Overview
4.1
Attracting foreign investment has been vital for Australia’s economic development. Australia has historically been a net capital importer, and many Australian businesses have relied on foreign investment to support their ventures.
4.2
Australia’s ‘open, well-regulated and stable economy and sound institutions’ have traditionally attracted foreign investment. In 2018, total foreign investment hosted by Australia equalled $3.5 trillion. Australian investment abroad reached $2.5 trillion at the end of 2018.
4.3
This chapter outlines Australia’s foreign investment profile, including the advantages and disadvantages of foreign investment and whether Australia is too reliant on foreign investment. The chapter also provides an overview of the foreign investment framework, with a focus on recent changes to the foreign investment screening process. Given the scope of the inquiry’s terms of reference, this report does not consider Australia’s foreign investment abroad.
Foreign investment trends
4.4
The Department of Foreign Affairs and Trade (DFAT) described Australia’s sources of foreign direct investment (FDI) as ‘diverse with investors from a wide range of regions’, and that they reflect ‘those countries which are the main exporters of capital globally.’
4.5
The United States Studies Centre (USSC) outlined that Australia has benefited from ‘successive waves of foreign investment’:
Before the [Second World] War, the United Kingdom (UK) was the big power. Since the second war, we've had successively the United States (US), Japan and China. Each wave has been controversial with strong opposition as it rises and then dissipates and falls.
4.6
The US is Australia’s current largest investor by a wide margin, followed by the UK. Asialink Business outlined that Australia’s strong historical and cultural ties with these countries had resulted in these higher levels of overall foreign investment.
4.7
Asialink Business commented on common perceptions about investment in Australia from China and stated that:
Despite perceptions about an overwhelming level of Chinese investment in Australia, including by State Owned Enterprises, 2019 data shows that investment from China represents about 2.0 per cent with Hong Kong about 3.7 per cent, in contrast to the US at 25.6 per cent.
4.8
At the same time, the Productivity Commission (PC) noted that the speed at which China’s investments in Australia have grown over the past decade is a ‘significant development’, and that China is currently Australia’s fifth largest source of FDI. The USSC stated that this rise ‘has paralleled the growth of our economic engagement [with China], particularly in resources, tourism, education and food processing.’ The USSC added that ‘Australian companies have about the same amount invested in China as Chinese companies have invested in Australia.’
4.9
The PC also explained that investment from China may be even higher, if the ‘ultimate beneficial owner’ was considered when measuring FDI, as well as the ‘immediate owner’:
The international standards for measuring FDI have been revised so that in future both concepts of ownership are recorded, but national statistical agencies have yet to implement the standard. [The PC’s] foreign investment report considered alternative datasets that attempt to trace the ultimate owner. They are illustrative and no substitute for official statistics. Moreover, the estimates we reported vary in both methodology and what they measure. But they do suggest that inflows into Australia, with ultimate beneficial ownership by an investor in China, could be averaging about three times larger over recent years as inflows from China measured by immediate ownership.
4.10
The Department of the Treasury (Treasury) and the Foreign Investment Review Board (FIRB) explained that the PC’s concerns regarding a data gap between the immediate and ultimate owners, as identified in the PC’s report on foreign investment released in June 2020, related to the data and methodology used by the Australian Bureau of Statistics (ABS). The FIRB advised that it used a different dataset to the ABS when assessing foreign investment proposals and that it undertook complex research to identify the ultimate owner of the investment.
4.11
DFAT commented on the different methodologies used to measure foreign investment, and noted that:
Some might measure investments that are approved in a particular year, and others might measure investments that actually take place in a particular year. They'll all generate different numbers, depending on those different methodologies.
4.12
The USSC explained that foreign investment datasets were ‘too infrequent and too broad’, advising that:
… the ABS provides data on the economic activity of foreign affiliates in Australia and Australian affiliates abroad only once every 15 years. Even then, the ABS is only able to provide that data when extra funding is allocated from DFAT. Australian policymakers cannot enact informed economic and national security policies if the underlying government statistics are unavailable or out of date. The future economy will be knowledge-intensive and, as such, Australia should take a knowledge-intensive approach to ensuring it is best prepared.
Impact of COVID-19 on investment
4.13
DFAT explained that due to the economic impact of COVID-19, global FDI was expected to drop by 40 per cent in 2020. Recognising this, DFAT noted that ‘attracting and retaining FDI will be challenging’, but that:
The government’s public health measures to slow the spread of the virus, economic stimulus packages to support businesses and consumers, and strong messaging that Australia remains ‘open for business’, demonstrates Australia continues to offer a safe, stable and welcoming environment for international investors.
