21 January, 2016
The new changes to Australia’s foreign investment rules are expected to reduce red tape for investing in the infrastructure sector – unless you are a foreign government investor.
Summary
The recent changes to Australia’s foreign investment laws have some particular implications for the infrastructure and utilities sectors.1 The changes make investment into land and land entities easier for non-government foreign investors. A ‘foreign government investor’ will remain subject to more stringent oversight by FIRB.
Passive investment in infrastructure funds
We have previously discussed how the flow-through calculation of land interests could mean that, under the former foreign investment regime, the acquisition of any interest in certain infrastructure funds (however small in value or percentage) could require FIRB approval due to those funds’ large Australian land holdings.2
The changes attempt to address this by introducing a dollar value threshold below which indirect investments in Australian land (eg via the acquisition of units in infrastructure funds which are deemed to be Australian land trusts because of their large developed commercial land holdings) do not require approval.
Despite some lack in clarity in new definitions and terminology, the better view appears to be that investments in these infrastructure funds will not generally require approval where the value of the investment is less than $252 million.3
However, this de minimis exception will not apply to foreign government investors (eg sovereign wealth funds), which will still need to obtain FIRB approval (and pay the relevant
application fee) for acquisitions of any interest in land-heavy infrastructure funds, however small the size or value of that interest.
‘Sensitive’ sectors
An exception to the above threshold of $252 million applies where the investment is the acquisition of securities in a sufficiently land-heavy vehicle and both the following apply:
(a) some or all of the entity’s land is commercial land that is not vacant and that land falls into any one of a number of ‘sensitive land’ categories; and
(b) the acquisition gives the investor the right to occupy the land or to be involved in the central management and control of the fund.
For these investments, the relevant threshold is $55 million instead of $252 million. ‘Sensitive land’ includes land that will be leased to the Commonwealth or a State Government, land on which a mining operation (which includes oil and gas operations) will operate, and land on which public infrastructure will be located (eg an airport, port, public transport system or utility).4
Aggregation amongst foreign government investors from one country
The changes potentially create some troublesome ‘association’ implications for foreign pension funds which have some statutory or government connection.5 Where more than one such fund is connected to one particular country, all those funds will be treated as associates of each other for the purpose of the relevant ownership levels at which FIRB approval requirements kick in.6
For example, many Canadian pension funds may, strictly speaking, be ‘foreign government investors’ and treated as associates of each other (with their holdings aggregated when determining whether the regime applies to their investments). Yet it is well known that these funds are generally completely separate to, and independent from, each other. Further, in many instances, these funds compete with one another in different bidding consortia for infrastructure assets. Investors in this category will need to act carefully, and may need to engage further with FIRB in order to obtain clarity on their obligations.
Acquisitions of land interests by foreign-owned infrastructure businesses
Infrastructure and utility businesses commonly need to acquire interests in land, as part of their ‘business as usual’ activities or in relation to capital projects.
If the level of foreign investment in those businesses is sufficiently high so as to make them foreign persons, then any acquisitions of land interests will need to comply with Australia’s foreign investment legislation.
Given the $252 million threshold that would typically apply to relevant land acquisitions by foreign persons, in most instances these requirements will not be problematic.
However, if the infrastructure business is itself a foreign government investor (eg because 20% or more of it is owned by a single sovereign pension fund or a foreign government-connected utility company, or 40% or more of it is owned by more than one of these kinds of foreign government-related entities) then it will be faced with a need to obtain FIRB approval from the first dollar of investment. Further, the relevant types of land acquisitions caught by this regime include not just freehold acquisitions, but also leasehold interests and licences (where the duration exceeds five years), easements and shares or units in a land entity.
The FIRB changes provide a couple of helpful exemptions in these circumstances that are available to both foreign persons and foreign government investors. Under the first, utility businesses do not need FIRB approval in order to obtain easements in gross in connection with the operation of the relevant utility.7 However, any other land access rights required for maintenance or expansion of the business will still require FIRB approval, however small the interest.
Under the second exemption, it may be possible for infrastructure businesses to obtain exemption certificates, either in relation to various types of ‘business as usual’ land acquisition programs or in relation to specific projects.8
It remains to be seen how willing FIRB will be to grant these exemption certificates on terms acceptable to the investor. This is one area, among many, where the development of FIRB’s practice and policy will be important in determining just how open for business Australia really is.
FOOTNOTES
1. For a summary of the package of the new legislation, including the new application fees, please refer to the article by Tony Damian and Malika Chandrasegaran entitled ‘FIRB changes: a snapshot of what you need to know’ on page 2 of this edition of the Australian Foreign Investment Review.
2. For a detailed discussion, please refer to the article by Simon Haddy and Sarah d’Oliveyra entitled ‘Foreign investment in Australian urban land corporations and trusts – regulation is broader than you might think’ in the June 2013 issue of the Australian Foreign Investment Review.
3. Of course, the other usual thresholds (eg acquisition of a substantial interest in an Australian company or trust valued at over $252 million) may also be triggered for acquisitions of sufficiently large proportionate interests.
4. See Regulations 2015, s 52(6).
5. For a detailed discussion of the new rules applying to foreign government investors, please refer to the article by Robert Nicholson and Annabel Sampson entitled ‘FIRB changes: impact for foreign government investors’ on page 7 of this edition of the Australian Foreign Investment Review.
6. This broad definition of ‘associate’ does not apply to foreign government investors in which no individual foreign government, separate government entity or foreign government entity holds a substantial interest (i.e. 20%): Regulations 2015, s 45(5).
7. Regulations 2015, s 39.
8. Section 58, Foreign Acquisitions and Takeovers Act 1975 (Cth).
For further information, please contact:
Simon Haddy, Partner, Herbert Smith Freehills
simon.haddy@hsf.com
