Opinion: Foreign investors need more certainty, stability

The government’s announcement that it will review legislation around Commerce Commission regulation (without limiting the commission’s independence) is long overdue and much needed. 

In making the announcement, Finance Minister Bill English specifically cites the interest of consumers and investors in having a reasonably predictable regulatory regime. New Zealand needs a stable regulatory and political environment to attract investment.

International capital is highly mobile. Investors weigh opportunities in New Zealand against opportunities in Australia, Asia, North America, Europe and elsewhere. Given our size and demography New Zealand relies on an inflow of international investment, especially to fund large scale infrastructure projects. If New Zealand compares unfavourably to other potential markets, that investment will go elsewhere.

The recent political football over Chorus and the telecommunications regulatory regime creates unpredictability and uncertainty at precisely the time when large investments are being made that will deliver significant benefits for New Zealanders well into the future.

When the government speculated about legislating to set wholesale copper prices, it was attacked as being unprincipled by opposition parties who are themselves promising to use legislation to intervene and set electricity prices.

This political inconsistency and regulatory unpredictability threatens New Zealand’s international reputation and, with it, billions of dollars of much needed investment capital. The situation with Chorus and the multi-billion dollar ultrafast broadband (UFB) project provides a clear example of this.

Citing regulatory and political uncertainty, the €5.1 billion London-based Newton Asian Income Fund has stated it will not be investing in New Zealand for the foreseeable future, saying, “We are not going to invest any more money in New Zealand for the foreseeable future. We have to rank it up with places like Pakistan in terms of political risk. This is a shame because it ought to be a developed and stable country.”

Overseas funds quit Chorus
Bank of New York Mellon, which has $US1.5 trillion of assets under management, has reduced its holding in Chorus after the Commerce Commission’s wholesale copper price intervention. The A$5 billion Sydney-based Investors Mutual Limited fund has said it will not be making further investments in New Zealand companies in regulated sectors until the Chorus situation is clarified.

The uncertainty over Chorus’ future created by the Commerce Commission draft and then final wholesale copper decision has contributed to a reduction in Chorus’ share value of over 50%. Political and regulatory uncertainty has also seen falls in share values for Mighty River Power, Meridian, SkyCity and others.

In this environment the ability of all New Zealand regulated utilities to raise equity and debt is compromised. The quality and internal coherency of our regulatory regime is exacerbating the situation.

For instance, the telecommunications regulatory regime takes a piecemeal approach, looking at individual components of the copper broadband pricing regime largely in isolation, and does not align with government policy objectives.

The Commerce Commission’s mandated benchmarking approach is not used in Australia, the UK, the US or anywhere in Asia and has been heavily criticised by international institutions ranging from Deutsche Bank to Malaysian-based CIMB Bank. “There is no sensible context in which prices in Scandinavia should act as a guide to UFB investment or utilisation in New Zealand,” CIMB says.

Further litigation likely
The regulatory regime should provide certainty and a stable environment in which to make investment decisions. Instead, having been through a two-year benchmarking process, Chorus is now embarking on a two-year final pricing principle (FPP) process in order to see a regulatory methodology based on actual costs applied. Years of litigation by affected parties will likely follow, further prolonging uncertainty.

Against this backdrop the regulatory health check is essential. New Zealand needs high quality, low cost regulation that protects and balances the interests of consumers while incentivising investment.

That in turn requires a regulatory regime that reflects broad policy objectives that benefit New Zealand as a whole rather than regulation which deals with related issues in isolation from each other. 

If we can join up clear, well communicated outcomes, regulatory frameworks and independent implementation we can reduce unpredictability and uncertainty. This will encourage investment and help deliver modern infrastructure and services.

John Harbord is a former senior advisor to Prime Minister John Key. He is a consultant at commercial and public law specialists Franks and Ogilvie