NEW ZEALAND GOVERNMENT PROPOSES TO BOTH RELAX AND

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