Following a number of high-profile recommendations made by the Foreign Investment Review Board (FIRB) and decisions made by the Treasurer, the Senate referred an examination of the foreign investment review framework to the Senate Economics References Committee for inquiry and report in November 2015.
The Committee issued its report in report in April 2016, with recommendations which focused on the lack of consistency and transparency in the foreign investment review process and its outcomes. The limited availability of public information and reasoning for decisions were raised specifically as issues that required attention. In the Committee's view, this lack of transparency in the process could serve as a disincentive to foreign investors, and damage public confidence in foreign investment into Australia.
On 28 March 2017, the Government tabled its response to the findings and recommendations of the Committee, setting out its approach to building confidence in the consistency and transparency of the FIRB approval process.
Recommendation 1: Treasury should publish guidance about the foreign investment review assessment process.
The Government agreed with this recommendation and committed to providing additional information about the assessment and screening process on the FIRB website.
Recommendation 2: The Treasurer's rationale behind decisions regarding foreign investment be published to inform the public and to instil public and investor confidence in the review process.
The Government response was that it was unable to publish information for reasons of:
- national security;
- confidentiality; and
- protecting identifying information from being disclosed in accordance with taxation law and the Foreign Acquisitions and Takeovers Act 1975.
Recommendation 3: That the Government establish a publicly available Agricultural Land Register to increase public confidence in the framework and its effectiveness in safeguarding economic and security interests.
The Government's response was that it had already established a register of agricultural land ownership under the Australian Taxation Office, but was prohibited, under taxation laws, from producing reports that might identify any investor.
Additional Recommendation from Senator Xenophon: That a national interest test be implemented with criteria, including the economic effects and consideration of defence and national security issues for strategically sensitive assets.
The Government accepted that certainty could be improved, but also that the factors considered as part of the national interest test are not legislated, as to do so would limit the flexibility of the framework. It also noted that the Critical Infrastructure Centre had been established in January 2017, with the purpose of identifying and managing national security risks in critical infrastructure.
The response to this additional recommendation is noteworthy, as it provides insight into the Government's approach to balancing national security risks, while encouraging foreign investment into Australia.
Is the solution to provide a precise definition of "national interest"?
The suggestion that Australia should adopt a national interest test that sets out national interest criteria cuts to the heart of issues of consistency and transparency.
Under the current framework, where a foreign person proposes to undertake an action covered by the foreign review framework, the Treasurer is authorised to:
- decide not to object;
- allow the action to proceed, provided there is compliance with conditions imposed; or
- decide that taking the action would be contrary to the national interest and make an order prohibiting the proposal.
The Treasurer is not required to make public the rationale behind his or her decisions on foreign investment, which makes it difficult for prospective foreign investors to understand the criteria by which they will be judged.
Australia's Foreign Investment Framework in contrast to New Zealand's
In contrast to FIRB, the New Zealand foreign investment review framework publishes summaries of its decisions on its website, and provides details such as the company or person proposing the investment and the value of the investment. There is also a list of criteria set out in legislation showing considerations used in deciding whether the proposal will be of benefit to New Zealand.
Rationale behind the Australian Government's position on the "contrary to the national interest" test
If the framework does not contain a precise definition of the national interest, and this case-by-case approach leads to uncertainty in approval outcomes for foreign investors, why have the Committee's recommendations only been noted, and not accepted?
According to the theme of the Government response, the undefined test in the Australian framework of "contrary to the national interest" is intended to provide a high degree of flexibility in reviewing proposals for foreign investment. By privileging flexibility over a legislated definition of national interest, the Government is in a position to respond to factors it considers likely to affect national interest.
This response from the Government shows that it intends to retain the current broad and undefined national interest test and is reluctant to lose the flexibility under the current framework, even at the cost of uncertainty to foreign investors.
Identifying and proactively managing national security risks in critical infrastructure
Another foreign comparison provided in the Committee's report was the US framework. The US framework is explicitly focused on assessing the national security implications of proposed foreign investment. Notably, critical infrastructure assets are treated differently from other assets; the US equivalent of FIRB must undertake an investigation if critical infrastructure would result in control being passed to a foreign person.
Taking action to maintain public confidence - critical infrastructure
Based on the transactions reviewed, the Committee's report suggests that FIRB was not in a position to review proposed acquisitions in relation to Australia's long-term strategic interests, and the case-by-case approach did not provide sufficient consistency, transparency and certainty to encourage public confidence and foreign investment.
Although the Government has indicated that it will not follow the New Zealand model, it has borrowed from the US idea and taken steps towards providing a more consistent approach with foreign investment and critical infrastructure. As noted above, on 23 January 2017, it established the Critical Infrastructure Centre to pre-emptively assess national security risks relating to infrastructure assets in the sensitive sectors of power, ports and water. The Centre has recently closed submissions in response to a discussion paper on this subject, and both foreign investors and infrastructure owners will be watching closely to understand the scope and direction of this new initiative.
Watch this space: Additional information on FIRB process and the Critical Infrastructure Centre
We can expect additional information about the assessment and screening process to be updated in the near future on the FIRB website.
Although the balancing act of managing national security risks and encouraging foreign investment into Australia is recognised, business clearly needs more certainty and transparency. In light of the steps being taken with the Critical Infrastructure Centre, foreign investors and infrastructure owners should closely follow developments in Australia's foreign investment framework.