I have been invited today to speak about foreign investment – how the regime works and how Australia is and will remain an attractive destination for foreign investment.
In my capacity as the Chair of the Foreign Investment Review Board, I have recently returned from a visit to China and Hong Kong.
Among many productive meetings I had with firms who have a direct interest in advancing foreign investment between our nations, I had the chance to meet with senior leaders of the China Merchants Bank. This was another good opportunity to hear firsthand that Australia continues to be an important investment destination for overseas investors – including China.
Foreign investment is important to Australia
Foreign investment brings many benefits to Australia. It supports existing jobs and creates new jobs, it encourages innovation and the induction of new technologies and skills, it provides access to markets and it promotes competition amongst our industries.
As a relatively small open economy, we rely on foreign investment to fill the gap between domestic savings and investment.
The fact we have high investment rates reflects that we have enough opportunities for both Australians to invest and for foreign investors to invest. Put simply, we have an abundance of investment opportunities, not a shortfall of savings.
This injection of foreign capital provides additional investment in the Australian economy than would otherwise be possible. Importantly, without additional foreign capital, some Australian investments would be delayed or may not even proceed at all.
Indeed, the more than $200 billion worth of investment in Australia’s Liquefied Natural Gas (LNG) capacity over the past decade would not have been possible without the assistance of foreign capital, including from China.
To further support the value Australia places on foreign investment, here are a few facts:
- At the end of 2018, the stock of total foreign investment in Australia was worth around $3.5 trillion. This was an increase of $187 billion (or 5.6 per cent) over the previous year.
- The total stock of foreign direct investment (FDI) in Australia increased by 9.5 per cent to $968 billion in 2018.
- Treasury’s foreign investment approvals data showed that there was $163 billion of proposed investment approved in the 2017-18 financial year.
- Firms with FDI, support 1 in 10 jobs in Australia. They also make a significant contribution to the one in five jobs that are trade-related.
- Let us not forget Australian outbound foreign investment also contributes to the national economy through the transfer of Australian capital, know-how and eventual repatriation of dividends earned overseas. At the end of 2018, the total stock of overseas investment by Australia stood at about $2.5 trillion, with the US and UK remaining the largest economies for Australian investment.
Australia has an open and transparent foreign investment review framework
Australia’s openness to foreign investment is strongly embedded into our longstanding foreign investment review framework.
Australia’s foreign investment regime strikes a balance between ensuring that we remain an attractive investment destination, while maintaining community confidence in foreign investment and protecting Australia’s interests.
While Australia welcomes foreign investment, we, just like China, have a responsibility to ensure incoming investment is in the national interest. If we fail to live up to that responsibility, we risk losing the public's support, and consequently the many benefits foreign investment provides.
As a starting point, Australia’s system uses a set of monetary thresholds, with investment proposals above those thresholds being screened against a national interest test.
The China-Australia Free Trade Agreement includes provisions to support two-way investment. These provisions are broadly similar to Australia’s other FTA partner countries – specifically providing that private Chinese investment of up to $1.154 billion in non-sensitive areas does not require foreign investment approval.
Successive Australian governments have endorsed the view that there is no sector in the Australian economy in which foreign investment is prohibited, nor any country from which it is prohibited. Rather, Australia’s system is based on principles of being open, transparent and non-discriminatory. In accordance with these principles, foreign investment proposals are considered against the backdrop of national interest and on a case‑by‑case basis.
The national interest test is necessarily broad and provides considerable flexibility to respond to an ever evolving investment environment. The national interest, and what would be contrary to it, includes factors such as:
- Impact on the economy;
- Impact on the community;
- National security;
- Taxation; and
- The character of the investor.
The Foreign Investment Review Board assesses applications against this national interest test and works with investors to manage any identified concerns against the broad national interest criteria. Where national interest concerns are identified, the Government’s preference is to apply conditions as part of the approval to manage risks and to allow the investment to proceed.
Because of this, the framework is sometimes criticised for lacking certainty and clarity – particularly, following a rejection.
Yet rejections are rare.
For instance, over the last decade, there has only been a handful of rejections. In each rejection, there have been important national interest considerations at stake and, where possible, the Treasurer has sought to outline the basis for those decisions to the investor.
To avoid the possibility of a rejection, we encourage investors to engage with us early, particularly in sensitive sectors such as critical infrastructure. This is the best way of helping ensure that key issues are identified early and can be worked through – rather than being left to the end when commercial constraints are typically more significant. Early engagement may also help to reduce surprises down the track.
