The Forest Processing Investment Environment - Review of key policies and legislation affecting forestry

Review of key policies and legislation affecting forestry

Overseas Investment Act 1973

The Overseas Investment Commission (OIC) administers the government’s overseas investment policies. This principally involves assessment of applications from foreigners for consent to make substantial direct investments in New Zealand. The Overseas Investment Act 1973 is the principal legislation regulating foreign direct investment in New Zealand. The major regulatory provisions of the Act require that potential foreign investors must obtain consent in order to acquire or take "control" of 25 percent or more of:

businesses or property worth more than $50 million;
land over 5 hectares and/or worth more than $10 million;
any land on most off-shore islands;
certain sensitive land over 0.4 hectares (e.g. on specified islands, containing or next to reserves, historic or heritage areas, the foreshore or lakes).

The Act has established investment criteria, which require that non-land investments be approved if an applicant can satisfy an "investor" test based on business experience and acumen, financial commitment and good character. Recent amendments to the Act have, however, raised this threshold by requiring that an investment demonstrate substantial and identifiable benefits to New Zealand or to a region, district or general locality where the investment is targeted.

In terms of wood processing, the Overseas Investment Act constitutes a relatively minor barrier to investment. In terms of greenfields investment, the Act applies to moderately large-scale processing facilities. The Act requires that a consent be obtained where an overseas entity intends establishing a new business where the total expenditure to be incurred in setting up the business exceeds $50 million. By way of example, a single-line MDF plant capable of producing around 150 000 cubic metres per annum is estimated to cost around NZ$120 million. Even if OIC approval is required, the process is neither unduly onerous nor obstructive. None of the interviewees had concerns with formal Overseas Investment regulations constraining investment. It was noted that documentation for OIC approvals can be burdensome, mainly for forest owners, particularly when an overseas company is required to re-apply frequently to acquire approvals to purchase small parcels of land. In this instance, it was suggested that a streamlined process could apply for applicants that are "known" to the OIC.

Commerce Act 1986

The Commerce Act 1986 is New Zealand’s principal anti-trust and competition legislation. The main purpose of the Act is to promote competition in the domestic marketplace. In terms of investments, the key restrictions are in Section 47 of the Act, which deals with business acquisitions and the development of potential monopoly situations. Section 47 prohibits the acquisition of assets if, as a result of that acquisition, a dominant position in a market would be acquired or strengthened. The Act allows, however, for the Commerce Commission to clear or authorise business acquisitions if the Commission considers that market dominance is not created or strengthened, or if the public benefits of an acquisition exceed any detriments. The Commission’s guidelines suggest that market dominance is at issue if an entity holds a greater than 40 percent market share in the absence of another significant player, or holds greater than 60 percent share of a market in the presence of another player holding not less than 15 percent.

A recent Commission approval (March 2001) for the acquisition of Norske Skog’s Kraft pulp facility at Kawerau, by Carter Holt Harvey, suggests that the Act will have little direct relevance on the wood-processing industry in the foreseeable future. It is difficult to envision any realistic scenario for a future potential acquisition of a wood-processing facility that could result in creating substantially greater dominance in a market than this. In this instance, the Commission noted that large market share would not equate with dominance, and that the ability of CHH customers to import products, the ability of CHH suppliers to export products and, in some markets, the countervailing power of customers or suppliers all act to prevent dominance. Most recently, Nelson Pine Industries has had approved an application (No. 2544: File 4567) for a clearance to acquire a 100 percent share in Rayonier MDF New Zealand, which provides further substantial evidence that the Commerce Act is unlikely to directly impede wood-processing investment.

In the past, however, the Act has had potentially significant indirect impacts on the evolution of the wood-processing industry, and retains potential for future influence, through its regulation of acquisitions of forests. Some of the most significant Commerce Act decisions, for forestry, have been those relating to purchasing forests in the Central North Island during the 1980s. For example, three of New Zealand's major companies were prevented by the Act from freely bidding for forests in the initial privatisation round. Similarly, during the 1980s sale of New Zealand Forest Products, the Commerce Act blocked at least one New Zealand bidder, resulting in Elders Resources, an Australian company with little background in forestry, acquiring NZFP, quite possibly to the detriment of both companies (Carter Holt Harvey Limited & Elders Resources NZFP Limited merged in 1990). In forestry, where security of supply is a paramount concern, and where economies of scale are of fundamental importance in terms of international competitiveness, it is, perhaps, questionable whether a regulation concerned with domestic competitive structures should be applied quite so stringently.