4.14
The Australian Investment Council (AIC) similarly stated that COVID-19 had ‘already begun to have an impact on the outlook for new investment capital flowing into venture from domestic and international sources.’ The AIC expected to see increased risk aversion from investors (including superannuation funds) and a fall in investment in innovation and research.
4.15
The Australia China Business Council commented that the economic crisis caused by the pandemic had led to a:
… slowdown in foreign investment coming into Australia, particularly out of China. That's consistent right around the world. … That's largely because of what's happening within China. They've reset their domestic policy settings, so they're focused more on supporting the domestic consumption market as opposed to overseas foreign investment. Where there is foreign investment, they're diverting that or pushing it more towards countries that are aligned particularly under the Belt and Road Initiative they've established.
4.16
Asialink Business explained that competition for foreign capital will increase as the world recovers from COVID-19:
Of the top 5000 multinational enterprises worldwide, research suggests that their expected earnings for this year are likely to be revised down by 40 per cent. This means that there will be even greater competition for reinvested earnings that are then going to flow from multinational enterprises as capital into countries, including countries such as Australia. So we very much recommend a risk-adjusted return lens, rather than a pure lens of risk, in evaluating foreign investments, because we are going to be competing for foreign capital in an even more competitive global environment.
4.17
The Minerals Council of Australia (MCA) also expressed concern regarding the impact of the pandemic on the level of foreign investment. The MCA explained how vital foreign investment was for Australia’s economy and the resource sector in particular. Describing the rise of protectionist sentiments and measures across the globe, the MCA stated that it was critical that the government to continue to support and promote foreign investment.
Foreign investment framework and reforms
4.18
DFAT outlined Australia’s foreign investment framework and stated:
Foreign investment in Australia is regulated by a framework that welcomes investment that is not contrary to Australia’s national interest. The Government, through the FIRB, reviews foreign investment to ensure consistency with the national interest.
4.19
Treasury advised that, on 5 June 2020, the Government proposed ‘major reforms’ to the Foreign Acquisitions and Takeovers Act 1975. These reforms took effect on 1 January 2021, after the evidence for this inquiry was received. DFAT explained that the changes were expected to support ‘Australia’s attractiveness’ to foreign investors; ‘maintain public confidence in the integrity’ of the foreign investment framework; and protect Australia’s national interest and security.
4.20
Treasury further outlined the reforms:
The reforms update the framework in three broad ways. They address national security risks; they strengthen the existing system; including with regard to compliance; and they streamline investment in non-sensitive businesses. The underlying principles of our system remain the same: that Australia welcomes foreign investment for the significant benefits it provides but that we need to ensure investments are not contrary to the national interest, including national security.
4.21
The FIRB explained that the need for reform had been driven by changes in the foreign investment environment in recent decades, including the privatisation of some critical infrastructure and developments in digital technology upon which critical infrastructure now relies. The FIRB advised that these factors had:
… increased the vulnerability of critical infrastructure and aspects of national security, including the protection of data, and has required the government, not just the FIRB, to look much more closely on a case-by-case basis at investments where there is a possibility that our critical infrastructure or our other national security assets might be at risk in ways that they weren't before the advent of technology and privatisation.
4.22
The FIRB continued and outlined that previously, some investments with national security implications may not have been subject to federal scrutiny:
… with the imposition of previous thresholds, we never looked at any investment that might have had an impact on national security if it was valued at less than $274 million or $1.2 billion by a company from a country with whom we had a free trade agreement. They were simply escaping, as it were, the net. A principal intent of these reforms is to reduce the threshold so that the government, through the agency of the Treasury and the FIRB advising the Treasurer, can look at these cases to determine whether they should go ahead.
4.23
Treasury added that the reforms will enable it to ensure the conditions associated with a foreign investment approval are being adhered to.
4.24
While confirming that the FIRB’s function is to ‘facilitate investment while protecting the national interest’, the FIRB advised that there was no specific definition of what the ‘national interest’ was. Instead, the FIRB and Treasury advised a ‘common sense judgement’ is made based on criteria including: national security, competition, other government policies (including tax), impact on the economy and the community, and the character of the investor.
4.25
The PC stated that ‘the scrutiny of investment applications against the national interest test lacks clarity around how it is interpreted from case to case, stirring investor uncertainty.’ The PC recommended greater transparency in this regard and stated:
While some discretion is understandable, potential investors would benefit from more certainty from the process. We considered that there is scope to lower compliance costs and lift investor certainty and transparency—for example, by routinely publishing reasons for decisions to block proposals, while recognising that national security and commercial confidentiality may limit the detail or timing of publication, and also by publishing more detailed information on the timeliness of decisions each year and giving early advice to investors where standard timelines will not be met.