Equally, we are open to engaging with vendors of critical infrastructure as they look to develop their sale process.
Foreign investment in sensitive acquisitions
Many countries, like China, prohibit foreign ownership in important sectors or ensure these assets remain under the government’s control. In Australia, many equivalent assets are in private hands - including critical infrastructure, media and telecommunications companies.
Private ownership does not, however, absolve government of responsibility for ensuring Australia's critical infrastructure is secure and resilient – particularly in today's age of the dependence of our critical infrastructure on the cyber world.
In view of this, the Government has introduced a range of reforms since 2015 to protect and promote the national interest. These reforms include establishing the Critical Infrastructure Centre (CIC) in 2017 to work with industry to enhance the resilience of Australia’s critical infrastructure assets – regardless of ownership. The CIC also plays an important role in assisting FIRB scrutiny of investments in critical infrastructure.
Australia is not alone in recognising and responding to national security challenges.
For example, in August 2019, Japan expanded the scope of sensitive sectors for which notification is required – covering an additional 20 new industries. The government is now proposing further restrictions on foreign investment on national security grounds, including lowering the threshold in sensitive companies from the current 10 per cent to as little as 1 per cent.
Last year, the United Kingdom (UK) released a white paper on National Security and Investment. The UK is expected to pursue a voluntary notification regime with an option to conduct a national security assessment for investments or activities that could result in significant influence or control over an entity.
The United States (US) has passed legislation to strengthen the remit of the Committee on Foreign Investment in the United States (CFIUS) with respect to national security matters. This includes the potential for mandatory notification of foreign involvement in specified critical technologies, infrastructure and data.
China has also introduced a unified foreign investment screening regime, which includes a new national security review power.
The Australian Government actively works with foreign investors to minimise risks that might be associated with a given proposal. In a small number of instances, where the use of conditions may not mitigate risks to a suitable level, some form of ownership restriction may be needed. The application of conditions or ownership restrictions will depend on the unique circumstances of the transaction and the nature of the asset. For example, in the electricity sector, due to the critical nature of many of the network and generation assets, a key safeguard will be ensuring there is a level of diversity in the ownership of those assets.
In recognition that not every proposal involves significant sensitivities, the Australian Government recently introduced a range of streamlining measures to reduce the regulatory burden and cost to business.
A notable measure was the introduction of business exemption certificates which enable investors to seek pre-approval to make a series of routine and low-risk acquisitions.
This has been a successful initiative, in keeping with the Government’s commitment to reducing red tape and unnecessary regulation. Importantly, it has given businesses additional flexibility to add investments and to respond swiftly to changing market conditions. It is another indication of Australia’s willingness to support foreign investment that is in our national interest.
Australia is an attractive investment destination
For foreign firms considering whether they should invest in Australia, I believe their answer should be a resounding ‘yes’.
The Australian economy has just completed 28 years of uninterrupted economic growth.
We are closely located to some of the most dynamic and fastest growing markets in the world – and new doors have been opened with a number of Free Trade Agreements (FTAs) in the region.
We are a stable democracy, underpinned by a strong rule of law. We accord foreign investors the same protections and benefits enjoyed by Australians.
We have abundant natural resources and, for a developed economy, a relatively fast-growing population.
We have a highly-skilled workforce, world-class industry capabilities and, dare I say, a terrific lifestyle.
It is these characteristics which have continued to position Australia as an exceptionally attractive investment destination.
At the beginning of the 20th century, FDI into Australia generally came from the UK.
After World War II, investment grew from the US, as multinationals invested in Australia's growing industries, including manufacturing and mining. This created post-war jobs, and led to the transfer of technology and skills into Australia.
For example, the US aerospace company Boeing remains a strong investment story arising out of this period.
Since then, investment from Asia has increased – first we saw rising investment from Japan, and now, increasingly from countries such as Singapore, China and Malaysia.
Each of these periods has coincided with a level of public interest and debate.
In recent years, foreign investment, including from China, has helped Australia to capitalise on the once-in-a-generation mining boom. This demonstrates the mutually beneficial nature of trade and investment. In the reverse direction, for example, exports of Australia’s iron ore and coal have helped China to build and prosper.
Foreign investment has also contributed to growth in the non-mining sectors of the Australian economy. While investments in agriculture and food have obvious appeal to firms in Asia, foreign investors are more and more pursuing opportunities in Australia’s healthcare, services and innovation sectors.