More recently (February 1999), the Commerce Commission has declined clearance for the acquisition by RI Weyerhaeuser World Timberfund LP of the forestry assets of Carter Holt Harvey Limited in Nelson (Decision No. 342). This decision related to Weyerhaeuser’s proposal to purchase 28 500 hectares of forest, 16.5 percent of the total Nelson-Marlborough resource. The purchase would have raised Weyerhaeuser-affiliated forest holdings in the region to around 90 000 hectares, or around 53 percent of the regional resource. In this instance the next largest owner (Rayonier NZ Ltd) would have held only 3.4 percent of the resource. The Commission noted in its findings that for both total holdings, and radiata pine holdings aged above 20 years, the proposal would result in combined market shares, which are outside the safe harbours defined in the Commission’s Business Acquisition Guidelines. In this instance the Commerce Act has clearly influenced the evolution of forest ownership patterns in the Nelson-Marlborough region, and, consequently, may also influence the development of processing capacity (though in terms of access to wood supplies the impacts on Weyerhaeuser and independent processors are likely to be substantially different). It is notable that in early-2000 Weyerhaeuser acquired the Kaituna sawmill near Blenheim. Thus, clearly Weyerhaeuser has a processing investment strategy in the Nelson-Marlborough region and it is open to speculation as to how the Commission decision has impacted on that strategy. Conversely, the Commerce Act has provided a protection to other processors in the Nelson-Marlborough region from any detrimental effects that might have accrued from Weyerhaeuser’s acquisition. The key question is whether the potential magnitude of detrimental effects outweighs the benefits that may accrue. Of particular concern is whether the concept of regional wood supply markets, as currently defined, is sensible and realistic. This is a subject that could usefully be investigated further.

A further area where the Commerce Act could potentially impact on wood processing is in the establishment of long-term wood supply contracts. The Commerce Act renders unenforceable any contract provision that has the purpose or effect of substantially lessening competition in a market. Thus, for example, a wood supply contract in a region where there is a substantially dominant forest owner, which resulted in a single buyer acquiring all supplies, could be contested. This provides a protection to wood processors, but could also constrain the development of a large-scale processing facility.

Recent changes to the Commerce Act have strengthened prohibitions by lowering the threshold for monopolisation and lowering the threshold for prohibition of mergers. Several interviewees expressed concern that, in future, this will make forest acquisitions such as those described above even more difficult. Concerns were also expressed that the process tends to be closed and somewhat one-sided, in terms of providing little opportunity for applicants to contest statements by affected parties.

Resource Management Act 1991

The Resource Management Act 1991 (RMA) provides a basis for environmental management, including air, water, soil, biodiversity, the coastal environment, noise, subdivision and general land use planning. The RMA requires that every district council prepare a district plan and every regional council prepare a regional policy statement and, if necessary, regional plans. Regional policy statements establish a framework for resource management issues in a region, and facilitate an integrated approach among district councils in managing those issues. More detailed district plans set out significant resource management issues in each district, and establish objectives, policies, and methods to address these issues. District plans typically cover issues relating to:

land use impacts;
effects of activities on rivers and lakes;
noise.

Regional plans are typically developed to regulate:

discharges of contaminants, to land, air or water;
water quality and quantity
coastal marine areas; and
soil conservation.

Thus, each region or district/city has its own resource management issues and establishes a plan to regulate activities that may impact on the environment. Councils classify activities according to perceived potential impacts. Where activities are classified as controlled activities, discretionary activities, restricted or limited discretionary activities, or non-complying activities, a resource consent must be obtained before the activity can be undertaken. Additionally, some activities may be prohibited.

