New laws can streamline the approvals process and safeguard national security
Foreign investment has been critical to our nation’s economic success, with one in 10 jobs created by it. Whether it be mining, manufacturing, agriculture, tourism or financial services, every sector of the economy has been the beneficiary.
The additional capital has helped bridge the investment savings gap, supported growth and improved our standard of living. It also brings with it an influx of skills and expertise.
The stock of total foreign investment in Australia today exceeds $3.8 trillion with our traditional trading partners the most prominent.
More than 20 per cent of foreign investment comes from the US, more than 10 per cent from each of Japan and Britain, and about 5 per cent from China.
Since its establishment, our foreign investment framework has been designed to strike a balance between welcoming and attracting foreign investment, while ensuring that only investment that is in the national interest proceeds. This is critical to maintaining the community’s confidence in the integrity of our regulatory framework.
With the rapid development in technology and the increasing complexity in our geopolitical landscape, there is a need for our framework to adapt to these new and emerging risks. In particular, foreign investment is increasingly being used the world over to further strategic, rather than purely commercial, objectives.
In this changing environment, governments must have visibility and the necessary capability to respond. This has seen like-minded nations, including the US, Britain, Japan and New Zealand, among others, strengthen their foreign investment framework with a greater focus on protecting critical and sensitive sectors.
It is against this backdrop that the Morrison government is seeking to strengthen our foreign investment framework with the most significant reforms since the Foreign Acquisition and Takeovers Act came to be in 1975.
These reforms follow extensive consultation with our relevant agencies and are supported by the chairman of the Foreign Investment Review Board, David Irvine. As a former diplomat and security agency head, he is well placed to advise government on the challenges we face and the response required.
The reforms cover three key areas.
First, the government is introducing a new national security test that will require foreign investors, be they government or private, to inform the FIRB if they are preparing to acquire a direct interest in a “sensitive national security business”.
Businesses covered could include those in the defence supply chain, telecommunications sector and those regulated under the Security of Critical Infrastructure Act 2018, such as energy and utility assets. Businesses that own, store, collect or maintain sensitive data relating to our national security and defence may also be included.
Exposure draft legislation will be released next month, with the government to consult on the final definition of what comprises a “sensitive national security business”.
As a result of this reform, all foreign investments and sensitive national security businesses will be subject to a zero-dollar security threshold as opposed to the current legal requirement that sees only foreign government investors subject to the zero-dollar threshold.
In the event a proposed investment falls outside the definition of a “sensitive national security business”, the Treasurer will also have a new power to “call in” the proposed investment for review if national security risks arise.
There will also be a new national security “last resort” power that will enable the Treasurer to impose or vary conditions or require divestment in a limited number of exceptional circumstances.
For example, this will include where an applicant has made a material misstatement or omission to the Treasurer and it related to national security risks posed by the acquisition, where the activities conducted by the acquired business change substantially and have given rise to national security risks that could not reasonably be foreseen at the time of approval.
The second set of changes will strengthen penalties and enforcement powers to ensure greater compliance.
In recent years, there has been a substantial increase in the number of applications that have been approved, subject to conditions. In the past year, more than 80 per cent of investments by value were approved with conditions reflecting the increased complexity and sensitivity of applications.
There are currently more than 1000 conditional approvals on FIRB’s books. With this trend expected to continue, FIRB needs the tools to address noncompliance if and where it arises.
Under current law, the maximum civil penalty for an individual breaching conditions in relation to a non-residential realestate investment is about $52,000, and for a corporation $262,000. This is an insufficient amount to act as an effective deterrent and we are looking to increase penalties substantially, proportionate to the value of the investment.
Third, recognising we compete globally for capital, we are streamlining the approval processes for certain privately controlled institutional investment funds that hold purely passive foreign government funds, alongside private capital in non-sensitive sectors.
Currently, if an investment fund is undertaking investments using a mix of passive foreign government and private capital, with no foreign government holding more than 20 per cent of the fund, then it is not treated as a foreign government investor.
However, the investment fund is treated as a foreign government investor if collective foreign government ownership of the particular fund exceeds 40 per cent.
We are removing the 40 per cent cap so long as the underlying foreign government investment remains passive and no single foreign government holds more than a 20 per cent stake. This will attract and speed up investment from privately controlled and managed institutional investors, who between them have trillions invested globally.
The combination of these reforms to streamline approvals, introduce a national security test and improve compliance and enforcement will provide the nation with a stronger and more effective foreign investment framework.
During the COVID crisis we put in place measures to reduce all thresholds to zero dollars.
This change, to protect the national interest, was always designed to be temporary. With the introduction of these new reforms, the intent is to remove these temporary measures and seamlessly transition to the new framework by January 1 next year.
This will allow Australia to continue to be an attractive destination for foreign capital while safeguarding our national interest.
Josh Frydenberg is the federal Treasurer.