The pending acquisition of Australia's leading grain handler, GrainCorp, by US commodities giant ADM, and the agreed sale of two of the three biggest Australian energy utility companies to State Grid, a Chinese SOE, has raised concerns amongst some Australians about the extent of foreign direct investment in key Australian assets. While there is always going to be some concern amongst the public about the control of Australian assets being in overseas hands, it is important to recognise the following:
- firstly, that foreign investment in Australia is, generally speaking, crucial to economic growth and prosperity (and especially so in uncertain economic times like the present);
- secondly, that in the agribusiness sector, foreign investment is particularly important if Australia is to capitalise on the ever-increasing demand for food in the region; and
- thirdly (and as recently noted by Treasury), that historically Australia has relied on foreign investment to meet its investment needs and that that foreign capital has "allowed the Australian people to enjoy higher rates of economic growth, employment and a higher standard of living" than would have been achieved without that investment.
The Australian Government has consistently confirmed that it "welcomes foreign investment", a sentiment back by recent statistics. Of the more than 10,700 applications considered for Foreign Investment Review Board (FIRB) approval for the 2011-2012 period (including proposed investments of A$3.6b in agriculture, forestry and fishing and A$51.65b in mineral exploration and development) only 13 were rejected. The OECD ranks Australia as imposing less regulation of foreign direct investment than any of China, Japan, South Korea, Canada, India and Russia.
FIRB Thresholds and Criteria
Under Australia's current foreign investment regulations, overseas investors need to obtain prior approval from FIRB before acquiring a substantial interest in:
- an Australian business that is valued at more than A$248m; or
- an offshore company whose Australian subsidiaries are valued above A$248m.
An overseas investor holds a substantial interest when that person (including any associates) has 15% or more, or a number of overseas investors (including any associates) have 40% or more, of the issued share capital or voting power of a corporation. For NZ- and US-based investors, the threshold is A$1,078m, except in relation to certain sensitive sectors (such as media, telecommunications, transport and military) where the A$248m threshold applies.
Overseas investors which are SOEs also require FIRB approval irrespective of the investment amount, where the investment constitutes direct investment (ordinarily an investment of an interest of 10% or more) – the Australian Government does not explicitly prohibit or reject investment by SOEs, but prefers to "look carefully" and consider whether the investment is "commercial in nature" or if in fact the investor is "pursuing broader political or strategic objectives that may be contrary to Australia's national interest". This causes some unease among Chinese investors because, as the Premier of Western Australia, Colin Barnett, noted during a recent trip to Beijing, while the Chinese private sector continues to grow, most of the largest Chinese investors are SOEs, and therefore need FIRB approval before making any investment in Australia. While on that trip (primarily to seek financial backers for the troubled Oakajee port and rail project), he stated that he hoped restrictions on investment by SOEs would be eased for this very reason.
Factors that assist in determining that an SOE's investment is not contrary to Australia's national interest include:
- the existence of external partners or shareholders;
- the level of non-associated ownership interests;
- the governance arrangements for the investment;
- ongoing arrangements to protect Australian interests from non-commercial dealings; and
- whether the target will be, or remain, listed on the ASX or another recognised exchange.
Investments in Real Estate
Australia's current foreign investment regulations also provide that overseas investors need to obtain prior approval from FIRB before acquiring an interest (including agreeing to enter into a lease or licence, or financing or profit sharing arrangements) in certain types of real estate, including:
- vacant land for commercial development;
- developed commercial real estate (including hotels) valued at A$54m or more (A$1,078m for NZ- and US-based investors);
- mining tenements, where there is:
- a right to occupy and the term is likely to exceed 5 years; or
- an interest in an arrangement involving the sharing of profits or income; and
- rural land (being land that is used wholly and exclusively for carrying on a business of primary production – including forestry) where the total assets of the business exceed A$248m (A$1,078m for NZ- and US-based investors).
SOEs require FIRB approval in relation to investment in real estate irrespective of the investment amount.
FIRB in the Asian Century
It will be interesting to see if and how FIRB's decision making reflects the ever-strengthening economic ties between Australia and China, and Australia's desire to seize on opportunities in the Asian Century. During 2011-2012, FIRB approved Chinese-based investment of approximately A$16.2b (third only to US-based investment of A$36.6b and UK-based investment of A$20.3b), and by far and away Chinese investors were the recipients of the largest number of approvals – approximately 44.4% of all approvals given, with the UK a distant second with approximately 9.5%. Recent FIRB decisions in relation to Chinese investments include the approval of a Chinese SOE's acquisition of a 35% stake in the bidder for Western Australia-based Talison Lithium (supplier of one-third of the world's lithium) and the approval of a private Chinese company's winning tender to develop the A$700m West Australia Ord River irrigation project.
In our recent dealings with FIRB (including in respect of investments in precious metals and minerals, coal and uranium), we have seen that it has placed special significance on how the target will be funded post-investment and the investor's future plans for the target.
FIRB under Review
Australia is poised for a federal election later in 2013, and if a Coalition government is elected, the opposition has indicated that it would review Australia's foreign investment rules. While it is very unlikely that the FIRB approval requirement for SOEs will be lifted outright, whether an investment value threshold is introduced, or existing investment value thresholds generally are reviewed to reflect Australia's relationship with China and position in Asia remains to be seen, but we still see Australia as being very much open for business and just as much so for Chinese investment as investment from Australia's other major partners.
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