Australia has a mutually beneficial economic relationship with China and welcomes Chinese foreign investment
The Australia-China bilateral relationship is based on strong economic and trade complementarities, with both economies benefiting greatly from the relationship.
For a number of years now, China has been Australia’s largest two‑way trading partner, with two‑way trade reaching a record high of around $215 billion in 2018.
For context, China accounts for nearly one‑third of our exports and around one-fifth of our imports. With regard to Australian exports, China accounts for more than 80 per cent of Australia’s iron ore exports, around a third of our liquefied natural gas and more than a fifth of our coal.
We are also a major exporter of quality agricultural goods, China accounts for around three-quarters of our exports of wool, more than a third of alcoholic beverages and more than half of seafood product exports.
At the same time, China has been equally reliant on Australian exports to support its economic transition. For example, with regard to China’s imports, Australia accounts for more than 60 per cent of China’s total iron ore imports and around 45 per cent of its LNG imports.
The continued expansion of China's middle class will provide China with further opportunities to benefit from its economic relationship with Australia. For example, an expansion of our trade in services will help drive growth in both China and Australia – potentially creating many thousands of new jobs in each country. China's investment in other sectors where Australia has a comparative advantage will also be mutually beneficial: areas such as agribusiness, health products and services, tourism and education.
We share a mutual respect for education, Australian universities, colleges and schools continue to educate Chinese students, with around 200,000 Chinese students in Australian education for the year to August 2019 – more than any other country.
Another mutual benefit lies in tourism, which is booming in both directions, with the two way flow of short-term visitors at around 2 million per year in 2018-19.
This strong trade relationship is well supported by what is arguably one of China's most ambitious trade agreements, the China-Australia Free Trade Agreement, which came into force in 2015.
But our relationship with China is much broader than trade.
Investment plays an important part in our bilateral relationship. I am extremely fortunate to have had my own brush with the forging of this investment relationship.
Back in the early eighties, as a young diplomat in China, I played a small part in China's first major overseas investments, the first steps in the era of "gaige kaifang" or "Reform and Openness" policies. Those first “Open Door” steps included Chinese investment in the Portland Alumina Smelter in Victoria, and in the Channar iron ore mine in the Pilbara – both in the 1980s.
Later, as Ambassador to China, I supported negotiations to conclude the agreement for China to invest in Western Australia’s North West Shelf LNG project, another first for China and something which has benefited both countries.
This was only the start.
Today, China is the 5th largest holder of FDI stock in Australia – sitting behind the US, Japan, UK, and the Netherlands.
The stock of FDI from China has grown from a negligible amount in the mid-2000s to over $40 billion by the end of 2018. Of the total stock of FDI in Australia, China accounts for around 4.1 per cent.
Australia welcomes China’s announced improvements to foreign investment market access (decreasing its negative list from 48 to 40 restricted sectors) and the introduction of China’s Foreign Investment Law, which will enhance intellectual property protection from January 2020. We encourage China’s continued reform, noting that Chinese FDI in Australia is around three times the size of the stock of Australian FDI in China ($13.5 billion) – an imbalance that in part reflects the openness of Australia’s foreign investment framework compared with China’s.
Treasury’s foreign investment approvals data shows that China has in recent years been our largest source of proposed foreign investment year-on-year – only to be pipped last year by the US for the mantle of our largest source country for 2017‑18.
In 2017-18, the top three sectors for approved proposed Chinese investment were real estate ($12.7 billion, including both residential and commercial real estate); services ($3.9 billion); and mineral exploration and development ($3.8 billion).
While it is certainly true that the larger state-owned enterprise deals make the evening news, private Chinese companies make an important and welcome contribution to Australia.
For example, Goldwind, China’s largest wind energy company, has invested in Australia since 2010 with projects spread across New South Wales, Victoria and Tasmania.
Let me emphasise: to be successful, the economic relationship between Australia and China needs to be mutually beneficial. The relationship over the years has not been solely to Australia’s benefit. Australian iron ore and coal has been an important contributor to China’s growth for more than thirty years; Australian LNG is helping fuel China; Australian education helps increase the Chinese skills base; Chinese investment in Australia gives China knowledge and opportunity. Our challenge is to ensure the economic relationship continues on a mutually beneficial path. Two-way investment will help meet that challenge.
Thank you for the opportunity to speak today – I’d welcome the opportunity to answer any questions.