The Federal Government is in danger of harming Australia's
well understood and practical Government policy on investments by
state owned enterprises.
Recent statements suggest it may heighten the regulatory burdens
on foreign state-owned enterprises by requiring SOEs to gain
approval for every investment they wish to make in Australia - no
matter how small.
Such a policy change is unnecessary. At worst it could
discourage foreign investment and cause Australian businesses to
miss out on essential capital.
Australia's foreign investment policy currently requires
SOEs to notify and gain the approval of the Foreign Investment
Review Board if they plan to make a 'direct investment' in
A direct investment is any investment which has the objective of
establishing a lasting interest in an asset, or a strategic
long-term relationship with a target enterprise.
It generally applies to investments of 10% or more, although
FIRB considers that investments of 10% or less can be direct
investments if the acquiring SOE can use that investment to
influence or control the target.
While the definition of a 'direct investment' has caused
some minor interpretation difficulties, the current policy is far
better than the previous version which was in place until June 2010
and required all investments by SOEs to be reviewed by
FIRB. A return to the pre-2010 position is not needed and would not
The issue gained attention in June this year when Etihad, the
state-owned United Arab Emirates airline, acquired an initial 3.96%
interest in Virgin Australia. Etihad did not notify FIRB before
making its initial investment even though it stated in its press
release that the investment would strengthen the strategic
partnership between the two airlines.
Presumably, Etihad concluded the transaction did not qualify as
a 'direct investment' because it was below the 10%
threshold. However, this is a questionable conclusion. The
relationship between Etihad and Virgin Australia and the strategic
objectives associated with the investment suggest it was not a
purely economic investment.
Etihad subsequently obtained FIRB approval to increase its
interest in Virgin to 10%.
Etihad's initial investment in Virgin Australia without FIRB
approval suggests there exists some uncertainty surrounding FIRB
requirements for SOEs wishing to make investments of 10% or
FIRB has since announced it will release new policy guidelines
to clarify when it should be notified of potential investments by
SOEs. This seems a rather drastic response to what has been simple
issue of interpretation and signals a potential shift in position
on SOEs. To the extent the Policy does shift, it should not move to
a point where SOEs must notify FIRB of every investment in
Australian entities. This would be a backward step in
Australia's foreign investment policy and have consequences for
For instance, SOEs, and in particular sovereign wealth funds
often make investments in Australian companies through placements
and other fundraising structures in circumstances where deadlines
are tight and the acquisition is purely economic (with the SOE
having no intention of, or immediate ability to, exert any level of
control or influence over the Australian company). Requiring
notification of every investment by an SOE may prevent the SOE from
complying with the placement/rights issue timetable and therefore,
potentially cause the Australian company to miss out on essential
Some Australian companies also have a level of SOE ownership
which means they themselves are considered by FIRB to be a
'foreign person' and an SOE. If SOEs were required to
obtain approval by FIRB before making any investment, such
Australian companies would also be subject to the notification and
approval requirements which could restrict their ability to operate
their business in Australia.
Further, FIRB could find itself sinking under a much larger
administrative burden, assessing insignificant investments that
could not possibly affect Australia's national interest. This
would be a waste of resources and likely increase the time FIRB
takes to process and decide applications.
Australia's foreign investment regime has been very
effective in regulating investment by SOEs, while at the same time
being firmly market-based. The Government should be wary of
unnecessarily tightening our foreign investment regime to address
minor issues that do not represent any substantial policy
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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