As the expected final stages of the Chinese-Australia Free Trade Agreement (“CAFTA”) negotiations are taking place, there is significant focus on the changes that are likely to impact the treatment of Chinese investors under Australia’s foreign investment regime. Consistent with other recently negotiated free trade agreements, increased scrutiny of foreign investment in the rural sector is expected to be integrated into the CAFTA. What is not yet clear is whether the unique nature of China’s investors will fuel the refinement of the ‘foreign government investor’ definition or create a standalone approach.
The Australian Government has been vocal in saying that Australia is open for business. The opening words of Australia’s Foreign Investment Policy are – “[t]he Government welcomes foreign investment”. To maintain this, there needs to be a careful handling of the approach to foreign government investors as well as implementation of new thresholds in the rural land sector.
Investment by entities that are related to foreign governments regardless of origin is closely scrutinised – which is particularly significant to Chinese investment given that a large number of FIRB applications come from Chinese state-owned enterprises (“SOE”) - on the ground experience shows that the Australian Government clearly welcomes investment from China. No objections statements are issued promptly and mostly without fanfare.
This article looks at the definition of “foreign government investor”, particularly when it comes to dealing with Chinese investors and the CAFTA and the proposed changes to the treatment of agricultural investment.
1. “Foreign Government Investor”
Australia’s Foreign Investment Policy defines “foreign government investor” to include:
- A body politic of a foreign country
- Entities in which governments, their agencies or related entities from a single foreign country have an aggregate interest (direct or indirect) of 15% or more
- Enities in which governments, their agencies or related entities from more than one foreign country have an aggregate interest (direct or indirect) of 40% or more
- Enities that are otherwise controlled by foreign governments, their agencies or related entities, and any associates, or could be controlled by them including as part of a controlling group
Some points to note:
- The definition is not simply about SOEs and sovereign wealth funds (“SWF”). It is much broader in scope than current debate about the approach to government related investment. It is an inclusive definition and is intended to capture entities in which a foreign government has influence or control.
- There is no country identified as a country of concern. The general approach under Policy since its inception has been that the Australian Government has been concerned to ensure that it understands at all levels what foreign governments are doing in Australia. It is a myth that the Policy approach to foreign government investment is an invention of the previous Australian government when Treasurer Swan released guidelines for foreign government investors in 2008. Treasurer Swan’s press statement noted that the Policy had been applied by successive governments for many years.
- Whilst it is has been suggested that the change of the definition in 2013 to an aggregate 15% interest from a single country was aimed at Chinese investment, the impact of the change has actually seen more American private equity coming within the scope of the definition. This results from the number of United States state government entities such as teachers’ funds and university endowments being investors in private equity funds and easily reaching the aggregate 15% threshold.
From the 1970s until the last couple of years Policy required all foreign government investment to be notified. There was no value or proportionate threshold. The current 10% passive investment threshold is a relaxation of the previous requirement.
SOEs and SWFs fall within the definition of “foreign government investor”.
The OECD Guidelines on the Corporate Governance of State Owned Enterprises state that an SOE is a commercial enterprise, where the state has significant control through full, majority or significant majority ownership. They attract a greater level of public concern than SWFs because of the risk that their investments may be seen as being in pursuit of political or strategic objectives rather than commercial outcomes.
In China, SOEs exist at both central and provincial levels. Almost all of China’s largest companies are central SOEs and state-owned banks, and have senior executives who are appointed by the Communist Party and listed among the top officials of the country.
SWFs, on the other hand, are special purpose funds or arrangements owned by a foreign government (and may be at central, provincial or even local government level). They do not generally attract the same level of concern as SOEs, because the influence of government ownership is generally less direct than for SOEs, and more predictable. They tend to hold, manage or administer assets to achieve financial objectives rather than have an active role in the businesses they are investing in. Because of their predictability, the International Working Group of SWFs has been able to establish The Santiago Principles, which are 24 generally accepted principles and practices for SWFs.
Policy’s current definition of foreign government investor ignores significant differences in the types of entities that have a degree of government ownership. Further, the A$0 threshold for direct investment (10% or more) by foreign government investors means that even routine or immaterial activities are subject to review.
Submissions to the Australian Government have included adopting different approaches to SOE and SWF investment.
- For SWFs, the suggestion is that where they accept The Santiago Principles, then there should be a relaxation of the Policy requirements and they then be treated as a foreign person under the legislation and have the benefit of the general thresholds.
- For SOEs, prescribing a set of criteria that if complied with would enable them to register as an approved SOE. The criteria would be designed to ensure they operate on a commercial basis. Once registered the SOE would be removed from the operation of the Policy and also be treated as a foreign person under the legislation.
It is not clear if the Government will adopt the suggested approaches generally or in respect of the CAFTA. There has been some indication from the Government of a willingness to look at a changed approach to Chinese SOEs under the CAFTA. The focus will be on ensuring that the SOE operates on a commercial basis with predictable commercial outcomes. (For non-government Chinese investors it is likely the CAFTA will provide the same higher threshold of A$1,078m in non-sensitive sectors currently enjoyed by US and New Zealand investors who will soon be joined by Japanese and South Korean investors under their respective free trade agreements.)
As the “foreign government investor” definition deems entities with 15% or more interests as foreign government investors, the impact of SOE and SWF interests on underlying entities will also need to be reviewed. Care will need to be taken as there is potential for creating additional thresholds and confusion in what is already widely regarded as a confusing regime.
2. New thresholds for investment in the rural sector
The Australian foreign investment policy regime, regulated principally under the Foreign Acquisitions and Takeovers Act 1975 (“the Act”) and by Australian Foreign Investment Policy (“Policy”), requires foreign investors to notify certain proposed acquisitions to the Federal Treasurer and obtain a ‘statement of no objections’. Under the Policy, nongovernment foreign investors must notify the Federal Treasurer before entering into acquisitions of rural land in excess of A$248m.
Following ongoing public concern over what is perceived to be a ‘selling off’ of the Australian farm to foreign investors, certain proposed measures are expected to be introduced that will result in increased scrutiny of rural land investments. These measures have been a part of the Government’s policy platform since late 2012. They include:
- A reduction of the monetary threshold from A$248m to A$15m for foreign investment by non-government entities in rural land
- A zero dollar threshold for foreign investment in agricultural land once cumulative purchases of A$15m have been reached
- A lower threshold for foreign investment in agribusinesses (where the investment exceeds 15% or more in an agribusiness valued at A$248m, or the investment in an agribusiness exceeds A$54m)
- The establishment of a register of foreign ownership of rural land, under which foreign investors will be legally required to report their value and level of interest in Australian rural land.
The proposed reduced A$15m threshold for foreign investment by non-government entities in rural land is already reflected in Australia’s recently signed free trade agreements with South Korea and Japan. It is likely that the proposed changes will also be implemented in the CAFTA. If so, current political and public sensitivity to investment in the rural sector must be addressed and handled carefully to ensure that Chinese foreign investors continue to be attracted to the sector.
The timing for the implementation of the new thresholds has not yet been announced. However, as they are in the Japanese and South Korean free trade agreements and likely to be in the CAFTA, the start date is expected to be relatively soon.
KWM are monitoring developments and would be happy to keep you directly informed. Please contact one of the contacts listed below to either discuss this topic further or stay directly informed.