The RMA presents a significant potential barrier to wood processing investment. The consistent message from interviewees was that the RMA constitutes the single biggest obstacle to the development of processing investment in New Zealand. It generally imposes compliance costs on potential investors in obtaining resource consents. It may impose conditional costs, where councils require extraneous mitigating activities; or councils may decline to issue resource consents. It should be noted that, in many instances, the RMA may not constitute as large a barrier to investment as this perception implies. Clearly, however, the anecdotal experiences of some companies (as well as the occasional well documented outcomes of RMA processes – e.g. the Wenita case described below) have created a climate where potential investors view RMA processes as a significant cost risk.

The cost of obtaining resource consents is an area of significant dissatisfaction. A number of interviewees expressed concerns over the costs of preparing applications, assessing effects, consultation and administration of consent applications. Where resource consents are withheld, potential investors may appeal Council’s decisions to the Environment Court, though this may incur substantial legal costs. In addition, costs may be awarded against the applicant where the appeal fails. For example, the Court awarded Auckland City Council costs of $30,500 in Hunt v Auckland City Council (1996) NZRMA 49 (HC). Commensurate costs were likely to have also been incurred by the complainant. Affected third parties can also contest resource consent approvals, thereby potentially imposing additional legal costs on investors.

Box 1: Wenita and the Resource Management Act

A significant example of the RMA acting as a barrier to wood processing investment is in regard to a proposal by Wenita Forest Product’s to establish an MDF plant at Allanton, on the Taeri Plains. In December 1995 the Otago Regional Council declined Wenita’s application for an air-discharge consent for the proposed plant. The company initially appealed this decision to the Environment Court, but the appeal was withdrawn before it was heard. Wenita has shelved plans for development at the Allanton site.

The general consensus of interviewees was that the overarching legislation and intent of the RMA are quite good. There are, however, major problems in how it is implemented. Criticisms of the RMA included:

The costs of going through the process.

One company noted that the entire process, including consultation, hearings, legal advice and the installation of required mitigating technology had added 8 percent (more than NZ$10 million) to project costs – on a very major investment. Another company estimated the costs of rezoning rural land for industrial use and consent for a medium-sized sawmill would be at least $300,000.

A lack of consistency between councils.

There is an expectation that council requirements will slowly harmonise over time, as those far outside the norms will moderate their plans. It was noted, however, that some councils just don’t want heavy industry. In the meantime, the differences are frustrating and are retarding investment in some regions. Several commented that the RMA philosophy has been lost and that, "The Act is full of grey areas and the lawyers are stifling development". It was noted that MED is preparing "Guides to Best Practices for the RMA" for use by councils.

Process delays and backlogs in the Environment Court.

It was noted that there are substantial delays in having cases heard in the Environment Court. These backlogs may run to six months or more, and constitute a significant impediment to getting projects underway. It was suggested that the time expectation for an entire consent process for a greenfields mill is 12-18 months.

Time burden of consultative processes

In addition to financial costs, there is an enormous cost in management time if consultative processes are to be carried out adequately. The whole process involves a major commitment from companies.

High degrees of uncertainty and risk

Most interviewees believed that the costs of going through an RMA process and the uncertainty of the process constitute too high a risk for many greenfields expansions. One interviewee explicitly stated that it would be ludicrous to contemplate expanding his mill onto a site across the road due to the additional costs imposed by the RMA process. It was suggested that "ability to process" on a site (i.e. holding consents) now has significant tangible value. At the same time, there are limits on the extent to which existing facilities can expand, and changes enforced by the RMA may create their own problems e.g. needs to shift to 24 hour processing, with associate light and noise pollution, 24 hour log deliveries, etc.

Problems with inadequate science

Several respondents were critical of the "science" applied in resource consent processes – particularly in emissions testing. There was criticism that some of the standards required of mills are prohibitive, and impose costs on mills far in excess of international norms. A further criticism was of the belief that the science supporting emission testing is fail-safe. One respondent stated that the accuracy of emissions science is far short of the standard required given the weight placed on it and cited a substantial error made in recent spectrographic testing. The respondent noted that in the United States these accuracy problems are well known, and the focus is on ensuring emissions control mechanisms are installed and operating efficiently, rather than testing emissions per se.

