Tuesday 14 August 2018, 9.00am - 9.30am
Westin Hotel, Sydney
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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 continue to have a strong demand for capital to develop and harness those resources and opportunities.
Foreign capital allows more investment than we could otherwise undertake ourselves. We have always relied on foreign investment to fill the gap between domestic savings and investment – allowing us to grow the Australian economy into the success that it is today. That domestic savings gap has averaged 3.5% of GDP over the last five years.
Foreign investment also provides an important mechanism by which the Australian economy can tap into technical or management expertise for our enterprises.
Key facts about foreign investment in Australia
In 2016-17, the FIRB considered more than 14,000 investment applications. Putting aside residential real estate applications, where approval is required regardless of the investment value, there were over 1,100 business related approvals.
The two largest source countries for approved investment in the 2016-17 financial year 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 by Chinese authorities.
In recent years, there has been significant foreign investor interest in Australian critical infrastructure assets, with activity driven by State Government privatisations, particularly in ports and electricity infrastructure.
There has been an estimated total volume of critical infrastructure transactions of over $40bn since 2015.1
The role of the FIRB
The role of the Foreign Investment Review Board (FIRB), of which I am the chair, is to advise the Treasurer and the Government on foreign investment matters. Ultimately responsibility for making decisions on foreign investment policy and investment proposals rests with the Treasurer.
The FIRB has six part-time members and a fulltime Executive Member – the Head of Treasury's Foreign Investment Division. Board members have been carefully chosen by the Government to bring knowledge and experience from a range of sectors that can actively contribute to the FIRB's responsibilities, whether it be tax or legal expertise, national security, data, or experience with the resources industry or agriculture.
The FIRB considers, and provides advice on, all applications decided by the Treasurer.
How Australia manages foreign investment and the national interest
While Australia welcomes foreign investment, we have a responsibility to ensure that it does not diminish our national interest. If we fail to live up to that responsibility, we risk losing the public's faith in the regime, and with it their support for foreign investment and the many benefits it provides.
To focus our efforts in the right places, Australia's system sets thresholds, above which investment proposals are screened against a national interest test.
Importantly, Australia's foreign investment framework is permissive. That means the approval process is targeted toward considering whether a proposed investment would be contrary to the 'national interest'.
'National interest' is an important concept that underpins the foreign investment framework, and includes factors such as:
- Impact on the economy
- Impact on the community
- National security,
- Competition,
- Taxation, and
- The character of the investor.
The FIRB assessed applications against the national interest test and to considers potential approaches to manage any identified concerns against the broad national interest criteria.
We are supported in this by drawing upon expertise within Government agencies, including national security agencies, the Critical Infrastructure Centre, the ATO and the ACCC, among others.
A key strength of Australia's investment regime is that it is non-discriminatory – applications are treated in the same manner regardless of the nationality of the applicant.
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 FIRB, like other regulatory agencies, is alert to these changes and the need actively to consider the impacts of these developments on the national interest.
Targeted approach
Many countries prohibit foreign ownership in key sectors or simply keep these assets under government ownership. In Australia, many key assets are in private hands – including infrastructure, media and telecommunications companies.
Successive Australian Governments have taken the view that an open approach to foreign investment is better for our economy than the alternative of large-scale investment restrictions. Rather than blanket bans the FIRB adopts a case-by-case approach. For us, every foreign investment transaction, and every asset sold, is unique, and approaches to mitigating national interest concerns must equally be highly targeted.
While some assets may raise specific national security concerns, others in the same sector may not. While this may be a source uncertainty for investors, I can assure you it is not a sign of inconsistency, it simply underscores that every case is different, and the response must be accordingly balanced and targeted. It is the product of wide consultation and consideration, and a regime where we try very hard to mitigate risks with transactions unless there is a clear harm to the national interest.
The board and I are working very hard to communicate to investors what we can about the regime and the likely national interest sensitivities.
Providing investor certainty
Sometimes the framework is criticised for lacking certainty and clarity – particularly, following any rejection of a business acquisition.
As a permissive framework, you would not be surprised that the vast majority of applications are dealt with in a timely and straightforward fashion.
Rejections are rare. There have been no more than a handful in the past decade. In each rejection 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.
Where national interest concerns are identified, the preference is to apply conditions as part of an approval to manage risks and concerns and allow the investment to proceed, rather than say no.
The national interest test is necessarily broad, with flexibility to respond to an evolving investment environment. The case-by-case approach can allow investment in transactions that might otherwise be blocked if we followed a more prescriptive approach.
While we understand that investors and asset owners may want detailed reasons for individual foreign investment decisions, this is not always appropriate given the nature of the concerns and any conditions to mitigate these. When it comes to national security issues we must be circumspect about what we can say. The Foreign Acquisitions and Takeovers Act itself imposes constraints on what information can be released.
Conditions on the sale of Australian electricity assets to foreign investors
Earlier this year, The Treasurer and the Minister for Home Affairs announced that all future applications for the sale of electricity transmission and distribution assets, and some generation assets, may attract ownership restrictions or conditions for foreign buyers.
The announcement formalised what has been practice, applied on a case-by-case basis, for previous transactions. It did not signal a new approach.
The announcement provides further clarity to business – identifying that the level of aggregation of ownership will be taken into account in considering the national security implications of foreign investment in critical infrastructure assets.
Ownership restrictions do not necessarily indicate a 'ban' or 'cap' on foreign ownership. And in cases where ownership restrictions are not considered necessary, conditions associated with the strategic and operational control of the asset may be applied.
