Four Seasons Hotel, Sydney
David Irvine AO
Foreign Investment Review Board
It’s a privilege to speak to the leaders of some of the many overseas companies that have decided to invest in Australia, and that continue to benefit our economy and society in so many ways.
I’ve been invited today to speak about foreign investment – why Australia welcomes it, how we think about it, and how we ensure it continues to contribute to our national interest.
I hope I can provide some insight into the role played by the Foreign Investment Review Board, in advising the Treasurer on foreign investment matters.
Why Australia welcomes foreign investment?
Foreign investment has always been important to Australia.
Our unique geography and history have shaped our need for foreign investment for over two centuries.
As a huge island nation – rich in resources and opportunities– we’ve long had a strong demand for capital.
We’ve relied on foreign investment to fill the crucial gap between domestic savings and investment – allowing us to grow the Australian economy into the success that it is today.
Perhaps not all Australians understand this, but foreign investment accounts for about 4% of GDP. Without overseas investment, we’d have fewer jobs, a lower rate of economic growth, and an overall lower standard of living.
Foreign investment also has a positive impact on Australian businesses.
Firstly, it sharpens them up by exposing them to competition, and to new business practices, technologies and expertise.
Secondly, it creates partnerships of mutual benefit between Australian and foreign firms.
An example of this is the partnership between Lovitt Technologies – originally a small automotive components manufacturer in suburban Melbourne – and Boeing – a company to which many of us regularly entrust our lives.
Boeing has invested over $1 billion in Australia – leading to its largest ever presence outside of the United States.
This investment has been crucial in helping Lovitt, and other Australian companies to grow into globally competitive businesses and exporters in their own right. And while the car industry has gone, Lovitt now has over 100 employees and contributes to some of Boeing’s cutting-edge projects, including fighter jets and Chinook helicopters.
Foreign investment, however, is not just about the economic benefits.
It’s also in keeping with our values – those of openness, of pluralism, and of multiculturalism – all of which shape our welcoming approach to foreign investment.
A key strength of Australia’s investment regime is that it is non-discriminatory.
Why invest in Australia?
For those foreign firms choosing to invest in Australia, there are plenty of benefits on offer.
We’re the only country in the developed world to have achieved 27 years of uninterrupted economic growth.
We are a stable democracy, underpinned by effective laws and institutions which afford foreign investors the same protections and benefits enjoyed by Australians.
Investors receive stability and certainty from our strong legal frameworks, and from our transparent regulatory requirements.
We have a highly skilled workforce, world-class industry capabilities and, for those who’ve come from overseas to work here, a terrific lifestyle.
We are well connected to some of the world’s most dynamic economies.
All of this provides an environment that is conducive to strong investment performance and lower risks, making Australia one of the world’s very best foreign investment destinations.
Key facts about foreign investment in Australia
The role of the FIRB is to facilitate foreign investment in Australia.
In 2016-17, the FIRB received more than 14,000 investment applications.
The two largest source countries for approved investment were China and the United States. We continue to see strong interest from Chinese investors despite the impact of factors such as tightening of capital controls.
Overall, Australia continues to attract significant business investment, with particular growth in investment in the services sector.
The story is different for investment in residential real estate where there has been a significant decline in both the number and value of approved residential real estate investment.
This decline is largely due to the introduction of application fees, which has reduced multiple applications, encouraging investors to only apply for those properties they genuinely intend to purchase.
How Australia manages investment
I’ve highlighted that Australia welcomes foreign investment, but we also have an important responsibility to ensure that it serves our national interest.
To shirk this responsibility is to lower public confidence in Australia’s foreign investment regime, and risk losing the many benefits it provides.
In our system, investment proposals above certain thresholds are screened against a national interest test.
The ‘national interest’ is a broad concept which includes factors such as:
- Impact on the economy
- Impact on the community
- national security,
- taxation, and
- the character of the investor.
Most applications go through relatively straightforwardly.
- Rejections are rare. A handful in over 10 years.
- Where national interest concerns are identified, the preference is to impose conditions to manage risks and concerns and allow the investment to proceed rather than block it.
The Foreign Investment Review Board plays an important advisory role in supporting the Treasurer to assess applications against the national interest test and to management of any identified concerns measured against the broad national interest criteria.
We are supported in this by Government departments, including national security agencies, the Critical Infrastructure Centre, the ATO and the ACCC, among others.
Approach to providing investor certainty
The national interest test is necessarily broad with flexibility to respond to an evolving investment environment, and important factors such as the character of the investor. The case-by-case approach is a key feature, allowing investment in that might otherwise be blocked if there was a more prescriptive approach.
This does mean that the framework is sometimes criticised for lacking certainty and clarity – particularly, following any rejection of a business acquisition.
The Government and FIRB understand that rejections create uncertainty but it is important to re-emphasise that this has only occurred in a handful of cases in ten years compared to the hundreds and hundreds of approved applications.
In each case there were important national interest considerations, and the Treasurer has sought to outline where possible the basis for those decisions to provide as much certainty to the market as possible. A key factor in all of those rejections was the specific circumstances of the transaction, highlighting the importance of a case-by-case rather than a one-size fits all approach.
Recent announcements made by the Treasurer on foreign investment aim to provide greater transparency and upfront certainty about the application of the national interest test. These have included an announcement that major electricity assets would require conditions or ownership restrictions to address national security risks; and an ‘Australian opportunity’ requirement which ensures Australians are given the chance to bid on agricultural land sales.
Similarly, the Government has worked to dispel misplaced community concerns about investment trends.
For example, an agricultural land register was introduced in 2015 in response to community concerns about foreign ownership of Australian farmland.
The Register allows the community to get the facts. At 30 June 2017, for example, only 13.6% of agricultural land was foreign-owned, over 80% of this was through leasehold interests. This ratio of foreign ownership of agricultural land has not changed significantly in the past decade.
