Foreign investment in Australia would face significant new hurdles if proposals just tabled by a Parliamentary committee were adopted.
The proposals are aimed primarily at foreign investment in the agricultural sector, but would also affect investment in other areas. They are contained in a report by the Senate Rural and Regional Affairs and Transport References Committee, which was tabled on 26 June.
The Committee recommends a two-pronged strategy in relation to foreign investment in agribusiness:
Perhaps the more radical proposal is to lower the thresholds for approval of private foreign investment in agribusiness. For agricultural land, the threshold would be $15 million (cf. the current threshold of $248 million). For agribusinesses, the Committee appears to propose that, in addition to reviewing acquisitions of more than 15% in agribusinesses valued at $248 million or more, the Foreign Investment Review Board (FIRB) should review agribusiness investments of more than $54 million.
The Committee also recommends that "once cumulative purchases of $15 million of private investment in agricultural land has been reached by a private business or associated entities, any further investment by that business or entity be required to receive FIRB approval regardless of value". This appears to suggest that a foreign investor will require FIRB approval once its total purchases of agricultural land exceed $15 million, regardless of whether those purchases relate to a single discrete area or multiple properties around Australia.
The definition of "rural land"
Australia's foreign investment regime divides land purchases into "rural land" and "urban land". Foreign investment in "urban land" is more strictly regulated than investment in "rural land".
Somewhat bizarrely, "urban land" includes most of the Australian landmass, including mines. That is because it is defined as meaning any land that is not used for primary production.
The Committee recommends that these definitions be amended "with the aim of more accurately reflecting the common understandings of these terms". Exactly what changes the Committee has in mind are unknown.
General foreign investment tests
At present, foreign investments which are notified to FIRB can be rejected if they are contrary to the "national interest".
For obvious reasons, there is no statutory definition of the "national interest". However, the Government's published policy on foreign investment indicates that it, in the case of agricultural investments, the "national interest" includes employment and prosperity in local and regional communities.
The Committee recommends that the transparency and public awareness of the "national interest" test should be increased, with two objectives:
"providing precise and unambiguous instructions to prospective foreign investors about their obligations to FIRB and the Treasurer, and how the national interest test is conducted; and
building the confidence of the public, FIRB stakeholders and the Parliament that the national interest test is being rigorously and fairly applied and takes into account all relevant factors including impacts on rural communities and the agriculture industry."
It also recommends that the policy be amended "to clearly define the 'interests of local economies' and the 'interests of local communities'. Furthermore, there should be a greater requirement for FIRB to take into account these local interests in the assessment of foreign purchases of agricultural assets".
Again, the Committee does not provide much detail about exactly what changes it thinks should be made. The reality is that any attempt to provide clear definitions in this area will produce only one outcome: proposed foreign investors will inevitably be caught up in time-consuming controversies triggered by complaints that their proposed investments do not fall within the strict definition of the national interest, the interests of local communities or the interests of local economies.
Compliance with the Act
Although the Government has the power to prohibit foreign investments on national interest grounds, it can also allow investments that would be contrary to the national interest, provided that the investor gives undertakings that would address the national interest concerns.
If an investor fails to comply with those undertakings, the Government can force it to divest the investment. The Committee notes that divestment is rarely ordered, and recommends that there should be also be other, less blunt, enforcement mechanisms available to the Government to address non-compliance.
Foreign investment evaluation processes
In what appears to be a vote of no confidence in the current approval procedures, the Committee recommends that the Government develop a stronger, more rigorous and more transparent system for examining foreign investment proposals, with a particular focus on "forensically examining":
company structures (including management relationships in joint Australian/foreign ventures);
the relationship between a foreign government's acquisitions strategy (such as food security) and the commercial operation of their subsidiary businesses in Australia; and
ways of setting clear and auditable ongoing undertakings that are in the national interest.
It is noticeable there is a major disconnect between the Committee's recommendations and the contents of the report: many of the recommendations mentioned above are not discussed, explained or expanded on in the report itself. As a result, it is unlikely that the recommendations will be enacted into law in their current form.
However, it should be noted that the report's main authors come from the two parties which are generally expected to form the next Government later this year. As a result, it is likely that complaints from the agricultural sector about foreign investment will find a ready audience in Government after the election.