7 April, 2016
Amendments affecting the sale of State-owned infrastructure assets
What you need to know
- The Foreign Acquisitions and Takeovers Regulation 2015 (the Regulation) has been amended by the Foreign Acquisitions and Takeovers Amendment (Government Infrastructure) Regulation 2016 (the Regulatory Amendments).
- From 31 March 2016, the Treasurer, through the Foreign Investment Review Board (FIRB), will be empowered to review sales to foreign investors of critical State-owned infrastructure assets that are considered relevant to national security.
- The sale of public infrastructure assets (owned wholly or in part by an Australian government) such as airports and ports, electricity and gas systems, roads and railways and telecommunications infrastructure will be captured by the Regulatory Amendments.
- These amendments restrict the exemption in section 31 of the Regulation which carves out from the FIRB regime any acquisition of an Australian business or Australian land from the Commonwealth, a State or Territory or a local governing body (except if the acquirer is a foreign government investor).
What you need to do
- Be aware that:
− any future sale of critical State-owned infrastructure assets, whether by asset sale, business sale or share
sale, to any foreign investors will no longer be exempt from the FIRB regime; and
− as a result those transactions will, if the relevant statutory thresholds are met, be subject to the same notification requirements as all other acquisitions made by foreign investors.
- These new regulatory hurdles should be factored into the strategic planning and risk assessment of any potential infrastructure privatisation transactions that a foreign investor may be considering. Inclusion of FIRB clearance as a condition precedent to relevant acquisitions by any foreign investors should be assessed in all such transactions.
Background: National security considerations drive increased scrutiny
The Regulatory Amendments come on the back of a suite of changes made to the foreign investment regime in Australia which have included significant amendments to the Foreign Acquisitions and Takeovers Act 1975 (the Act), the new Regulation, amended Australian Foreign Investment Policy and various Guidance Notes.
Section 31 of the Regulation operates to exempt certain transactions from being "significant" and "notifiable" actions under the Act. Section 31(1) provides an exemption for the acquisition of interests in Australian businesses carried on by government or State-owned land while section 31(2) operates to exclude the general exemption of
subsection 31(1) in certain circumstances.
Previously, under section 31(2) acquisitions by foreign government investors were excluded from the exemption, meaning that acquisitions of interests by foreign government investors in State-owned businesses and land would be subject to the regulatory clearances required under the Act. Foreign investors falling outside the Act's definition of "foreign government investor" were, by operation of section 31(1), exempt from regulatory scrutiny under the Act.
The Regulatory Amendments now limit the exemption in section 31(1) by revising section 31(2) to include:
- the acquisition of an interest in Australian land that includes an interest in certain prescribed critical infrastructure relevant to national security; and
- the acquisition of an interest in an Australian State-run business (which importantly for the purposes of the section, is a business carried on either solely by the State or together with other persons) holding an interest in land where the interest in land is or includes an interest in any of the prescribed critical infrastructure,
- in addition to an acquisition of such an interest by a foreign government investor.
The Australian Government has made the policy rationale behind the Regulatory Amendments clear. In introducing the proposed Regulatory Amendments, Treasurer Morrison said in his media release, "While we welcome foreign investment in Australia it is imperative that critical infrastructure sales are scrutinised to ensure any potential national security risks can be addressed." The Regulatory Amendments are understood to be a government response to the grant by the Northern Territory of a long term lease of the Port of Darwin to a foreign investor without the investor first obtaining FIRB clearance in reliance on the exemption.
The Regulatory Amendments commenced on 31 March 2016 but do not apply to any agreements relating to the acquisition of an interest in Australian land or an Australian business entered into prior to 31 March 2016.
The infrastructure assets affected
Section 31(2)(b) of the amended Regulation now captures the following classes of assets:
- Public infrastructure except in relation to public roads, where 'public infrastructure' is defined in section 5 of the Regulation as:
− Airports or airport sites;
− Infrastructure for public transport;
− Electricity systems;
− Gas systems;
− Water systems; and
− Sewerage systems;
- Certain infrastructure designated under a law of a State or Territory as either significant or controlled by the State or Territory.
- Infrastructure that is part of the National Land Transport Network (within the meaning of the National Land Transport Act 2014) including:
− Infrastructure for existing or proposed
− Railways; or
− Inter-modal transfer facilities;
- Telecommunications infrastructure; and
- Nuclear facilities.
An Australian business that holds an interest in Australian land which is, or includes, an interest in the infrastructure listed above will also be excluded from the exemption.
Note, section 31 of the Regulation extends the definition of business carried on by the State to any business the State carries on, whether alone or together with one or more persons.
For further information, please contact:
Murray Wheater, Partner, Ashurst