Objections processes

Two primary difficulties were raised with the objections process. Firstly, it was suggested that the objections process is being abused by people making spurious objections in anticipation of forcing corporates to buy their properties out. A second obstacle to bringing the public onside lies in the so-called "Green Form" waiver. Mill owners can facilitate their application if they can get affected parties to sign a standard waiver. The current structure of the form waives all future rights of protest, and consequently most affected parties, even those who are unconcerned by a project, are reluctant to sign away their future rights.

Treaty of Waitangi Issues

The Treaty of Waitangi constitutes an important aspect of the investment landscape in New Zealand and, in some regions, has had significant direct impacts on forestry. For example, during the sale of Crown Forestry Licences the Crown Forest Assets Act 1989 contained provisions for the return to Maori ownership of any licensed land, subject to the relevant Crown forestry licence. Similarly, six Aoraki forests (Naseby, Herbert, Silverpeaks, McLaren’s Gully, Waimate, and Geraldine forests) were withheld from the asset sales process by government for possible settlement with Ngai Tahu. There is, consequently, potential that these constraints have influenced the development of processing investment. Nonetheless, most interviewees did not regard Treaty of Waitangi issues as a significant constraint on wood processing investment. Maori concerns are generally regarded as being a legitimate component of the RMA. Several noted that requirements for consultation with Maori interests can place a burden on investors, but generally these relate more to forest ownership rather than processing investment.

Forests Act 1949

The principal impacts of the Forests Act 1949 on investment in wood processing relate to the Provisions Relating to Indigenous Forests inserted as Part IIIA of the Act by the Forests Amendment Act 1993. With a handful of anomalies, these Provisions prohibit the export of sawn timber of indigenous species other than beech or rimu (and these only from forests with a sustainable management plan). Milling of indigenous timber requires that a mill be registered under the Act and wood is required to be obtained from sources approved under the Act (generally areas for which a sustainable management plan or permit has been approved). The Act consequently places constraints on indigenous wood supplies, primary processing and product distribution. While none of these is unduly onerous on a potential investor in indigenous timber processing, in terms of creating a physical barrier to investment, the Act undoubtedly creates a psychological barrier to investment in indigenous wood processing. The Provisions signal that milling indigenous timber is not an activity strongly favoured by government, and creates uncertainty regarding the likelihood of future constraints.

This uncertainty would have been amplified by indigenous forest policies advocated by the current government and encapsulated in the cancellation of the West Coast Accord under the Forests (West Coast Accord) Act 2000, the cancellation of Timberlands West Coast’s beech logging scheme, the cessation of the "Buller Overcut", and the announcement that logging in publicly owned natural forests will end in March 2002. In this circumstance it is difficult to envisage any large-scale investment in indigenous wood processing capacity, despite the relatively attractive returns available from such investment.

Taxation and levies

Taxation is an often controversial and always unpopular burden on the private sector. In general, structures and levels of taxation in New Zealand are perceived to be within international norms, and consequently don’t provide a major competitive disadvantage except in countries where special taxation incentives on investments have been introduced. Table 9 provides a broad assessment of indicative rates of corporate tax in various countries.

Table 9: Indicative basic rates of corporate taxation

Country/region	Basic rate of corporate tax (%)	Country/region	Basic rate of corporate tax (%)
Oceania		Europe
New Zealand	33.0	Belgium	40.2
Australia	30.0	Germany	45.0
North America		Italy	41.2
United States	40.0	United Kingdom	31.0
Canada	39.0 – 43.5	Netherlands	35.0
Asia		Sweden	28.0
India	43.0	South America
Indonesia	10.0-30.0	Argentina	30.0
Malaysia	30.0	Chile	15.0
Philippines	35.0	Brazil	15.0