National security considerations
4.26
The Department of Defence acknowledged the potential risks associated with foreign investment, particularly in relation to critical infrastructure, and stated:
Foreign investment is critical to the continued prosperity of the Australian economy, supporting growth and innovation into the future. The future sales of significant assets, and in particular critical infrastructure, will likely involve elements of foreign investment. However … foreign investment may sometimes provide other countries with access and control over Australian organisations and assets that may not be otherwise attainable.
4.27
The PC highlighted the rising investment from China in Australia, and noted that ‘for the first time, one of our largest sources of investment is not a democracy or a military ally’.
4.28
The PC further outlined concerns regarding investment from state owned enterprises and particularly from China:
One of the risks with state owned enterprises is that the motivation for an investment may go beyond purely commercial interests. There are concerns that it may be used in a more strategic way or in a way that could conceivably, in some instances, be against our national interests. That's because the profit motive isn't necessarily the driving motive of those investment decisions.
We also make the point, particularly with the rise of the share of inward investments in Australia being from China, that under their laws there is an obligation on all businesses, whether they're state owned or not, to maintain and support Chinese national security.
4.29
Professor Clive Hamilton added that the Chinese Communist Party ‘uses economic relations in order to extend its political influence and dominance in other countries’, which makes it different to Australia’s other major investment partners. To mitigate this risk, Professor Hamilton pointed to a proposal for the development of a ‘green list’ of safe goods and services that can be traded with China, and a similar list for investments.
4.30
DFAT advised that all investments from state owned enterprises are screened, to ‘ensure that [Australia’s] national interests and national security interests are fully taken into account.’
4.31
The USSC was concerned that national security was ‘becoming a barrier to foreign investment’:
New foreign investment rules calling for investment in sensitive sectors, requiring FIRB approval regardless of the amount is, I think, an indication of the much tougher national security approach that's being taken, as is the revelation recently that 80 per cent of foreign investments last year had conditions imposed. There is a global trend here, and Australia has gone further than most. It's part of a global backlash against globalisation that threatens to choke the flow of investment. So I think it's important that there remains a strong economic focus on the benefits of investment in the FIRB process.
4.32
The AIC stated that it was crucial that Australia remain an attractive destination for foreign investment, especially to bounce back from the impact of COVID-19.
4.33
Asialink Business agreed and stated that it was ‘important in the current environment to not just take a pure risk-focus lens in attracting foreign investment.’ Asialink Business put forward an alternative approach:
We recognise the thresholds that have been put in place by the FIRB, where the monetary threshold has been reduced to zero over this COVID period. We recommend that perhaps there is an opportunity to have an alternative approach to risk, publishing a negative list of sensitive or national interest sectors that attract a different level of screening or have more restrictions on FDI.
4.34
The Australian Chamber of Commerce and Industry similarly suggested that a ‘negative list’ could be used, to prevent international investment in certain assets or classes of investment, but recommended such a list should not target any particular country.
4.35
Dr Triggs also recommended that the government focus on particular risks rather than particular countries, and that any restrictions be made clear to avoid investor uncertainty. Dr Triggs stated:
The focus really needs to be on what risks we want to mitigate rather than on particular countries. If we do identify particular industries and particular assets where we simply wouldn't want to tolerate any foreign investment, then the goal is to make that as clear and predictable as possible. In terms of the cost of restrictions on foreign investment, the major cost that we impose is via creating more uncertainty. When we create a lot of uncertainty, or if we allow, for example, retrospective changes to previous investments that were approved, the consequence of that is that people will stop investing.
4.36
In contrast, Mr Simon JianDan noted that some countries carry more risks than others, and that ‘post COVID, the threshold for FIRB scrutiny should either be lower for all foreign investors or lower for foreign investors from specific countries deemed high risk.’
4.37
The FIRB explained that, in assessing foreign investments, it focused more on ‘the areas where the investment occurs’ and ‘the nature of the investment’, rather than the investment’s country of origin.
Box 4.1: Port of Darwin
In 2015, the Northern Territory Government sold a 99 year lease on the Port of Darwin to a privately-owned Chinese company. The PC’s 2020 report on Foreign Investment in Australia stated that there were concerns from the US about the sale, which were ‘were attributed to the surveillance and espionage capabilities presented by the port’s close proximity to Australian and US Defence facilities, as well as concerns about the strategic purpose of China’s investment in the region as part of its Maritime Silk Road.’
