US embassy cable - 04WELLINGTON686

UNCLAS SECTION 01 OF 02 WELLINGTON 000686 
 
SIPDIS 
 
STATE FOR EB/TPP AND EAP/ANP 
STATE PASS USTR-BWEISEL 
COMMERCE FOR GPAINE/4530/ITA/MAC/AP/OSAO 
NSC FOR MGOODMAN 
 
SENSITIVE 
 
E.O. 12356: N/A 
TAGS: EINV, ECIN, ECON, ETRD, NZ 
SUBJECT: NEW ZEALAND GOVERNMENT PROPOSES TO BOTH RELAX AND 
TOUGHEN RULES FOR FOREIGN INVESTMENT 
 
REF: 03 WELLINGTON 1247 
 
1. (U) Sensitive but unclassified - protect accordingly. 
 
2. (SBU) Summary: Proposed changes to the New Zealand 
government's review of foreign investments would reduce the 
scope of business deals requiring its review while 
tightening the screening of land purchases by foreigners. 
The government is trying to strike a balance between its 
desire to arrest a five-year slide in foreign investment and 
the public's wish to keep so-called iconic sites and large 
stretches of shoreline out of foreign ownership.  The rules' 
impact on U.S. business investors is expected to be slight, 
although they will complicate some land purchases by 
Americans.  End summary. 
 
3. (U) The proposed rules, approved by cabinet July 5 and 
announced July 20, must be incorporated into legislation and 
then face a parliamentary vote.  If approved, they most 
likely would take effect July 1, 2005, according to Stephen 
Dawe, chief executive officer of the New Zealand Overseas 
Investment Commission (OIC), which since 1973 has 
administered the government's foreign investment policies. 
The new rules would lift the threshold for scrutiny of 
proposed business purchases from NZ $50 million (US $32.6 
million) to NZ $100 million (US $65.2 million), where a 
foreigner is proposing to take control of 25 percent or more 
of a business. 
 
4. (U) For purchases of rural land of more than 12.35 acres 
and for land in certain sensitive or protected areas, 
foreigners would have to provide a management proposal 
covering any historic, heritage, conservation or public 
access matters and any economic development planned.  That 
proposal would have to be approved and made a condition of 
consent.  In addition, investors would be required to report 
at one- or two-year intervals on their compliance with the 
terms of the consent.  (The government's proposal continues 
existing rules requiring approval for acquisition of rural 
land of more than five hectares, or 12.35 acres, and for 
land in certain sensitive or protected areas, including most 
offshore islands or next to the foreshore.)  The rules would 
ease restrictions on purchases of urban land. 
 
5. (SBU) The new rules are expected to have minimal impact 
on decisions by U.S. investors to buy New Zealand 
businesses.  The proposed rules would have eliminated the 
required review of at least four U.S. proposals submitted in 
2003, or nearly 6 percent of all U.S. applications.  Among 
them would be Illinois-based Brunswick Corporation's US $33 
million acquisition of a 70 percent stake in Navman, a New 
Zealand company specializing in global positioning systems- 
based products and marine electronics. 
 
6. (U) Moreover, since 1984, the OIC has never rejected a 
foreign investment in New Zealand businesses, which was a 
reason cited by Finance Minister Cullen for changing the 
rules, according to Dawe.  Cullen felt as if he were rubber- 
stamping OIC decisions that should not have needed his -- 
nor the commission's -- consideration, Dawe said.  He noted 
that the OIC last year considered 206 applications by U.S. 
interests (including some applications submitted in prior 
years).  The commission rejected eight of those 
applications, which were for land acquisitions and had been 
submitted primarily by Americans who had come to New Zealand 
as tourists. 
 
7. (SBU) U.S. investment applications have declined 33 
percent since 1999, for reasons unrelated to the 
government's screening requirement.  While delays and 
compliance costs may deter some potential foreign investors, 
U.S. businesses cite other reasons for their reluctance to 
put their money in New Zealand.  These reasons include the 
government's energy and environmental policies, employment 
laws, excessive regulation in certain sectors and tax policy 
(reftel).  The stock of U.S. direct investment in New 
Zealand has shrunk by nearly two thirds in the last five 
years from U.S. $10.3 billion (NZ $15.809 billion) in fiscal 
1998 to an estimated U.S. $3.65 billion (NZ $5.596 billion) 
in 2003.  Nonetheless, the United States ranks second after 
Australia in terms of foreign direct investment in New 
Zealand. 
 
8. (U) In announcing a review of the government's foreign 
investment rules on November 10, Cullen stated his desire to 
provide greater protection to sites of special historical, 
cultural or environmental significance.  He also cited the 
need for attracting foreign capital if the country is to 
achieve the government's stated goal of returning to the top 
half of OECD rankings.  As a percentage of GDP, foreign 
direct investment in New Zealand peaked at more than 60 
percent in 1998.  It declined to about 40 percent of GDP by 
March 2003. 
 
9. (SBU) The review of investment rules was prompted in part 
by publicity indicating that the OIC may have been lax in 
monitoring compliance by foreign landowners with the 
consents imposed by the agency.  Among the most publicized 
cases was that of American Alan Trent, who bulldozed coastal 
cliff tops for a subdivision of expensive homes.  Americans 
are the leading foreign landholders, but the amount of land 
purchased by foreigners has declined since 1995.  In 2003, 
foreign land purchases fell by more than half from the 
previous year, with 181 foreigners buying 13,427 hectares. 
That drop may be due partly to the fact that there is less 
rural land available to purchase.  In addition, about 30 
percent of New Zealand's landmass, or 8 million hectares, 
lies outside the grasp of any private landowner.  These 
lands are managed by the Department of Conservation. 
 
10. (U) Under the government's proposal, the OIC's functions 
will be transferred to Land Information New Zealand.  The 
OIC's nine staff members will be offered the opportunity to 
transfer to the new unit. 
 
11. (SBU) Comment: While easing controls on non-land 
business purchases, the new rules on foreign ownership would 
leave in place a screening mechanism that is considered 
inconsistent with the WTO General Agreement on Trade in 
Services and with the notion that such regimes should be 
unnecessary in developed nations.  In fact, the New Zealand 
Treasury initially recommended scrapping all controls on 
foreign business acquisitions, except for competition 
provisions.  It then proposed raising the threshold to $250 
million (US $163 million), which cabinet ministers scaled 
back.  The go-slow approach may be dictated by politics. 
Leading up to the next election in 2005, the ruling Labour 
Party holds a slim lead in the polls and may need the 
support of the Green Party and New Zealand First -- both 
fervent proponents of keeping New Zealand property in New 
Zealand hands.  Members of the opposition National Party 
also have indicated they might make their desire to protect 
certain land areas from foreign ownership an election issue. 
 
Burnett