Source: Brown 1999

While the rates cited here provide only a very broad indication of the burden of taxation in countries, it is apparent that, at face value New Zealand’s corporate rate of taxation is not badly out of line with international norms – although several key competitor countries (e.g. Chile) clearly offer lower rates of taxation, at least at face value. Several interviewees expressed some concern, however, that the recent downward revision in Australian corporate tax rates (from 36 percent to 30 percent) will reduce New Zealand’s competitiveness in that market, as well as making it a more attractive investment destination. By way of comparison, Danziger FDI also notes that:

The following tax incentives are available to companies which are incorporated in Australia, public-trading trusts and companies which are members of partnerships:

150% tax deduction for research and development costs which encourage innovation and international competitiveness
tax allowances for new plant and equipment
customs duty exemption for imported goods which cannot be made in Australia
refund of customs duty, excise duty and sales tax on imported goods which are reexported after processing or treatment in Australia
grants for the cost of export promotion.

The most frequently mentioned area interviewees suggested for review was depreciation regimes and the merits of accelerated depreciation. It was noted that increasing technology is leading to reduced effective lifecycle of some capital and this changing reality has not been recognised in tax regulations. Tax holidays on research and development were also suggested as having merit. Several international companies noted that top rates of personal taxation are a disincentive to senior management relocating in New Zealand. A major issue for smaller independent processors is the costs of compliance with an increasingly complex taxation regime.

Industrial relations legislation

In the industrial relations sphere, the Employment Relations Act 2000 (ERA) remains largely untested as a piece of overarching legislation. While it is not suggested that there are specific weaknesses in the Act it is worthwhile recalling that prior to the mid-1980s shift toward a free-market economy, and the accompanying Labour Relations Act 1987 and subsequent Employment Contracts Act 1991, industrial relations played a highly significant role in the New Zealand economy and were a focal point in a number of investment projects. The 1983 NZFP Kinleith Pulp and Paper modernisation is a case in point for the wood-processing sector. The first phase of the modernisation project was notable for a protracted and acrimonious industrial dispute, which led to the signing of a joint management-trade union Heads of Agreement in 1987, prior to the commencement of the second modernisation phase, for which the statement of intent noted:

Unions and Bechtel (the project management team employed by NZFP) recognise that there were serious management and labour deficiencies in respect of the No 5 Recovery Boiler Project at Kinleith resulting in unacceptable overruns in both Schedule and Budget. A repetition of such circumstances will lead to cessation of work on the Project and will jeopardise the future of the Kinleith Mill and of Tokoroa.

The central point is that, while industrial relations is not generally considered to be a significant constraint to wood processing investment, this is a relatively recent development and the sphere warrants monitoring.

More recently, one interviewee noted that industrial relations had a direct and major impact on a decision to shift a planned processing investment in New Zealand offshore. Industrial action at one of the company’s existing plants had initiated concerns over potential exposure to risks of widespread industrial action in New Zealand, and the merits of diversifying investment. This led to investigation of alternative processing locations offshore, and an eventual investment elsewhere.

Notwithstanding the above, most other respondents believe that New Zealand’s recent labour relations record is internationally competitive and probably better than many close competitors. Several respondents viewed current port disputes with some alarm, noting the long history of industrial relations problems on the wharves, and the costs these have imposed on other industries.

Other legislation and regulations

A variety of other pieces of legislation have potential to influence wood-processing investment decisions. Legislation that plays significant roles in commercial regulation requires regular review to ensure it is effective and that it conforms to international norms. Aspects of, for example, the Securities Act relating to insider trading (contained in The Securities Amendment Act 1988) were identified by one interviewee as failing to meet acceptable international standards, and thereby hindering international investment. Similarly, aspects of takeover laws (Takeovers Act 1993) and regulations warrant further scrutiny. For example, the current investigation into potential breaches of Stock Exchange rules in the recent Lion Nathan takeover of Montana creates a perception that playing fields are not necessarily level.

In these instances, if regulation is perceived to be poor or application is inconsistent, then perceptions of New Zealand’s quality as an investment destination are compromised. This will not necessarily affect direct investment in wood processing facilities, but it may compromise the abilities of listed New Zealand forestry companies to raise equity capital.

Contact for Enquiries

Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND

Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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