A proposed "national interest" test for large-scale foreign investment could deter potential investors, critics of the plan warn.
The government has proposed the test as part of a second round of changes to the Overseas Investment Act following last year's ban on foreigners buying existing residential property.
The Associate Minister of Finance, David Parker, said the current rules allowed the government to reject business investments above $100 million only if the purchaser could not prove its financial capability or good character.
"Beyond that there is not discretion to turn down a large investment. We think that we should consider whether we have a more general discretion," he said.
Mr Parker said when the Labour government turned down the Canadian Pension Plan Investment Board's bid to buy Auckland International Airport in 2008, it did so using a regulation related to the amount of land involved in purchase.
"We couldn't do that under the large business criteria, we actually had to do it as land more than five hectares, which is absurd."
The test was one of several options that also included adding more criteria to the current system, or creating a "backstop" power allowing the government to turn down investments that posed a risk of substantial harm to public safety.
Mr Parker said a national interest test would be used sparingly and was most likely to be applied to essential infrastructure such as power lines companies.
"There needs to be a discretion for the government in respect of some of those infrastructure assets with monopoly characteristics to say 'no we don't think it's in New Zealand's interests to sell that asset overseas'."
But an economist for Business New Zealand, John Pask, said infrastructure companies like airports did not need protection from foreign ownership.
"Whether it's foriegn-owned or domestic-owned they've still got to abide by the same rules and regulations," he said.
Mr Pask said New Zealand needed foreign investment and he warned that a ministerial power of veto based on a poorly-defined national interest test would deter potential investors.
"Things like this can actually have a chilling effect on the whole foreign investment regime so unless there's a significant problem we've got to be careful about putting rules in place that make it more difficult for foreigners to enter New Zealand," Mr Pask said.
The National Party's finance spokesperson, Amy Adams, said foreign firms were unlikely to try and invest in New Zealand if they knew their efforts might be in vain.
"They want to know before they start whether there's a good chance of what they're looking at being acceptable or not, not spend one, two years and hundreds of thousands of dollars getting a yes or a maybe or 'see if ministers like it' answer," she said.
Ms Adams said there were are already sound regulations around monopoly infrastructure and the government could be putting much-needed investment at risk for the sake of ideology.
"If you take something like roading or broadband, if the choice for New Zealand is wait for a New Zealand company to want to come along and fund it or take some foreign investment with careful controls and regulatory oversight to how it's operated, I think most New Zealanders would say 'just build the infrastructure'."
Merger and acquisitions partner at law firm Minter Ellison Rudd Watts, Mark Forman, said there was already an extra layer of scrutiny for strategic assets.
"What they're trying to do is to toughen that up and to make it a bit more binding. That is probably a sensible approach and probably more similar to what they've got in Australia. If they are going to do that they need to be very careful as to how and when that test applies, so perhaps limiting it to assets such as the airport or certain ports or telecommunications networks or similar."
Mr Parker told Morning Report the government needed discretion to decline projects of more than $100 million in the national interest.
Potential overseas investors in rural land have to meet requirements such as proving they're providing jobs, but that did not apply to commercial investments, Mr Parker said.
Other countries including Australia allowed ministers broad discretion to intervene, but it was rarely exercised.
"Governments are meant to rule in the interests of their people so if governments take those decisions because they don't think it's in the interests of the country, it's actually on behalf of the people."
Consultation on the proposed reforms closes on 29 May.
The consultation document can be found here.