The USSC stated that:
US national security officials have not forgotten Australia’s surprise announcement about leasing the Port of Darwin to a Chinese company in 2015. With foreign investment facing unprecedented pressure from nationalist and protectionist forces, it is more important than ever for close allies to seek to align, or at least maintain a dialogue, on restrictions of foreign entities in their respective countries.
The FIRB stated that, at the time, the leasing of the Port of Darwin occurred outside of the FIRB’s purview. The FIRB continued that ‘as a result of that, the government has since introduced changes to the [Foreign Acquisitions and Takeovers Act 1975]’ to enable it to intervene in similar situations in the future.
The Institute for Integrated Economic Research - Australia (IIER-A) added:
… the scale of our economic reliance on trade with China is leaving us vulnerable to Chinese economic policy manipulation. This vulnerability is compounded by the scale of foreign investment in our nation’s critical infrastructure and industries that occurred prior to increasing vigilance by the FIRB.
Foreign investment benefits
4.38
Foreign investment has permitted Australian businesses to benefit from additional capital to grow their commercial enterprise, access global supply chains, and finance infrastructure. It has also encouraged ‘competition and increased innovation by bringing new technologies and know-how to Australia, which boosts productivity and jobs’.
Additional capital and increased employment
4.39
DFAT explained that a key benefit of foreign investment has been in ‘providing capital to finance new businesses and enhance existing businesses.’ Other witnesses similarly emphasised the benefits of foreign investment for Australia’s development, including through raising tax revenue. Some emphasised the importance of ensuring Australia is an attractive destination for foreign investment, provided that such investment was not contrary to the national interest, or national security.
4.40
The Committee heard evidence that foreign investment provided vital capital to support Australian businesses’ investment needs that could not be met by the domestic savings pool, especially in the agriculture, mining, manufacturing and services sectors. The Perth USAsia Centre emphasised that inward foreign investment contributed to building Australia’s export capability on a global scale and stated that:
Australia’s largest export industries – across the resources, technology, education, agriculture and services sectors – have been necessarily underpinned by foreign investment.
4.41
The Infant Nutrition Council similarly explained that ‘European, North American and more recently Asian investment has underpinned the growth of many of Australia’s industries’, particularly in the agricultural and manufacturing sectors.
4.42
Several witnesses also emphasised the benefits of foreign investment in creating employment, driving income and standards of living upwards, and stimulating competition and productivity.
4.43
Austrade highlighted the contribution made by foreign investment to Australian workers:
FDI supports 1.2 million or one in 10 jobs in Australia. These companies contribute one-quarter of total Australian business output. They pay wages and salaries to workers in Australia valued at $82 billion, and they contribute around 14 per cent of Australia's total tax revenue from business.
4.44
DFAT added that ‘direct investment in Australia from the European Union (EU) (including the UK) and the US contributed to employing over 680 000 Australians in 2017.’
4.45
The Australian Sugar Milling Council (ASMC) and the Property Council of Australia (PCA) similarly described how foreign investment had boosted jobs in their sectors.
Access to new technology and skills
4.46
The PC highlighted how important FDI was for innovation and upskilling:
FDI is also a conduit for knowledge transfers, innovation, better management practices, linkages into supply chains, and, less tangibly, the creation of business networks.
4.47
The USSC expressed similar sentiments:
… it's not just foreign capital that's coming in; it's foreign expertise. Australia has a lot of natural partnerships in the technology space on things like critical minerals. There's also the US example on space where US investment is not just capital but actually some of the essential knowledge that Australia needs to develop its own native capacity in those areas.
4.48
The Australian National University (ANU) Energy Change Institute suggested encouraging foreign investment from ‘technology-leading countries such as Germany and Japan’ to assist in capturing more value from Australia’s natural resources.
Facilitating foreign investment flows
4.49
To maximise these benefits, some submitters called for the government to explore opportunities to facilitate foreign investment. This was considered particularly important in a post-COVID-19 environment.
4.50
The AIC advised that addressing regulatory ‘barriers, blockages, and bottlenecks’ to investment was:
… an especially important element to help revitalise the economy given the limited scope for fiscal stimulus. There are several areas of policy where targeted reforms could potentially unlock billions of dollars of private capital annually for investment into Australian businesses.
4.51
The Financial Services Council put forward recommendations to increase investment in Australia, which included: ‘streamlining foreign investment processes, reducing [Australia’s] company tax rate and boosting superannuation savings.’
