, and reducing the value of their shares)
- Rules to force network owners (such as Telecom) to make the facilities available to all comers at a reasonable price.
- Price controls on telecommunications and electricity where they significantly reduce profitability, and therefore reduce the market value of the providers’ assets
- Rules to restrict carbon emissions which increase firms’ costs, and therefore reduce the market value of their assets
- Reforms such as the 1998 electricity reforms which forced many companies to sell parts of their operations. Had they sold at a significant loss, they could have claimed compensation.
- Local government zoning and land use regulations which restrict certain types of development (such as big box retailers or liquor outlets) to protect the character of neighbourhoods
- Other actions by local government – such as Auckland City Council’s halting of the Britomart scheme in 1999 which led to the loss of future profits and the value of the company promoting the scheme (indeed, it could be claimed, its eventual failure); and the Marlborough District Council 2000 bylaw slowing fast ferries in the Marlborough Sounds to prevent damage to surrounding shores and sea life, and for the safety of small vessels. The ferry owners – then Tranz Rail and Top Cat – claimed the action reduced their profitability (and hence the value of their assets). Top Cat went out of business shortly afterwards, claiming the District Council’s actions as a factor.
The international panels would decide on whether central and local government actions are “necessary” (in the strictest sense) to achieve normal government aims such as protecting the environment, security, or public morality. They are given the power to make judgement on whether laws are consistent with the Agreement – far beyond the powers of our courts, which must accept laws and may only interpret their meaning. These privileges would not be available to New Zealand companies. They give overseas investors a choice between local courts and international panels, whichever they think is most likely to rule in their favour.
Undermine our interests when the government buys or sells assets
- When buying an asset (as the government did recently in buying back the rail system from Toll Holdings) it would encourage a seller covered by the Agreement to hold out for a high price, because if the government was forced to legislate to acquire the asset, the company would be able to take the government to international adjudication.
When selling an asset, the government could not insist on Kiwishare style restrictions, that New Zealand purchasers should have priority, or that a minimum percentage of the company should be New Zealand owned.
When reintroducing universal public provision of services, overseas service companies could seek to have the government policy overturned or force substantial penalties, even if their service had been overpriced or otherwise unsatisfactory. An example is the return to publicly provided ACC by the Labour-Alliance government after the 1990s National Government opened it to private competition.
If introducing competition into an service provided by the government, it cannot insist on conditions that have the (perhaps unintended) effect of giving overseas corporates less favourable treatment such as insisting on locally provided call centres, a local headquarters or board with majority New Zealand representation, or privileged status for local non-profit providers such as Plunket.
Further weaken our ability to control capital movements and currency speculation.
Such controls can help to
- restore a degree of stability and realistic value to the New Zealand dollar
- reduce the effect on exports of New Zealand interest rate rises
- protect us against economic blackmail by threat of capital flight
- provide a degree of insulation from international financial crises
- provide some protection against “herd” behaviour by short term overseas investors which can increase the seriousness of economic crises
- control our overseas indebtedness
- control inflation more effectively without contributing to recessions