Successive Australian Governments have maintained the position that an open approach is better by far for investment than the alternative of large-scale investment restrictions.
Many countries prohibit foreign ownership in key sectors or simply keep these assets under government ownership. In Australia, key assets are in private hands – including telecommunications companies.
Every foreign investment transaction, and every asset sold, is unique, and responses must be highly targeted.
Often, an asset will raise specific concerns that may not be apparent in other investments.
In 2016, when the Treasurer blocked the sale of AusGrid, this was because of specific national security issues related to that asset.
Since then, other electricity assets have been sold. This isn’t due to an inconsistent approach – it simply underscores that every case is different, and the response must be accordingly balanced and targeted.
The evolving foreign investment environment
In recent years, Australia’s foreign investment system has responded to significant changes in the foreign investment environment. This includes technological change – especially the reliance on interconnected, internet-enabled systems and the wave of privatisation of sensitive critical infrastructure. This has resulted in national security issues coming more to the forefront of national interest considerations than in previous decades.
New technologies provide many benefits, but there is a downside – they can create new ways of causing harm.
The large number of state and territory critical infrastructure sales has also posed new challenges. Each asset is unique and raises a different set of risks that need to be managed.
The Government recognised the challenges in trying to understand the risks inherent in each assets. Our aim is to manage the national security risks at the point of sale.
In response, in January 2017, the Critical Infrastructure Centre (CIC) was established to provide a more comprehensive approach to managing the national security risks to critical infrastructure, regardless of whether it was owned by foreign or domestic interests.
The CIC will provide dedicated resources to identifying and managing national security risks to our critical infrastructure, with an immediate focus on those assets and sectors identified as highest risk: Water, Ports, Electricity and Gas and Telecommunications.
One function of the CIC is to provide more coordinated national security advice to support foreign investment decision-making. Over time, as the CIC builds its expertise and knowledge, it will support a more proactive approach to managing national security risks including those that arise through changes in ownership.
The CIC will be supported by new legislation, the Security of Critical Infrastructure Act, passed by Parliament last month.
Our understanding of who owns and operates our highest risk critical infrastructure assets will be enhanced through the establishment of an asset register.
The legislation also provides the Minister for Home Affairs with a directions power to ensure that businesses (both foreign and domestic) address national security risks where cooperation is not forthcoming.
The legislation applies to both foreign and domestically owned assets.
The FIRB and CIC work closely to identify and manage transactions that may raise national security risks.
Security of data is a growing area of sensitivity. The Government has an obligation to promote the protection of the private or personal data of Australian citizens. How and where it is stored and who has access to it. That obligation becomes relevant for FIRB as a result of growing foreign investor interest in data sensitive assets such as health care services and data centres.
Again, the approach to managing these issues has been to develop and impose data security conditions rather than blocking foreign investment.
National security interests
As previously noted, increasingly, conditions are being applied to manage identified risks such as national security risks. The number of assets that require national security conditions to be applied is still a tiny proportion reflecting the Government’s desire to take a proportionate and targeted response to national interest concerns – a response that allows an investment to proceed, and with the smallest possible impost.
In a number of small instances, it may not be possible to manage all risks to an acceptable level through the imposition of conditions and some form of ownership restriction may be required. Again, rather than blocking the acquisition altogether, the practice has been, wherever possible, to limit the level of interest a particular company or country can acquire.
There is no magic red-line and the type of ownership restrictions that may be imposed are highly dependent on the unique circumstances of the transaction and the nature of the asset. In the electricity sector, due to the criticality of many of the network and generation assets, a key safeguard is ensuring a level of diversity in the ownership. Again there is no magic number.
It is the nature of the asset that is key.
Another key area of focus for the Government has been ensuring the integrity of the tax regime. The imposition of standard tax conditions ensure foreign investors are aware of their tax obligations and have been used as part of a broader set of strategies to combat multinational tax avoidance.
Reducing the regulatory burden on lower risk transactions
Of course, not all proposals involve critical infrastructure or otherwise raise significant sensitivities. Some investments are routine, low-risk or otherwise unlikely to raise national interest concerns. Last year the Government introduced a range of streamlining measures to reduce the burden and cost to business. A key measure was the introduction of business exemption certificates which allows investors to seek pre-approval for a program of routine and low-risk acquisitions. This measure was particularly targeted at private equity funds that have a component of foreign government investment. Other key changes included simplifying the business fee regime, including legislating a low fee for low value acquisitions. The Government’s program of liberalising trade and investment has also resulted in investment screening thresholds being raised for free trade agreement partner countries.
FIRB's regulatory style
The FIRB’s approach is to work with investors to facilitate investment that is consistent with the national interest.
We understand commercial imperatives. The membership of the FIRB reflects deep experience across a range of private-sector industries, and we know that deals can die if approvals take too long.
For this reason, we encourage early engagement by investors, particularly in sensitive sectors. This allows us to be on the front foot, and start our assessment of national interest concerns as early as possible.
It also avoids surprises, as any national interest concerns can be identified, better understood and managed as early as possible.
I’d like to close by noting that this early engagement is a two-way street, and that we in the FIRB see it as our responsibility to engage with investors too.
We don’t want to surprise anyone either, as we know surprises can impact on the investor certainty we are keen to promote.
To summarise the key messages I hope I’ve imparted:
Australia continues to welcome foreign investment. The role of the FIRB is to facilitate rather than impede foreign investment.
Australia benefits from the openness of our investment regime. By protecting the national interest, we protect the integrity of that open system.
The key to managing the tension between protection and openness is clear, early communication between investors and Government.
Thank you for the opportunity to speak today - I’d welcome the opportunity to hear your views, or to answer any questions.