4.52
Dr Shumi Akhtar noted that Australia’s net position in regards to FDI has barely changed over the last 30 years, and encouraged the Australian Government to stimulate foreign investment, including through reviewing Australia bilateral agreements and tax treaty terms.
4.53
To facilitate foreign investment, Asialink Business recommended:
… streamlining the processes for inward investment with the creation of a one-stop-shop approach, similar to Singapore's Economic Development Board; reduction in corporate taxes to benchmark against major competitors; and provide sector-specific incentives.
4.54
The ASMC highlighted that foreign investment in its industry from businesses from Belgium, Singapore, China, Thailand, Germany and Pakistan had benefitted workers and the economy. The ASMC stated that there had been ‘$7 billion invested to purchase and operate, maintain and run [sugar] mills since 2006.’
4.55
The USSC commented on the benefits of venture capital (VC) to assist businesses to ‘scale globally’ and ‘access world-leading expertise.’ The USSC referred to Israel’s Yozma program, a government initiative designed to create a competitive VC industry in the 1990s, and resulted in Israel becoming the world leader for VC investments as a percentage of Gross Domestic Product (GDP). The USSC said that the Australian Government could learn from this example, and that its Early Stage Venture Capital Limited Partnerships program could do more to attract foreign VCs (particularly from the US).
4.56
The Commonwealth Scientific and Industrial Research Organisation (CSIRO) also commented on Australia’s VC system. While noting the significant increase in Australia’s VC system since the late 1990s, CSIRO also advised that ‘there is still a lack of willingness to engage in high-risk areas’, especially in terms of funding early-stage initiatives.
Level of reliance and concentration of foreign investment
4.57
The PC addressed the question of whether Australia was too reliant on FDI overall, and stated that according to its analysis ‘Australia is not excessively reliant on FDI in aggregate.’
4.58
Dr Akhtar expressed similar sentiments and stated that ‘Australia doesn’t seem to be overly reliant on foreign investment, either inbound or outbound.’ In fact, Dr Akhtar found that in comparison to countries such as Hong Kong and Singapore, ‘if we compare the need for FDI to GDP, Australia is consistently and significantly lagging behind’.
4.59
In contrast, Dr John Coyne highlighted that ‘Australia’s north is far too reliant on foreign investment for its development’, and as a result ‘northern development is being driven by foreign economic visions and investments.’
4.60
Grain Producers Australia was concerned that relying too much on foreign investment could restrict the scope of research investment ‘to only those areas, technologies or issues of broad importance to the world market in general, or those fields with potential international commercialisation prospects.’
4.61
The Perth USAsia Centre highlighted that ‘Australia’s investment relations are highly concentrated in a small number of foreign partners’, with the US and the EU accounting for the majority of Australia’s two way investment. Perth USAsia attributed this to ‘longstanding corporate connections’ between Australia and the UK, US and the EU. Professor Medcalf did not see the dominance of the US as a trading partner as a concern, stating that Australia and the US ‘have a strategic alignment of interests and political values’ which makes for a ‘trust based set of investment relationships.’ Mercury International Consulting similarly stated that the US and the UK have been Australia’s largest trading partners for many years and that ‘this has not been a cause for concern.’
4.62
Others, while also supporting foreign investment, recommended some level of diversification. In relation to investment in critical infrastructure, the Department of Home Affairs advised that it targeted ‘like-minded international partners.’ The PCA stated that ‘investors with a long-term focus and deep capital pools, such as pension funds and sovereign wealth funds are the most suitable.’ Dr Akhtar advised that diversification was important as ‘not all investment types provide the same investment return at the same time’.
4.63
The USSC outlined that diversification should always be a priority and stated:
I don't think anyone should not try to diversify investment markets. I think everyone should continue to attract as much investment from abroad as possible, especially from reliable investment and trading partners. I don't think that US and European ties somehow preclude ties to other countries, especially in South-East Asia.
4.64
Asialink Business suggested that ‘deepening our engagement with Japan, India, the Republic of Korea, and South-East Asia will reduce our reliance on traditional western sources’ of investment. The Perth USAsia Centre similarly advised that FDI from Australia’s traditional partners was likely to ‘plateau’ in coming decades, and that Australia will need to find new sources of investment.
4.65
The MCA highlighted the value of foreign investment despite the current geopolitical concerns, and said:
While it may be tempting to respond to protectionist sentiments through more stringent foreign investment screening, trade barriers or weakening efforts to negotiate international agreements, it is essential to Australia’s strategic interests that government continues to support and promote strong investment, open markets and free trade while building enduring relationships with all nations.
