Australia – Senate Committee Calls For Greater Transparency In The Foreign Investment Review Process.

 

14 August, 2016

 

In April this year, the Senate’s Economic References Committee released its substantive report on its examination of Australia’s foreign investment review framework. We discuss its findings. 

 

Summary

 

The substantive Senate Committee report on the foreign investment review framework was released in early April 2016.

 

It contains recommendations aimed at increasing transparency in the foreign investment review process, being for Treasury to publish further guidance around the process as well as the Treasurer’s rationale for both positive and negative decisions, and to make the agricultural land register publicly available.

 

It is interesting to note that the majority of the Senate Committee was comprised of ALP and independent senators. Accordingly, whether, and the extent to which, the recommendations are adopted may turn on the outcome of the July 2016 Federal election.

 

In early April this year, the Senate’s Economic References Committee (Committee) released its substantive report on its examination of the foreign investment review framework.1

 

The Committee’s terms of reference required it to examine Australia’s foreign investment review framework, including the powers and processes of the Foreign Investment Review Board (FIRB), in relation to Australian assets of strategic or national significance being subject to lease or purchase by foreign owned interests, and whether there ought to be any legislative or regulatory changes to that framework to ensure Australia’s national interest is being adequately considered.

 

The Committee was asked to have particular regard to a number of high profile foreign investment proposals, being:

 

• the grant by the NT Government of a 99-year-lease over the Port of Darwin to Landbridge Group;
• the planned lease by the NSW Government of TransGrid; and
• the decision by the Treasurer to block the sale of S Kidman and Co on national interest grounds.

 

The Committee released an interim report in February this year, which focused on its inquiry into the grant of the Port of Darwin lease.2 In light of the concerns raised in the course of such inquiry, in addition to the original terms of reference, the Committee decided to examine, among other things, whether the fact that the national interest test is left deliberately broad and unlegislated, provides a sufficiently robust framework to support the Government’s decision-making process in respect of the likely effects of foreign investment proposals on Australia’s economic development and national security. 

 

In light of the above, the Committee made three key recommendations in its substantive report, each of which is discussed further below.3

 

A legislated national interest test?

 

The Committee examined Australia’s foreign investment review process in the context of the decisions noted above and in particular, the national interest test. The Committee noted the Treasury’s submission that Australia’s foreign investment review framework was designed to provide a high degree of flexibility. In that regard, the Treasury submitted that:

 

“A codified national interest test with a rigid set of criteria incorporated into the legislative framework risks being inflexible, prescriptive and may require ongoing amendments (such amendments may be difficult to implement because Australia’s free trade agreement commitments would limit the Government’s ability to make subsequent changes).” 4

 

In the course of its review, the Committee contrasted Australia’s foreign investment review process with the equivalent processes applicable in New Zealand and the United States. In particular, the Committee highlighted the “positively” focused character of New Zealand’s framework, in which the criteria for decision making are legislated and decisions to both authorise or refuse foreign investment proposals are published. In addition, such decisions are justified with 

reference to the ways in which proposed foreign investments will benefit New Zealand’s national interest. The

Committee was of the view that this made New Zealand’s foreign investment review process more open and transparent than the Australian counterpart.

 

Ultimately, however, the Committee did not recommend a legislated national interest test in Australia but called for greater transparency in the process, noting as follows:

 

“The committee recognises the validity in retaining the broad and unlegislated character in respect of the national interest test. Yet such flexibility must be balanced by a clear, consistent and rigorous procedure for assessment that is publicly accountable. In short, flexibility should not come at the expense of both consistency and transparency. While the committee appreciates FIRB's concerns that a fully codified review framework could be counterproductive and overly restrictive, there is considerable scope for greater clarity regarding the process and its outcomes.” 5

 

These comments are the crux of the Committee’s recommendations discussed below, each of which are aimed at
increasing transparency and in turn, increasing public confidence in the foreign investment review process.

 

Recommendation 1: Further guidance regarding the assessment process6
 

The Committee noted that evidence provided during the inquiry suggested that the foreign investment assessment process is seen by many stakeholders as predominantly ad hoc, with little indication of how important criteria, such as the national interest test, are interpreted by the Treasurer, FIRB and other government agencies.

