25 April 2016

FIRB to take a closer look at the sale of critical government-owned infrastructure assets

This article was written by Malcolm Brennan and Alison Black.

The Treasurer, through the Foreign Investment Review Board (FIRB), has been given additional power to scrutinise the sale of critical infrastructure assets to private foreign investors, with a clear focus on national security.

The changes to the Foreign Acquisition and Takeovers Regulation 2015 will impact all non-government related foreign investors seeking to invest in any level of Australian government-owned infrastructure assets including: airports; ports; electricity, gas, water and sewerage systems; roads; railways; inter-modal transfer facilities; telecommunications networks; and nuclear facilities (Critical Infrastructure Assets).

Previously, foreign private investors did not need FIRB approval to acquire an interest in Australian land from the Commonwealth, a State or a Territory or even a local government. Now the scope of this exemption is much narrower. Investors will not be exempt from FIRB scrutiny when acquiring an interest from government entities of interests in land or assets comprising:

  • Critical Infrastructure Assets; or
  • an Australian business, which holds interests in Critical Infrastructure Assets.

Foreign government investors never had the benefit of this exception, and this remains unchanged. Also, there was never an exemption for the acquisition from government entities of interests in Corporations Act entities and this position continues.

What does this mean for foreign investors?

All foreign investors, whether private or foreign government investors, will need to comply with the FIRB approval regime when buying Critical Infrastructure Assets. These new changes came into effect on 31 March 2016.

The tightening of foreign investment regulation has attracted significant attention in recent months. In November, a Senate Committee inquired into FIRB’s oversight of foreign investment in assets of strategic or national importance. This came in the wake of the Port of Darwin lease from the Northern Territory Government, and the subsequent media attention this transaction attracted. In its interim report, the Committee expressed concerns about the transparency, comprehensiveness and adequacy of FIRB’s review process, especially where national security considerations are at play. In a report released on 8 April 2016, the Committee recommended that the Treasurer’s reasons for authorising or refusing foreign investment proposals should be made publically available.

These recommendations are an attempt to make the assessment process more open and transparent, in an environment where the legislative framework does not define “national interest” and applications are judged on a case-by-case basis. A final report is due at the end of April. We suggest that care needs to be taken in this approach as there is significant risk of losing much needed investment for Australia should foreign investment be paraded publicly where other investment retains confidentiality.

FIRB Annual Report

FIRB has released its Annual Report for 2014 – 2015. Key highlights include:

  • China remains the number 1 investor under FIRB’s review processes.
  • For the period, China was the largest investor in terms of value of all approvals – approximately $47 billion, accounting for 33% of the total value of approvals by foreign country. This was driven by a large increase in residential real estate approvals.
  • China also leads the way in the agriculture, forestry and fishing sector, accounting for approximately $2.5 billion of the total value of approvals in that sector.
  • Real estate in total – comprising residential and commercial – now accounts for almost half of investment by value with a combined total of 49.8%.
  • There were an additional 17 proposals in agricultural land since 1 March 2015 when the screening thresholds were lowered from $252 million to $15 million. Next year’s annual report will more clearly show the increased number of agricultural land proposals owing to these threshold changes.
  • Mineral exploration and development now accounts for 13.7% of investment by value. This is down from 28% 10 years ago but slightly up on the last report.

Overall FIRB applications are showing a marked increase. Residential land comprises the vast majority of applications and reflects the growing interest of foreign investment in Australia’s residential property. The increase in FIRB applications can also be attributed to the Government’s clear messaging around its get tough policy on enforcement of the foreign investment regime. Whilst there were no prohibition orders in the report period, the celebrated sale of the Point Piper mansion is noted in the report as the only divestment order. The next annual report will make for interesting reading on prohibitions and divestment orders following the amnesty period up to 30 November 2015 and under the new regime which started on 1 December.

The Federal Government’s message is clear: foreign investment in Australia is welcome, but national security and compliance will be a greater consideration for FIRB, especially when Critical Infrastructure Assets are up for sale.

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