Community concerns about foreign investment
4.66
In its June 2020 report on foreign investment in Australia, the PC noted that:
Many Australians express concerns about the effects of foreigners purchasing Australian residential real estate (especially in Sydney and Melbourne) and farming land (including investment in the broader agriculture sector).
4.67
The Committee received submissions from individuals expressing similar concerns. Foreign investment in these sectors, and related community concerns, are outlined below.
Foreign investment in farmland
4.68
The Australian Tax Office (ATO)’s Register of Foreign Ownership of Agricultural Land stated that as at 30 June 2019, the estimated proportion of agricultural land in Australia with a level of foreign interest was 13.8 per cent. The ATO explained that this rate had remained ‘relatively stable over the past four years.’ The ATO’s report also outlined that:
Aggregating total freehold and leasehold foreign ownership interests, China and the UK have ownership interests in the largest area of total Australian agricultural land (each having 2.4 per cent), followed by the Netherlands (0.7 per cent) and the US (0.6 per cent).
4.69
Professor Laurenceson emphasised that these figures account for leaseholds as well as ownership, and that ‘80 percent of agricultural land held by foreign interests are leasehold, meaning they do not own the underlying land asset.’ Professor Laurenceson further stated that:
… the definition of a ‘foreign interest’ is a corporate entity with just 20 per cent foreign ownership. By far the largest agricultural land holdings with ‘Chinese interests’ are those held by Australian Outback Beef Ltd, totalling 7.92 million hectares, or 86 per cent of total Chinese agricultural land holdings. But, in fact, Outback Beef only features a 33 per cent Chinese ownership share. A 67 per cent share is held by Gina Rinehart’s Hancock Prospecting.
4.70
ITS Global highlighted the China-Australia Free Trade Agreement (ChAFTA), which it described as ‘China’s first comprehensive trade agreement.’ ITS Global stated that the ChAFTA has ‘liberalised Chinese inward investment,’ and noted:
Chinese investment in Australia means orientation towards Chinese markets. Chinese companies such as New Hope and Mengniu have invested in beef and dairy production in Australia. The relationship is not simply about trade; it is about broader economic integration.
4.71
The PC described the value of foreign investment in Australian agriculture as being ‘relatively small.’ The PC stated that the stock of FDI in Australian agriculture, forestry and fishing represented only 0.3 per cent of inward FDI. In 2015, the screening threshold for agricultural land was decreased from $252 million to $15 million, and a register of foreign owned agricultural land was created to further protect Australia’s national interest.
4.72
The Small Business Association of Australia recommended the Australian Government undertake ‘a review of the policies which allow for direct foreign ownership of valuable Australian resources such as agricultural land, water rights and other large- scale developments which may be exported to the detriment of Australian production.’
4.73
Dr Akhtar considered that Australia should remain alert to the potential national security impacts of foreign ownership and stated:
As an example, [Australia] sold valuable land and water rights to some foreign investors. While foreign capital inflow is vital for the development of our country, we must also be alert to the reality that our national security may be compromised when too much control is given to foreign nations through ownership.
4.74
The Committee received submissions from individuals concerned about foreign ownership of agricultural assets. Kristy Goldstraw, for example, considered that:
No country should be able to purchase farms, water, transportation hubs, [or] dairy. This is jeopardising our food security as well as our national interest. I am all for foreign investment, but not foreign ownership.
4.75
The FIRB acknowledged a concern within the community relating to foreign investment, including the sentiment that ‘foreigners are buying up the farm’. In relation to how community concerns inform its advice, the FIRB stated:
When I say that we take community attitudes into account, we certainly would be advising the Treasurer that there have been objections to a particular proposal from one area or the other. And we make sure that the Treasurer, in making a final decision, is aware of potential issues that could arise within the community if the proposal is approved or, indeed, if the proposal is not approved.
4.76
The FIRB added that part of its role is to ‘provide a partial assurance to the Australian community that foreign investment proposals are being looked at closely and that the national interest is being taken into consideration.’
Foreign investment in real estate
4.77
FDI in real estate activities made up 10.9 per cent of total FDI in Australia in 2019, equal to approximately $110.9 billion.
4.78
Some inquiry participants raised concerns regarding the impact of foreign investment on housing affordability. One submitter, for example, stated that ‘due to foreigners being able to buy prime real estate in Australia, property prices have sky rocketed.’ Another recommended Australia ‘prevent foreign investors from purchasing Australian real estate’.