 

To this end, the Committee recommended that Treasury, in consultation with other departments and in cooperation with FIRB, identify and publish guidance regarding some of the elements or key features of the assessment process, in order to introduce greater transparency and openness into the foreign investment framework.

 

Recommendation 2: Publish rationale behind both positive and negative decisions7

 

The Committee noted that there was public concern about foreign investment and that little had been done to instil public confidence in the foreign investment review decision making process. The Committee thought that much of the public concern would be alleviated if there was greater transparency in relation to the process.

 

Accordingly, the Committee suggested that a similar process to that applicable in New Zealand be introduced in Australia and recommended that the Treasury publish information regarding both positive and negative foreign investment review decisions. In particular, the Committee recommended that the Treasury should publish a clear and comprehensive explanation of the national interest rationale behind the Treasurer’s decision:

 

• not to object to a foreign investment proposal;
• to block a proposed investment; or
• to allow an investment to go ahead provided that certain specified conditions are met (noting that the published decision should outline the nature of these conditions and how they will benefit the national interest).

 

Recommendation 3: Agricultural Land

 

8 Register to be publicly available

 

As part of the amendments to the foreign investment framework made at the end of 2015, the Government established a register of foreign ownership of agricultural land (Agricultural Land Register), administered by the Commissioner of Taxation, to record interests in Australian agricultural land held by foreign persons. Foreign persons (including foreign government entities) with interests in agricultural land or changes to holdings of interests in agricultural land are required to report those interests or changes, generally within 30 days. 

 

The Committee noted its understanding that the Agricultural Land Register may not be publicly available and recommended that it be made available to the public to increase confidence in Australian’s foreign investment review framework and its effectiveness in safeguarding Australia’s long term economic and security interests.

 

Supplementary report

 

The Committee also released a supplementary report in late April focusing on the NSW Government’s decision to lease 50.4% of Ausgrid, one of NSW’s largest electricity distribution networks.9 The Committee was

of the view that the assessment process for the Ausgrid transaction reinforced the Committee’s recommendations made in its substantive report.

 

Next steps

 

Each of the Committee’s recommendations is primarily aimed at increasing transparency and consistency in the foreign investment review process (but do not fundamentally alter the current foreign investment review regime). 

 

It will be interesting to see the extent to which they are adopted, particularly given that the Committee was primarily comprised of Australian Labor Party and independent senators. It is also interesting to note that independent senator Nick Xenophon (who was a member of the Committee) went beyond the Committee’s recommendations and recommended that:

 

• Australia adopt a national interest test modelled on New Zealand laws that set out national interest criteria, including the economic effects of foreign versus local investment for a particular project, and a robust consideration of defence and national security issues for strategically sensitive assets including ports, water and electricity utilities; and
• Australia’s foreign investment legislation should be amended to require any credible locally based bid for an asset to be taken into account before approving any foreign based bid.10

 

Ultimately, what emerges from the recommendations may depend on the results of the July 2016 federal election. 

 

FOOTNOTES

 

1. Senate Economic References Committee, Parliament of Australia, Foreign Investment Review Framework (April 2016).
2. Senate Economic References Committee, Parliament of Australia, Foreign Investment Review Framework, Interim Report (February 2016).
3. In the context of its assessment of the Port of Darwin lease, the Committee also welcomed the introduction of the new regulation requiring FIRB approval to acquire government owned critical infrastructure assets which meet the threshold value.
4. 4. Senate Economic References Committee, Parliament of Australia, Foreign Investment Review Framework (April 2016), at 8 [2.12].
5. 5. Ibid, at 51 [5.2].
6. 6. Ibid, at 52–53 [5.5–5.10].
7. Ibid, at 53–54 [5.11–5.18].
8. Ibid, at 54–55 [5.19–5.23].
9. Senate Economic References Committee, Parliament of Australia, Foreign Investment Review Framework, Supplementary Report (April 2016).
10. See Senate Economic References Committee, Parliament of Australia, Foreign Investment Review Framework (April 2016), at 57–60. 

 

 

For further information, please contact:

 

Tony Damian, Partner, Herbert Smith Freehills

tony.damian@hsf.com