Importantly, there are no blacklists (where foreign investment is automatically ruled out), nor is there a list of acceptable foreign owners or level of ownership. The announcement recognises there are some assets or sectors that are significant enough to require diversity of ownership either in the asset itself or within the sector.
As was the case prior to the announcement, electricity transmission, distribution and generation assets may attract ownership restrictions or conditions for future sales.
The type and nature of restrictions will be determined on a case-by-case basis, depending on the nature of the asset and existing ownership in the sector. This will be communicated to parties as early as possible in the sales process (for example, via Treasurer's preferences). We understand that this also has implications for vendors, who are looking to maximise their potential bidder pool, and welcome earlier engagement by vendors on these issues as they develop their sale process.
Critical infrastructure
Critical infrastructure underpins the functioning of Australia's society and economy and is integral to the prosperity of the nation.
Critical infrastructure provides services that are essential for everyday life such as energy, communications, water and transport. Secure and resilient infrastructure supports productivity, and helps to drive the business activities that underpin economic growth.
The large number of state and territory critical infrastructure sales over recent years has posed new challenges for considering foreign investment. Each asset is unique and raises a different set of risks that need to be managed.
In the modern technological environment, and given our dependence on critical infrastructure for the effective working of our society and our economy, Governments have had to recognise and understand the risks inherent in each asset, regardless of whether it was owned by foreign or domestic interests.
In response, in January 2017, the Critical Infrastructure Centre was established to provide a more comprehensive approach to managing the national security risks to critical infrastructure.
To be clear, the Critical Infrastructure Centre is not part of FIRB – it has a role which is wider than considering foreign investment.
The Critical Infrastructure Centre has dedicated resources to identify and manage 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.
The Critical Infrastructure Centre is focused on helping owners and operators better understand and manage risk, and build resilience. The Centre will do this by conducting risk assessments and providing advice to reduce the potential for malicious actors to gain access to, and control of, Australia's critical infrastructure through ownership, offshoring, outsourcing and supply chain arrangements.
The Centre aims to ensure all businesses are equipped to manage national security risks.
Additionally, the Critical Infrastructure Centre also administers the Security of Critical Infrastructure Act 2018, enacted in July 2018, to strengthen the Australian Government's ability to manage national security risks in the electricity, gas, water and ports sectors.
The understanding of who owns and operates our highest risk critical infrastructure assets will also 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.
The legislation applies equally to both foreign and domestically owned assets.
While separate to FIRB, in the foreign investment context, one function of the Critical Infrastructure Centre is to provide more coordinated national security advice to support foreign investment decision-making. Over time, as the Critical Infrastructure Centre 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.
FIRB continues to assess foreign investment proposals for Australia's critical infrastructure where they meet relevant review thresholds.
The Critical Infrastructure Centre complements the foreign investment review process by providing clear, consolidated and early national security advice to inform the Treasurer's decision on foreign investment proposals.
The FIRB, and the Foreign Investment Division in Treasury, remain the primary point of contact for foreign investors in relation to critical infrastructure foreign investment proposals.
The FIRB and Critical Infrastructure Centre work closely together to identify and manage transactions that may raise national security risks.
Australia is not alone in recognising some of the national security risks associated with foreign investment in critical infrastructure.
For example, the UK has recently released a white paper on National Security and Investment. The White Paper is the next stage in the UK Government's reform of its powers in relation to protecting national security from hostile actors' acquisition of control over entities or assets, including in relation to certain types of infrastructure.
The United States Congress has this month passed legislation strengthening the remit of Committee on Foreign Investment in the United States (CFIUS) in respect of national security matters.2
Conditions to manage national security risks
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 very small 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.
As I touched on earlier, 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, and characteristics of the sector, that are key.
Conditions to manage tax risks
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.
While we are on tax, as many of you would know, the Government has announced a package of measures to address the tax risks posed by stapled structures and limit the concessions currently available to foreign investors for passive income. While not in the remit of the FIRB, I understand the Government's announcement is about ensuring Australia does not have a dual rate corporate tax system for large businesses, and to minimise the impact on existing investments the Government will provide existing investors with transitional arrangements for the majority of changes.
The package includes a concessional 15 per cent withholding tax rate for 15 years for Government-approved nationally significant infrastructure assets. This will ensure continued support for the development of nationally significant infrastructure assets that enhance the productive capacity of the economy and drive long term economic growth.
Advice for asset owners
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 including critical infrastructure. This allows us to start our assessment of national interest concerns on the front foot as early as possible. It also avoids surprises, as any national interest concerns can be identified, better understood and managed as early as possible.
The same goes for vendors. We are open to engaging with vendors of critical infrastructure as they develop their sale process, to consider potential national interest matters.
Closing remarks
To summarise the key messages I hope I've imparted:
Australia continues to welcome foreign investment. The role of the FIRB is to advise the Treasurer in a manner that facilitates rather than impedes foreign investment.
Australia benefits from the openness of our investment regime. By mitigating risks to the national interest, we protect the integrity of that open system.
The key to managing the tension between protecting the national interest and openness is clear, early communication between investors and Government.
The Critical Infrastructure Centre complements the existing FIRB process, providing early and comprehensive advice on national security risks.
Thank you for the opportunity to speak today – I'd welcome the opportunity to answer any questions.
1 - The volume of FIRB applications will differ from the actual value of investment as a number of foreign investors may seek approval in relation to a single infrastructure proposal where there is a competitive bid process. Comparisons over the short term should be considered with caution as the lumpy nature of infrastructure transactions means the timing of individual deals can materially change annual data.
2 - The Foreign Investment Risk Review Modernization Act of 2018