4.79
The PCA explained that foreign investment contributes to both commercial and residential real estate. In relation to residential real estate, the PCA clarified that:
… the Australian controls and laws are quite clear that foreign people aren't allowed to invest in existing housing; they're only allowed to invest in newly constructed housing. The logic of that is that that helps stimulate economic activity and jobs.
4.80
In its recent report on foreign investment in Australia, the PC observed that:
… consternation about foreign investors [in real estate] tends to become louder during periods of rapid house price growth. … Critics of foreign investment are correct to observe that the timing of the investment coincided with the most recent house price boom. The number of FIRB residential real estate approvals quadrupled during the latest boom, from less than 10 000 in 2011-12 to over 40 000 in 2015-16, with most of the growth in foreign investment applications appearing to have come from China. Application numbers then fell to about 13 000 in 2016-17, likely due in part to the introduction of a range of new federal and state taxes on foreign property investors and the introduction of fees on FIRB applications in December 2015.
4.81
The PC further noted that ‘the effect of foreign investment on house prices is difficult to quantify.’
Building domestic investment capacity
4.82
The AIC advised that Australia has a $2.9 trillion superannuation industry, and recommended the government ‘consider the role of superannuation funds in supporting patient capital in Australia.’
4.83
The USSC similarly noted that Australia had significant domestic savings through its superannuation system, but that the superannuation funds were ‘looking overseas’ to invest. The USSC explained the reasons for this:
[Superannuation funds] want to have a diversified portfolio. That's why, as much as the US is the largest source of investment into Australia, it's also the largest destination of Australian foreign investment. Most of our superannuation here in Australia is tied up in US investments, and it definitely has changed the nature of Australia's economy in many ways, and I think it's made it better and healthier for it.
4.84
The Association of Superannuation Funds of Australia highlighted the importance of superannuation in ‘providing an ongoing pool of capital to the economy’, with 60 per cent of regulated superannuation fund investments being invested domestically.
4.85
The Financial Services Council commented that Australia has moved into a current account surplus, which meant that Australia was ‘a net investor into the rest of the world’. The Financial Services Council indicated that:
If we continue on this path for quite a while, we'll end up in a net asset position, and Australia will be quite resilient to any future financial shocks. It will basically be the super. It will largely be because of super. If the super system grows to a sufficient size then we'll be able to source a lot of our investment money domestically.
4.86
The National Civic Council (NCC) recommended that, in order to reduce reliance on foreign investment, ‘incentives and/or mandates should be applied to Australian superannuation funds to encourage investment in domestic industries’, particularly strategic industries such as pharmaceuticals and medical supplies; defence; transportation; agriculture; telecommunications; manufacturing; essential consumer goods; and energy.
4.87
Dr Triggs cautioned that the idea that domestic investment would step in if levels of foreign investment were reduced was a misconception. Dr Triggs outlined the potential impact of Australia not having foreign investment:
If we didn't have foreign investment, Australians would have to save more, which would mean consuming less and a higher cost of living. We'd have higher interest rates, we'd have higher interest rates on our mortgages and more expensive government debt as a consequence of that. And, fundamentally, a higher cost of capital means that there would be lower growth, there'd be less investment and, ultimately, fewer jobs as well.
Co-investment
4.88
The AIC suggested that co-investment between government and industry, including superannuation funds, could assist in encouraging investment to stay in Australia. The AIC further explained that co-investment programs could support innovation and stated:
A meaningful and proven way that the government can work with the private sector to boost investment for Australian entrepreneurs and Australian businesses over the medium-term is to utilise co-investment funding programs. The timing is appropriate now to consider establishing a new co-investment fund that can support expansion of the funding pipeline for Australia’s innovation ecosystem.
4.89
The AIC highlighted that a public-private co-investment program to support high growth business was a ‘well-tested policy response’, and common in the US, the UK, Canada, New Zealand, Germany, France and other countries, and had been used in Australia at the state level.
4.90
The ANU Energy Change Institute suggested that ‘direct government investment and public-private partnerships to help kick-start industries with high growth potential is one way of ensuring Australians obtain lasting benefit from new export industries.’ The ANU Energy Change Institute suggested further options for boosting domestic investment:
The Government may also wish to consider measures to improve domestic savings rates coupled with domestic investment incentives, which would increase the amount of private Australian capital available for potential Australian-sourced private sector investment in Australia.
National development bank
4.91
The Committee received a number of submissions supporting the creation of a national development bank to fund long-term infrastructure projects, rebuild domestic manufacturing capabilities and limit reliance on foreign investment. Individuals such as Maria Sevo, for example, outlined that a national development bank could:
… make crucial investments in reviving domestic manufacturing, which is the best way to diversify our trade both in terms of trading partners and in terms of trade complexity, ensuring only beneficial Free Trade Agreements, and successfully avoiding any geopolitical tensions and consequently trade wars.
4.92
The Australian Citizens Party similarly outlined the potential benefits of a national development bank:
A national development bank would both stimulate an expansion of manufacturing capacity in existing and new industries that would naturally find new export markets, which would diversify Australia’s trade, and be able to harness the $3 trillion pool of Australian superannuation funds to invest in Australian economic development, reducing our dependence on costly foreign investment.
4.93
The NCC highlighted that there were 400 development banks across the globe, representing 10 per cent of annual global investment. The NCC gave examples of countries with development banks, such as Germany, France, Spain, Italy, Austria, Russia, Japan, China, Singapore, South Korea, and India.
4.94
Similarly, Dr McGovern suggested following the examples of the German development banks, the Asian Development Bank, the World Bank, and the revolving line of credit in the US, which have all contributed to funding development opportunities.
Committee comment
4.95
Foreign investment has supported the growth of Australia’s economy over many decades. Benefits of foreign investment that Australia has enjoyed include increased capital and employment; enhanced productivity and innovation; and support for Australia’s exports.
4.96
The United States is, by far, the largest foreign investor in Australia. While China is smaller investor, the Committee heard evidence that its investment in Australia is growing rapidly. The Committee notes that the data on foreign investment is complex, but considers that more appropriate measures need to be used, especially in relation to ultimate owners, to better inform decision making about foreign investment proposals, as well as providing reassurance to the Australian people that accurate assessments are being made.
4.97
As Australia, and the global economy more broadly, looks to recover from the economic impact of COVID-19, competition for foreign investment will intensify. The Committee considers that Australia should continue to present as an attractive destination for foreign investment, to support economic and employment growth.
4.98
While recognising the economic benefits of foreign investment, the Committee heard concerns about potential risks posed by foreign investment to Australia’s national security. A previous example of a security concern related to the Port of Darwin, which was leased to a private foreign company by the Northern Territory Government in 2015.
4.99
The Committee was pleased to hear about the Government’s reforms to the Foreign Acquisitions and Takeovers Act 1975, which included a greater emphasis on protecting Australia’s national interest and security. As these reforms only took effect on 1 January 2021, it is too early to assess their impact. The Committee will continue to consider this in the future.
4.100
The Committee believes that it is important that Australia’s foreign investment framework has the support of the Australian people. This support will be more likely if the public can see that Australia’s national interest is a key consideration in foreign investment decisions, particularly when it relates to investment in agriculture, real estate and critical infrastructure.
4.101
The Committee believes that there is a greater role for domestic investment in the Australian economy. Domestic investment opportunities include Australia’s superannuation savings, which could (with the right incentives from government), contribute to essential infrastructure and industry projects. A national development bank, which could reduce reliance on foreign investment and stimulate domestic economic activity, is another option that warrants consideration.
Recommendations
4.102
The Committee recommends that the Australian Government establish a clear, consistent definition of national interest for the purposes of foreign investment. The Committee further recommends that the Australian Government issue clear guidance on how the national interest test is applied, to provide confidence to investors and the community that it is being applied consistently and in a way that meets community expectations and creates opportunities for Australian workers, businesses and communities. This could include specific guidance for foreign investment in property, business and strategic assets, and how the Foreign Investment Review Board considers investment from entities where the ultimate beneficiary is or has links to a foreign state.
4.103
The Committee recommends that the Australian Government consider implementing the international standards for measuring foreign direct investment, to ensure both the ‘immediate’ and ‘ultimate’ owners of an investment are recorded.
4.104
The Committee recommends that the Australian Government increase the quality and timeliness of economic intelligence, both in terms of domestic production and foreign trade markets.
4.105
The Committee recommends that the Australian Government provide a report on whether the 99-year lease of the Port of Darwin to a foreign company will be subject to the Australia’s Foreign Relations (State and Territory Arrangements) Act 2020 (the Act) and if so, consider taking measures to have the Port of Darwin brought back under Australian ownership if current arrangements are not deemed to be in the national interest. Further, the Committee recommends that other ports and strategic infrastructure owned by, or leased to, foreign corporations also be reviewed under the Act.
4.106
The Committee recommends that the Australian Government investigate ways to incentivise domestic investment from Australian superannuation funds.
4.107
The Committee recommends that the Australian Government consider the establishment of a national development bank to assist in the development of Australian manufacturing capacity.
Mr George Christensen MP
Chair
24 February 2021